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: April 30, 1998
Commission File Number: 0-3713
NATIONAL COMPUTER SYSTEMS, INC.
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(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
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(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 June 5, 1998, was 31,147,639.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months
Ended April 30,
-------------------
1998 1997
------ ------
(In thousands, except
per share amounts)
REVENUES
Information services $48,786 $33,864
Product sales 36,508 34,037
Maintenance and support 12,621 11,070
------- -------
Total revenues 97,915 78,971
COST OF REVENUES
Cost of information services 36,390 25,496
Cost of product sales 16,014 15,235
Cost of maintenance and support 7,989 7,429
------- -------
Gross margin 37,522 30,811
OPERATING EXPENSES
Sales and marketing 15,072 12,438
Research and development 2,332 2,153
General and administrative 11,157 8,920
------- ------
INCOME FROM OPERATIONS 8,961 7,300
Interest expense 318 325
Other expense, net 148 227
------- -------
INCOME BEFORE INCOME TAXES 8,495 6,748
Income taxes 3,400 2,700
------- -------
NET INCOME $ 5,095 $ 4,048
======= =======
EARNINGS PER SHARE
Basic $0.17 $0.13
Diluted 0.16 0.13
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 30,814 31,000
Diluted 32,309 31,480
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 30, January 31,
1998 1998
--------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,090 $ 23,267
Receivables 90,471 101,334
Inventories:
Finished products 5,017 5,166
Scoring services and work in process 20,541 8,218
Raw materials and purchased parts 2,926 2,855
-------- --------
Total inventories 28,484 16,239
Prepaid expenses and other 6,708 6,562
-------- --------
TOTAL CURRENT ASSETS 142,753 147,402
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 58,039 57,281
Machinery and equipment 149,554 141,949
Accumulated depreciation (109,030) (105,206)
-------- --------
Net property, plant and equipment 98,563 94,024
INTELLECTUAL PROPERTIES, NET
Acquired and internally developed
software products 14,489 14,967
Assessment instruments 9,944 10,317
-------- --------
Total intellectual properties 24,433 25,284
OTHER ASSETS, NET
Goodwill 45,386 45,634
Other assets 3,133 3,070
-------- --------
Total other assets 48,519 48,704
-------- --------
TOTAL ASSETS $314,268 $315,414
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 30, January 31,
1998 1998
---------- -----------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 5,064 $ 6,448
Accounts payable 28,220 26,767
Accrued expenses 35,604 36,237
Deferred income 24,208 29,026
Income taxes 4,596 4,156
-------- --------
TOTAL CURRENT LIABILITIES 97,692 102,634
LONG-TERM DEBT -- less current maturities 11,363 12,396
DEFERRED INCOME TAXES 5,568 6,390
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
31,081 and 30,846 shares, respectively 932 925
Paid-in capital 6,889 4,518
Retained earnings 197,891 194,348
Other comprehensive income -
Foreign currency translation adjustment (2,328) (2,343)
Deferred compensation (3,739) (3,454)
-------- --------
Total stockholders' equity 199,645 193,994
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $314,268 $315,414
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
April 30,
------------------
1998 1997
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(In thousands)
OPERATING ACTIVITIES
Net income from operations $ 5,095 $ 4,048
Depreciation, amortization and other
noncash expenses 7,225 6,780
Provision for deferred income taxes (822) (161)
Changes in operating assets and liabilities:
Accounts receivable 10,780 (2)
Inventory and other current assets (12,391) (5,099)
Accounts payable and accrued expenses 1,260 (7,516)
Deferred income (4,818) (4,006)
------- -------
Net cash (used in) provided by
operating activities 6,329 (5,956)
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,800) (4,707)
Purchases of business systems (1,796) (480)
Acquisitions, net - (2,742)
Other, net 483 (830)
------- -------
Net cash used in investing activities (9,113) (8,759)
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FINANCING ACTIVITIES
Net repayment of borrowings (1,515) (1,493)
Issuance (repurchase) of common stock, net (327) (13,072)
Dividends paid (1,551) (1,363)
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Net cash used by financing activities (3,393) (15,928)
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(Decrease) in cash and cash equivalents (6,177) (30,643)
CASH AND CASH EQUIVALENTS - beginning of period 23,267 58,079
------- -------
CASH AND CASH EQUIVALENTS - end of period $17,090 $27,436
======= =======
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 April 30, 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
Ended April 30,
-----------------
1998 1997
------- -------
Earnings:
Net income
Basic earnings per share $ 5,095 $ 4,048
Adjustments for dilutive securities:
Interest expense on convertible debentures,
net of tax 51 64
------- -------
Adjusted net income for diluted earnings per share $ 5,146 $ 4,112
======= =======
Weighted Average Shares:
Basic average shares 30,814 30,146
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds 899 458
Contingent stock awards, net of tax proceeds 86 293
Convertible debentures 510 583
------- -------
Diluted average shares 32,309 31,480
======= =======
Basic earnings per share $ 0.17 $ 0.13
======= =======
Diluted earnings per share $ 0.16 $ 0.13
======= =======
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 130, Reporting
Comprehensive Income. Statement 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 shareholders'
equity. Statement 130 requires unrealized gains or losses on 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
requirements of Statement 130.
<PAGE>
The components of Comprehensive income, for the three-month periods ended April
30, 1998 and 1997 are as follows:
1998 1997
------- -------
Net income $ 5,095 $ 4,048
Foreign currency translation adjustments 15 98
------- -------
Comprehensive income $ 5,110 $ 4,146
======= =======
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 financial position or
results of operations.
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 First Quarter Results
For the quarter ended April 30, 1998, total revenues increased by $18.9 million
or 24.0% from the quarter ended April 30, 1997. Overall gross margin declined by
0.7 percentage points as a percent of revenue due to revenue mix, though gross
margin dollars increased $6.7 million or 21.8%. Income from operations for the
quarter increased $2.7 million or 22.8% over the prior year first quarter,
representing a constant 9.2% of total revenues for both periods. Net income
increased 25.9% over the quarter ended April 30, 1997, and earnings per share
(diluted) increased 23.1%.
Revenues
Total revenues for the quarter ended April 30, 1998 were up 24.0% to $98.0
million from $79.0 million in the prior year. Approximately $5 million, or 6
percentage points of the 24% revenue growth, is due to the impact of fiscal 1997
acquisitions. By revenue category, first quarter 1998 compares to first quarter
1997 as follows:
Information services +44%
Product sales + 7%
Maintenance and support +14%
The $19 million of overall revenue increase in the first quarter of 1998 is
largely attributable to growth in information services. That growth is
principally due to increased assessment and testing services, more specifically,
increased volumes of statewide K-12 assessments coming from recent contract wins
in California, Arizona and Minnesota, among other projects. Quarter on quarter
information services revenue increases were also realized in education and
commercial large scale data management services.
First quarter increases in product sales and maintenance and support revenues
came principally from the acquisitions of London House and McGraw Hill School
Systems, respectively, in July 1997.
By major market, revenues from Education grew 35% in the first quarter, due
largely to the aforementioned testing volumes. Large scale data management
revenues grew 1% in the first quarter of 1998, compared to a very strong first
quarter of 1997 when those revenues grew 18% over the prior year.
<PAGE>
Cost of Revenues and Gross Margins
For the quarter ended April 30, 1998, the Company's overall gross margin
declined by 0.7 percentage points to 38.3% from 39.0% in the same period of the
prior year. This modest decline is due entirely to revenue mix, as gross margins
on each revenue line (information services, product sales, and maintenance and
support) improved. The rapid growth of information services influenced the
overall gross margin percentage decline.
Operating Expenses
Sales and marketing expenses increased $2.6 million or 21.2% in the quarter
ended April 30, 1998, over the prior year first quarter. The dollar increase in
these expenses is principally attributable to the acquisitions completed since
April 1997. As a percentage of revenues, sales and marketing expenses declined
by 0.4 percentage points.
Research and development costs increased $.2 million in the quarter ended April
30, 1998 as compared to the quarter ended April 30, 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 $2.2 million for the quarter
ended April 30, 1998 from the prior year quarter. This quarter-to-quarter
increase is also principally the result of acquisitions since last year's first
quarter. As a percent of revenues, general and administrative expenses remained
relatively constant.
Non-operating Expenses
Interest expense and other non-operating expenses were essentially unchanged in
the quarter ended April 30, 1998, from the comparable prior year period, and
are, in total, relatively inconsequential.
Provision for Income Taxes
The effective income tax rate was 40.0% for the quarters ended April 30, 1998
and 1997.
Liquidity and Capital Resources
For the three-month period ended April 30, 1998, the Company generated $6.3
million of cash flow from operating activities as contrasted with funds used by
operations of $6.0 million in the same period of the prior year. This
quarter-to-quarter comparison is predominantly the result of significantly
better collections of trade accounts receivable in the first quarter of 1998.
Cash was used principally to fund investments in property, plant and equipment
of $7.8 million, net repayment of borrowings of $1.5 million, as well as to pay
dividends of $1.6 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 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.
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 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of Stockholders on May 21,
1998.
(c) Briefly described below are the only matters voted on at the
Annual meeting and the number of votes with respect to each
matter.
(i) Election of Board of Directors
Withhold
Name For Authority
Russell A. Gullotti 23,681,785 71,424
David C. Cox 23,685,644 67,565
Moses S. Joseph 23,693,679 59,530
Jean B. Keffeler 23,697,982 55,227
Stephen G. Shank 23,705,069 48,140
John E. Steuri 23,699,279 53,930
(ii) Approval of the 1998 Employee Stock Purchase Plan
For 21,821,432
Against 221,728
Abstain 1,710,049
Broker Non-Vote 0
(iii) Approval of the appointment of Ernst & Young LLP as auditors
for the year ending January 31, 1999
For 23,666,761
Against 47,881
Abstain 38,567
Broker Non-Vote 0
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 April 30,
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: June 11, 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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<TOTAL-ASSETS> 314,268
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<BONDS> 11,363
0
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<COMMON> 932
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