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: May 1, 1999
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
June 1, 1999, was 31,692,000.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended
May 1, April 30,
1999 1998
-------- ---------
(In thousands, except
per share amounts)
REVENUES
Information services $ 71,864 $ 48,786
Product sales 40,152 36,508
Maintenance and support 13,801 12,621
-------- --------
Total revenues 125,817 97,915
COST OF REVENUES
Cost of information services 53,320 36,390
Cost of product sales 15,648 16,014
Cost of maintenance and support 8,718 7,989
-------- --------
Gross margin 48,131 37,522
OPERATING EXPENSES
Sales and marketing 16,572 15,072
Research and development 3,673 2,332
General and administrative 16,255 11,157
-------- --------
INCOME FROM OPERATIONS 11,631 8,961
Interest expense 162 318
Other expense, net 366 148
-------- --------
INCOME BEFORE INCOME TAXES 11,103 8,495
Income taxes 4,450 3,400
-------- --------
NET INCOME $ 6,653 $ 5,095
======== ========
EARNINGS PER SHARE
Basic $0.21 $0.17
Diluted 0.20 0.16
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 31,480 30,814
Diluted 32,849 32,309
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
May 1, January 31,
1999 1999
-------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,385 $ 16,310
Receivables 108,278 128,751
Inventories:
Finished products 4,786 5,096
Scoring services and work in process 27,668 14,442
Raw materials and purchased parts 2,786 2,253
-------- --------
Total inventories 35,240 21,791
Prepaid expenses and other 8,568 7,225
-------- --------
TOTAL CURRENT ASSETS 168,471 174,077
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 65,333 63,018
Machinery and equipment 162,671 152,414
Accumulated depreciation (115,135) (109,416)
-------- --------
Net property, plant and equipment 112,869 106,016
INTELLECTUAL PROPERTIES, NET
Acquired and internally developed
software products 11,733 12,170
Assessment instruments 8,488 8,835
-------- --------
Total intellectual properties 20,221 21,005
OTHER ASSETS, NET
Goodwill 52,132 52,840
Other assets 9,795 8,533
-------- --------
Total other assets 61,927 61,373
-------- --------
TOTAL ASSETS $363,488 $362,471
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
May 1, January 31,
1999 1999
-------- -----------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,768 $ 3,758
Accounts payable 34,826 35,809
Accrued expenses 48,919 51,779
Deferred income 29,103 32,209
Income taxes 3,759 3,883
-------- --------
TOTAL CURRENT LIABILITIES 120,375 127,438
LONG-TERM DEBT -- less current maturities 5,384 5,597
DEFERRED INCOME TAXES 2,559 2,570
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
31,638 and 31,467 shares, respectively 949 944
Paid-in capital 12,921 10,760
Retained earnings 225,700 220,625
Accumulated other comprehensive income -
Foreign currency translation adjustment (2,877) (3,880)
Deferred compensation (1,523) (1,583)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 235,170 226,866
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $363,488 $362,471
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
May 1, April 30,
1999 1998
-------- ---------
(In thousands)
OPERATING ACTIVITIES
Net income $ 6,654 $ 5,095
Depreciation, amortization and other
noncash expenses 8,664 7,225
Provision for deferred income taxes (11) (822)
Changes in operating assets and liabilities:
Accounts receivable 20,422 10,780
Inventory and other current assets (14,792) (12,391)
Accounts payable and accrued expenses (3,928) 1,260
Deferred income (3,106) (4,818)
------- -------
Net cash provided by operating activities 13,903 6,329
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (10,211) (7,800)
Purchases of business systems (2,582) (1,796)
Other, net (120) 483
------- -------
Net cash used in investing activities (12,913) (9,113)
------- -------
FINANCING ACTIVITIES
Net repayment of borrowings (103) (1,515)
Issuance (repurchase) of common stock, net 765 (327)
Dividends paid (1,577) (1,551)
------- -------
Net cash used by financing activities (915) (3,393)
------- -------
Increase (decrease) in cash and cash equivalents 75 (6,177)
CASH AND CASH EQUIVALENTS - beginning of period 16,310 23,267
------- -------
CASH AND CASH EQUIVALENTS - end of period $16,385 $17,090
======= =======
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 consolidated financial position, results of
operations and cash flows for all periods presented have been made. The
consolidated results of operations for the period ended May 1, 1999 are not
necessarily indicative of the operating results that may be expected for the
entire fiscal year ending January 29, 2000. For further information, refer to
the Consolidated Financial Statements and footnotes thereto included in National
Computer Systems, Inc. and Subsidiaries' Annual Report on Form 10-K for the year
ended January 31, 1999.
Note B - Effective February 1, 1999, the Company adopted a 4-4-5, 13-week
quarterly accounting cycle with the fiscal year ending on the Saturday nearest
to January 31. The four fiscal quarters in the current year will end on May 1,
1999, July 31, 1999, October 30, 1999 and January 29, 2000. The impact of this
change in the Company's quarterly and annual financial results in 1999 will be
insignificant.
Note C - 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):
<PAGE>
First Quarter Ended
May 1, April 30,
1999 1998
------- ---------
Earnings:
Net income for
basic earnings per share $ 6,653 $ 5,095
Adjustments for dilutive securities:
Interest expense on convertible
debentures, net of tax 41 51
------- -------
Adjusted net income for diluted
earnings per share $ 6,694 $ 5,146
======= =======
Weighted Average Share:
Basic average shares 31,480 30,814
Adjustments for dilutive securities:
Employee stock options, net of
tax proceeds 945 899
Contingent stock awards, net of
tax proceeds 33 86
Convertible debentures 391 510
------- -------
Diluted average shares 32,849 32,309
======= =======
Basic earnings per share $ 0.21 $ 0.17
======= =======
Diluted earnings per share $ 0.20 $ 0.16
======= =======
Note D - 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 E - The components of comprehensive income for the three month periods
ended May 1, 1999 and April 30, 1998 are as follows (in thousands):
1999 1998
------ ------
Net income $6,653 $5,095
Foreign currency translation
adjustments 1,003 15
------ ------
Comprehensive income $7,656 $5,110
====== ======
Note F - As previously disclosed, the Company was served with a summons and
complaint in a lawsuit filed against the Company by a former customer. The
lawsuit alleges certain claims against the Company in connection with certain
loan processing and servicing agreements and seeks out-of-pocket damages, lost
profits and compensation for extraordinary defaults and lost interest that it
claims resulted from breaches of these agreements by the Company. The customer
also seeks to have the Company acquire certain student loans with unpaid
principal, interest and late charges, which loans it claims are, or have been,
in default and were incorrectly processed or serviced by the Company. The
Company has tendered the defense of the claims 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 intends to
vigorously defend against the lawsuit. In addition, the Company has filed a
counterclaim against the former customer and a corporate affiliate seeking
compensatory damages and contribution and indemnity. The Company does not
believe that the outcome of this litigation would result in a material adverse
effect on the Company's consolidated financial position or results of
operations.
Note G - On May 28, 1999 the Company acquired NovaNET Learning, Inc. (NLI), an
interactive, online curriculum content company. NLI's annual revenues for its
full fiscal year ending December 31, 1999 are expected to approximate $20
million. The transaction will be accounted for as a purchase and, accordingly,
NLI's operations subsequent to the closing date will be consolidated with the
Company's. The purchase price was approximately $20 million in cash. The
transaction is expected to be slightly accretive to consolidated earnings of the
Company in fiscal 1999.
Note H - The Company has five reportable business segments; the table below
presents information by segment.
<PAGE>
<TABLE>
<CAPTION>
Assessments Education Data
& Testing Software & NCS Collection
Services Services Services Systems International Totals
----------- ----------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Period Ended 5/1/99
Revenues $ 31,927 $28,326 $33,797 $20,830 $10,937 $125,817
Income from operations 3,734 1,131 5,486 5,246 1,028 16,625
Depreciation & Amortization 2,524 2,053 628 1,251 761 7,217
Segment assets 110,682 87,847 45,175 37,396 27,907 309,007
Period Ended 4/30/98
Revenues $ 24,438 $21,447 $21,812 $18,541 $11,677 $ 97,915
Income from operations 3,634 503 2,264 4,359 595 11,355
Depreciation & Amortization 2,423 1,764 586 1,351 528 6,652
Total assets 105,645 69,744 37,211 38,761 31,264 282,625
</TABLE>
The difference between segment totals and the Company's consolidated totals
consist of central general and administrative expenses, non-operating expenses,
and corporate assets, all of which are not allocated to the segments.
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 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 five operating
segments.
Recap of 1999 First Quarter Results
For the quarter ended May 1, 1999, total revenues increased by $27.9 million or
28.5% from the quarter ended April 30, 1998. Overall gross margin remained
constant as a percent of revenue, and gross margin dollars increased $10.6
million. Income from operations for the quarter increased $2.7 million or 29.8%
over the prior year first quarter. Net income increased 30.6% over the quarter
ended April 30, 1998, and earnings per share (diluted) increased 25.0% to $.20
per share from $.16 in the prior year first quarter.
Revenues
Total revenues for the three month period ended May 1, 1999 and April 30, 1998
were up 28.5%. By revenue category, 1999 compares to 1998 as follows:
Quarter
-------
Information services +47.3%
Product sales +10.0%
Maintenance and support + 9.3%
Eighty-three percent of the $27.9 million of overall revenue increase in the
first quarter of 1999 was attributable to growth in information services. That
growth came from several sources: assessment and testing services; government
and commercial outsourcing; and K-12 networking and professional services
related to education software.
First quarter increases in product sales came principally from education
software licensing and related network hardware. Increased maintenance and
support revenues were also the result of increased support revenues from
education software.
By major market, for the first quarter, revenues grew 33% from the education
market and over 16% from the large scale data management (non-education) market.
Cost of Revenues and Gross Margins
For the quarter ended May 1, 1999 and April 30, 1998, the Company's overall
gross margin remained constant at 38.3%. On a quarter-to-quarter basis, the
gross margin in each revenue category (information services, product sales, and
maintenance and support) improved as a percentage of revenue, but the overall
gross margin remained constant at 38.3% due to changes in mix of revenues toward
information services, which has a lower gross margin.
Operating Expenses
Sales and marketing expenses increased $1.5 million or 10.0% in the quarter
ended May 1, 1999, over the prior year first quarter. As a percentage of
revenues, first quarter sales and marketing expenses declined by 2.2 percentage
points, due primarily to the relatively lower selling costs associated with
information services revenues.
Research and development costs increased $1.3 million in the quarter ended May
1, 1999 as compared to the quarter ended April 30, 1998. For the full year,
these expenses are expected to continue at higher levels for fiscal 1999 than
fiscal 1998, as the Company continues its investment in software products and
test processing technology.
General and administrative expenses increased by $5.1 million for the quarter
ended May 1, 1999 from the prior year quarter. As a percentage of revenue, first
quarter general and administrative expense increased 1.5 percentage points from
11.4% to 12.9%. These expenses increased due to general growth and costs related
to an improvement of the Company's employee benefit package (particularly
vacation) and variable compensation accrued because of favorable operating
results.
Non-operating Expenses
Interest expense decreased on a quarter-to-quarter comparison due to lower
average borrowing levels. Other expense, net, was insignificant for the quarter
ending May 1, 1999 and April 30, 1998.
Provision for Income Taxes
The effective income tax rate was a constant 40% for the quarters ended May 1,
1999 and April 30, 1998.
Liquidity and Capital Resources
For the three-month period ended May 1, 1999, the Company generated $13.9
million of cash flow from operating activities as compared to $6.3 million in
the same period of the prior year. Cash was used principally to fund investments
in property, plant and equipment of $10.2 million and business systems of $2.6
million, and to pay dividends of $1.6 million. The Company expects for the
remainder of fiscal 1999 that its positive cash flows from operations will be
adequate to fund its normal financing and investing activities. In addition, the
Company generally 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.
Impact of Year 2000
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities). As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not known,
and, if not corrected in a timely manner, could affect the Company and the U.S.
and world economy generally.
The Company's product development processes currently contain steps to include
Year 2000 compliance verification for all current and future products. Most of
the Company's products are currently Year 2000 compliant, and all continuing
products are expected to be compliant before December 31, 1999.
The Company has a full-time Year 2000 program leader and a team (consisting of
representatives from each of its business units) to address internal and
external Year 2000 issues. The Company's internal financial and other "IT"
computer systems have been reviewed to assess and remediate Year 2000 problems,
as have other "non-IT" systems such as security, HVAC and telephone systems. In
addition, executive management regularly monitors the status of the Company's
Year 2000 remediation plans. The Company's Year 2000 compliance program includes
the following phases: identifying systems with date sensitive points that will
need to be addressed; carrying out remediation work to modify those systems or
convert to new systems; conducting validation testing of systems and
applications to ensure compliance; and transition preparedness activities. As of
May 1, 1999, the Company believes it was approximately 80% completed with its
total Year 2000 effort. The Company expects to be substantially complete by
July, 1999, with the exception of transition activities described below.
Through May 1, 1999, the Company has spent approximately $5.5 million addressing
Year 2000 issues ($1.5 million in fiscal 1997, $3.3 million in fiscal 1998, and
$.7 million thus far in fiscal 1999.) The Company expects to incur a total of
approximately $1.3 million of Year 2000 expenses during the remainder of fiscal
1999. These costs are below original estimates and consist primarily of internal
resources, with relatively minor external costs. All amounts are being expensed
currently and are included in the Company's future operating plans and
expectations. In addition, the Company has also made, and will continue to make,
significant capital investments to enhance its internal business and service
delivery systems. However, these investments are not driven principally by Year
2000 considerations.
In addition, the Company is requesting assurances from its major suppliers that
they are addressing the Year 2000 issue and that products purchased by the
Company from such suppliers will function properly in the Year 2000. Also,
contacts are being made with the Company's major customers. These actions are
intended to help mitigate the possible external impact of the Year 2000 problem.
However, it is impossible to fully assess the potential consequences to the
Company of the Year 2000 problem in the event service interruptions from
suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government.
Based on its assessments to date, the Company believes it will not experience
any material disruption as a result of Year 2000 problems in internal processes,
information processing or interfaces with major customers, or with processing
orders and billing. However, if certain critical third-party providers, such as
those providers supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to the Company, a shutdown of
the Company's operations at individual facilities could occur for the duration
of the disruption. While the Company currently believes such disruptions of
basic services and facility shutdowns are unlikely, there can be no absolute
assurance that they will not occur.
The Company believes that the most likely worst case Year 2000 scenario will be
that NCS products do not operate properly for customers who have not installed
Year 2000 compliant versions of NCS products or have not updated their own
computing platform or network infrastructure to be operational in the Year 2000.
The Company has developed, and continues to refine, transition preparedness
plans to respond to a significantly increased number of customer calls at all
its support locations to address these Year 2000 problems. The Company is also
developing contingency plans to provide for continuity of processing in Year
2000 based on the outcome of its validation phase of its Year 2000 compliance
program and the results of surveying its major suppliers and customers. Assuming
no major disruption in service from utility companies or other critical
third-party providers, the Company believes that it will be able to manage its
total Year 2000 transition without any material effect on the Company's
consolidated results of operations or financial condition.
The statements which are not historical or current facts or are "goals" or
"expectations" contained in this 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, 1999, 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 27,
1999.
(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
---- --- ---------
William J. Cadogan 27,938,603 122,190
David C. Cox 27,931,624 129,169
Delores M. Etter 27,929,092 131,701
Russell A. Gullotti 27,929,203 131,590
Moses S. Joseph 27,521,213 539,580
Jean B. Keffeler 27,938,648 122,145
Stephen G. Shank 27,626,415 434,378
John E. Steuri 27,947,587 113,206
(ii) Approval of the 1999 Employee Stock Option Plan
For 24,942,092
Against 1,891,138
Abstain 1,227,563
Broker Non-Vote 600
(iii) Approval of the 1999 Non-Employee Director Stock
Option Plan
For 24,257,551
Against 2,498,302
Abstain 1,304,940
Broker Non-Vote 600
(iv) Approval of the appointment of Ernst & Young LLP as auditors
for the year ending January 29, 2000
For 27,973,809
Against 50,722
Abstain 36,262
Broker Non-Vote 600
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 May 1,
1999.
<PAGE>
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 8, 1999
<PAGE>
FORM 10-Q
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE QUARTERLY PERIOD ENDED MAY 1, 1999
EXHIBIT INDEX
EXHIBIT
27 Financial Data Schedule.
<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 29, 2000, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> FEB-1-1999
<PERIOD-END> MAY-01-1998
<EXCHANGE-RATE> 1
<CASH> 16385
<SECURITIES> 0
<RECEIVABLES> 108278
<ALLOWANCES> 0
<INVENTORY> 35240
<CURRENT-ASSETS> 168471
<PP&E> 228004
<DEPRECIATION> (115135)
<TOTAL-ASSETS> 363488
<CURRENT-LIABILITIES> 120375
<BONDS> 0
0
0
<COMMON> 949
<OTHER-SE> 234221
<TOTAL-LIABILITY-AND-EQUITY> 363488
<SALES> 40152
<TOTAL-REVENUES> 125817
<CGS> 15648
<TOTAL-COSTS> 77686
<OTHER-EXPENSES> 36500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162
<INCOME-PRETAX> 11103
<INCOME-TAX> 4450
<INCOME-CONTINUING> 6653
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6653
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.20
</TABLE>
