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 29, 2000
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
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(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: (952)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 May 31, 2000, was 32,632,000.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
For the quarter ended April 29, 2000 and May 1, 1999
2000 1999
-------- --------
(In thousands, except
per share amounts)
REVENUES
Services $133,159 $ 85,665
Product sales 41,206 40,152
-------- --------
Total revenues 174,365 125,817
COST OF REVENUES
Cost of services 94,729 62,038
Cost of product sales 17,617 15,648
-------- --------
Gross profit 62,019 48,131
OPERATING EXPENSES
Sales and marketing 17,271 16,572
Research and development 6,108 3,673
General and administrative 23,654 16,255
-------- --------
INCOME FROM OPERATIONS 14,986 11,631
Interest expense 118 162
Other expense, net 399 366
-------- --------
INCOME BEFORE INCOME TAXES 14,469 11,103
Income taxes 5,700 4,450
-------- --------
NET INCOME $ 8,769 $ 6,653
======== ========
EARNINGS PER SHARE
Basic $0.27 $0.21
Diluted 0.26 0.20
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 29, January 29,
2000 2000
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(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,527 $ 26,592
Marketable securities 18,251 -
Receivables 141,308 151,870
Inventories:
Finished products 6,169 5,880
Scoring services and work in process 38,665 23,158
Raw materials and purchased parts 3,823 4,581
-------- --------
Total inventories 48,657 33,619
Prepaid expenses and other 9,907 9,932
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TOTAL CURRENT ASSETS 221,650 222,013
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 68,544 67,928
Machinery and equipment 206,068 189,835
Accumulated depreciation (129,655) (125,654)
-------- --------
Net property, plant and equipment 144,957 132,109
INTELLECTUAL PROPERTIES, NET
Acquired and internally developed
software products 8,951 9,371
Educational content and
assessment instruments 22,707 23,306
-------- --------
Net intellectual properties 31,658 32,677
OTHER ASSETS, NET
Goodwill 52,414 50,263
Other assets 14,011 12,818
-------- --------
Net other assets 66,425 63,081
-------- --------
TOTAL ASSETS $464,690 $449,880
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 29, January 29,
2000 2000
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(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 15,101 $ 1,270
Accounts payable 31,732 38,546
Accrued expenses 68,304 73,163
Deferred income 37,974 51,785
Income taxes 16,005 6,570
-------- --------
TOTAL CURRENT LIABILITIES 169,116 171,334
LONG-TERM DEBT -- less current maturities 516 516
DEFERRED INCOME TAXES 1,375 1,642
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
32,603 and 32,348 shares, respectively 978 970
Paid-in capital 21,880 22,596
Retained earnings 264,336 257,195
Accumulated other comprehensive income -
Unrealized gain on marketable securities 11,266 -
Foreign currency translation adjustment (3,536) (2,969)
Deferred compensation (1,241) (1,404)
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TOTAL STOCKHOLDERS' EQUITY 293,683 276,388
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $464,690 $449,880
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the quarter ended April 29, 2000 and May 1, 1999
2000 1999
-------- --------
(In thousands)
OPERATING ACTIVITIES
Net income $ 8,769 $ 6,653
Depreciation and amortization 10,295 8,665
Deferred income taxes and other (228) (11)
Changes in operating assets and liabilities:
Accounts receivable 10,562 20,422
Inventory and other current assets (15,013) (14,792)
Accounts payable and accrued expenses (7,467) (3,928)
Deferred income (13,811) (3,106)
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Net cash (used) provided by operating activities (6,893) 13,903
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (17,308) (10,211)
Purchases of business systems (2,252) (2,582)
Acquisitions, net (4,719) -
Other, net (3,367) (120)
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Net cash used in investing activities (27,646) (12,913)
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FINANCING ACTIVITIES
Net increase in revolving credit borrowings 14,500 -
Net repayment of other borrowings (269) (103)
Issuance (repurchase) of common stock, net (1,135) 765
Dividends paid (1,622) (1,577)
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Net cash provided (used) by
financing activities 11,474 (915)
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Increase (decrease) in cash and cash equivalents (23,065) 75
CASH AND CASH EQUIVALENTS - beginning of period 26,592 16,310
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CASH AND CASH EQUIVALENTS - end of period $ 3,527 $16,385
======= =======
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
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 April 29, 2000 are not
necessarily indicative of the operating results that may be expected for the
entire fiscal year ending February 3, 2001. 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 29, 2000.
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:
Quarter Ended
April 29, May 1,
2000 1999
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Earnings:
Net income for
basic earnings per share $ 8,769 $ 6,653
Adjustments for dilutive securities:
Interest expense on convertible
debentures, net of tax 5 41
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Adjusted net income for diluted
earnings per share $ 8,774 $ 6,694
======= =======
Weighted Average Share:
Basic average shares 32,356 31,480
Adjustments for dilutive securities:
Employee stock options, net of
tax proceeds 991 945
Contingent stock awards, net of
tax proceeds 29 33
Convertible debentures 11 391
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Diluted average shares 33,387 32,849
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Basic earnings per share $ 0.27 $ 0.21
======= =======
Diluted earnings per share $ 0.26 $ 0.20
======= =======
<PAGE>
Note C - Marketable Securities: On January 29, 2000 the Company held a minority
investment in a privately held company and carried the investment at cost of
$350. During the first quarter, the investee's shares began trading on The
Nasdaq Stock Market(R), and therefore, NCS has begun accounting for this
marketable security under Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities. In
accordance with this Statement, the Company accounts for this investment as
available for sale, and has recorded the asset at the current market value of
$18,251, with the unrealized gain, net of tax, as a separate component of
Stockholders' Equity. Under the terms of the initial public offering, the
Company will not be able to sell the securities until September 1, 2000. Future
fluctuations in value will be recorded in Stockholders' Equity until the time of
sale.
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 quarter ended April 29,
2000 and May 1, 1999 are as follows (in thousands):
2000 1999
------ ------
Net income $8,769 $6,653
Increase in market value of
marketable securities, net
of tax 11,266 -
Foreign currency translation
adjustments (570) 1,003
------- ------
Comprehensive income $19,465 $7,656
======= ======
Note F - In March 2000 the Company purchased the minority interest in its
Australian joint venture for $4.7 million. The purchase price has been allocated
principally to goodwill.
Note G - On May 16, 2000 the Company announced that it has agreed upon the
preliminary terms for the formation of a joint venture with the University of
Cambridge Local Examinations Syndicate (UCLES), in the United Kingdom. Under the
anticipated terms of the joint venture, the entity will be majority-owned by NCS
and have an anticipated annual revenue stream in excess of $80 million. The
completion of the transaction is subject to the negotiation and execution of a
definitive agreement.
The creation of this joint venture would combine the core business of UCLES'
subsidiary, Oxford, Cambridge and RSA Examinations, with NCS' U.K. assessments
business. The proposed joint venture would provide content, scoring and related
education services, including electronic testing, Internet-based curriculum
delivery and school-based information technology centers.
<PAGE>
Note H - The Company has five reportable business segments; the table below
presents information by segment.
<TABLE>
<CAPTION>
Assessments Education Data
& Testing Software & NCS Collection
Services Services Services Systems International Totals
----------- ----------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended 4/29/00
Revenues $ 50,890 $32,307 $56,240 $20,289 $14,637 $174,363
Income from operations 8,601 (885) 11,280 4,990 1,068 25,054
Quarter 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
</TABLE>
The difference between segment totals and the Company's consolidated totals for
income from operations is central general and administrative expenses and
non-operating expenses, which are not allocated to the segments.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
National Computer Systems, Inc. (NCS or the Company)is a global information
services company providing software, services, systems and Internet-based
technologies for the collection, management and interpretation of data. The
Company serves segments of the education, testing, assessment and complex data
management markets.
Recap of 2000 First Quarter Results
For the quarter ended April 29, 2000, total revenues increased by $48.5 million
or 38.6% from the quarter ended May 1, 1999. Gross profit increased $13.9
million, or 28.9%, but decreased as a percent of revenue from 38.3% to 35.6%.
Income from operations for the quarter increased $3.4 million or 28.8% over the
prior year first quarter. Net income increased 31.8% over the quarter ended May
1, 1999, and diluted earnings per share increased 30.0% to $.26 per share from
$.20 in the prior year first quarter.
Revenues
Total revenues for the quarter ended April 29, 2000 were up 38.6% from the prior
year. By revenue category, Services revenue increased 55.4% and Product sales
2.6%. By reportable segment, 2000 first quarter revenues compared to first
quarter 1999 as follows:
Assessments and Testing Services +59.4%
Educational Software and Services +14.1
NCS Services +66.4
Data Collection Systems - 2.6
International +33.8
Increases in Assessments and Testing Services were the result of increased state
educational tests and electronic testing. Educational Software and Services had
increases in service revenue from software support and software product sales,
offset by lower revenue in network services. NCS Services revenues were higher
due greatly to $19 million of revenue related to the U.S. Census project. Data
Collection Systems revenues were relatively flat, year-on-year, in both
documents and data collection hardware. International revenues increased as a
result of the Argentine telecommunications project and increases in Australian
educational testing.
Cost of Revenues and Gross Margins
For the quarter ended April 29, 2000, the Company's overall gross margin was
35.6%, compared to 38.3% in the earlier period. The decrease reflects the
continued general change in revenue mix towards services, which has a lower
gross margin percent. On a quarter-to-quarter basis, the gross margin in service
revenue improved slightly as a percentage of revenue, with improvements in
education software support and electronic testing offsetting slight percentage
declines in state assessments and government services. Product sales gross
profit decreased slightly in several areas, including education software, where
subscription based revenues are becoming a greater portion of the total product
revenues.
Operating Expenses
Sales and marketing expenses increased $0.7 million or 4.2% in the quarter ended
April 29, 2000 over the prior year first quarter. As a percentage of revenues,
first quarter sales and marketing expenses declined by 3.3 percentage points,
due primarily to the relatively lower selling costs associated with services
revenues.
Research and development costs increased $2.4 million, or 66.3%, in the quarter
ended April 29, 2000 as compared to the prior year. This increased spending was
a result of higher investments in Internet-delivered products and services,
primarily for the K-12 Education Software segment, as well as other product and
service offerings.
General and administrative expenses increased by $7.4 million, or 45.5%, for the
quarter ended April 29, 2000 from the prior year quarter. As a percentage of
revenue, first quarter general and administrative expense increased from 12.9%
to 13.6%. These expenses increased due to variable compensation accrued because
of the Company's stock price appreciation, as well as increased information
technology costs.
Non-operating Expenses
Interest expense and other expense, net, were insignificant for the quarters
ending April 29, 2000 and May 1, 1999.
Provision for Income Taxes
The effective income tax rate was 39.4% for the quarter ended April 29, 2000,
compared to 40.1% for the earlier quarter. The higher rate in 1999 reflected
non-deductible losses of a foreign operation which was sold in the fourth
quarter of 1999.
Liquidity and Capital Resources
For the quarter ended April 29, 2000, the Company used $6.9 million of cash flow
from operating activities as compared to generating $13.9 million in the same
period of the prior year. This reflects the increased build-up of
work-in-process inventory in the test processing business and less progress
billing of these same services. Cash was used principally to fund investments in
property, plant and equipment of $17.3 million, which included the build-out of
the Austin, Texas facility and nine professional scoring centers, as well as
$2.3 million for business systems. The net uses of cash were funded with cash on
hand and short-term debt from the Company's revolving credit facility. The
Company expects for the remainder of fiscal 2000 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, future
excess cash flows from operations, and an existing revolving credit facility.
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 29, 2000, 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 25,
2000.
(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 28,046,510 52,316
David C. Cox 28,044,781 54,045
Delores M. Etter 28,066,541 32,285
Russell A. Gullotti 28,056,107 42,719
Jean B. Keffeler 28,049,888 48,938
John J. Rando 28,074,194 24,632
Stephen G. Shank 28,060,001 38,825
John E. Steuri 28,066,120 32,706
(ii) Approval of the appointment of Ernst & Young LLP as auditors
for the year ending February 3, 2001
For 28,028,846
Against 31,477
Abstain 38,503
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 29,
2000.
<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 12, 2000
<PAGE>
FORM 10-Q
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE QUARTERLY PERIOD ENDED APRIL 29, 2000
EXHIBIT INDEX
EXHIBIT
27 Financial Data Schedule.
