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: October 31, 1994
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: (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 November 30, 1994, was 15,322,158.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months
Ended October 31,
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1994 1993
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(In thousands, except
per share amounts)
REVENUES
Net sales $78,680 $60,777
Maintenance and support 15,928 16,868
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Total revenues 94,608 77,645
COST OF REVENUES
Cost of sales 52,043 37,471
Cost of maintenance and support 11,326 12,304
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Gross margin 31,239 27,870
OPERATING EXPENSES
Sales and marketing 10,649 11,899
Research and development 3,477 2,501
General and administrative 8,510 10,029
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INCOME FROM OPERATIONS 8,603 3,441
Interest expense 840 515
Other expense, net 260 46
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INCOME BEFORE INCOME TAXES 7,503 2,880
Income tax provision 2,925 1,375
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NET INCOME $ 4,578 $ 1,505
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NET INCOME PER SHARE $ .30 $ .10
AVERAGE SHARES OUTSTANDING 15,361 15,403
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months
Ended October 31,
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1994 1993
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(In thousands, except
per share amounts)
REVENUES
Net sales $195,348 $169,918
Maintenance and support 48,141 51,910
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Total revenues 243,489 221,828
COST OF REVENUES
Cost of sales 120,015 97,569
Cost of maintenance and support 33,989 38,604
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Gross margin 89,485 85,655
OPERATING EXPENSES
Sales and marketing 32,467 35,275
Research and development 9,019 6,911
General and administrative 27,003 29,646
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INCOME FROM OPERATIONS 20,996 13,823
Interest expense 2,390 1,487
Other (income) expense, net 163 (159)
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INCOME BEFORE INCOME TAXES 18,443 12,495
Income tax provision 7,200 5,025
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NET INCOME $ 11,243 $ 7,470
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NET INCOME PER SHARE $ .74 $ .48
AVERAGE SHARES OUTSTANDING 15,160 15,712
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
October 31, January 31,
1994 1994
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(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 754 $ 1,724
Receivables:
Trade 60,696 70,100
Other 1,061 5,328
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Total receivables 61,757 75,428
Inventories:
Finished products 6,527 6,348
Scoring services and work in process 9,091 6,117
Raw materials and purchased parts 4,785 4,905
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Total inventories 20,403 17,370
Prepaid expenses and other 9,999 9,198
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TOTAL CURRENT ASSETS 92,913 103,720
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 46,676 37,254
Machinery and equipment 99,342 88,950
Rotable service parts 9,738 11,085
Equipment held for lease 7,764 8,205
Accumulated depreciation (81,712) (75,988)
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Net property, plant and equipment 81,808 69,506
OTHER ASSETS
Acquired and internally developed
software products 29,398 20,092
Non-current receivables, investments
and other assets 21,285 21,896
Goodwill 5,273 4,959
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Total other assets 55,956 46,947
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TOTAL ASSETS $230,677 $220,173
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See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
October 31, January 31,
1994 1994
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(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 4,461 $ 2,677
Accounts payable 17,286 18,777
Accrued expenses 24,415 27,093
Deferred income 17,058 18,956
Income taxes 148 -
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TOTAL CURRENT LIABILITIES 63,368 67,503
DEFERRED INCOME TAXES 9,140 7,849
LONG-TERM DEBT -- less current maturities 45,905 44,674
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,301 and 14,983 shares,
respectively 459 449
Paid-in capital 3,609 -
Retained earnings 114,012 106,771
Deferred compensation (5,816) (7,073)
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Total stockholders' equity 112,264 100,147
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $230,677 $220,173
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See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
October 31,
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1994 1993
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(In thousands)
OPERATING ACTIVITIES
Net income $11,243 $ 7,470
Depreciation, amortization and other
noncash expenses 18,447 19,130
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 14,795 (1,569)
Increase in inventory and other
current assets (4,016) (4,794)
Decrease in accounts payable and
accrued expenses (6,221) (8,995)
Increase (decrease) in deferred income (2,200) 517
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Net cash provided by
operating activities 32,048 11,759
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (23,038) (15,201)
Capitalized software products (4,648) (8,306)
Acquisitions, net (3,216) -
Other - net (2,737) (1,284)
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Net cash used in investing activities (33,639) (24,791)
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FINANCING ACTIVITIES
Net increase in revolving
credit borrowing 1,700 19,000
Net proceeds of other borrowings 2,265 2,233
Issuance (repurchase) of common stock, net 730 (14,095)
Dividends paid (4,074) (4,234)
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Net cash provided
by financing activities 621 2,904
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Decrease in cash and cash equivalents (970) (10,128)
CASH AND CASH EQUIVALENTS - beginning of period 1,724 10,767
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CASH AND CASH EQUIVALENTS - end of period $ 754 $ 639
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See Notes to Consolidated Financial Statements.
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 October 31, 1994,
are not necessarily indicative of the operating results that may be
expected for the entire fiscal year ending January 31, 1995.
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 - In July, 1994, the Company completed the acquisition of
Abacus Data Group, Inc., a developer of Windows-based instructional
management software for the education market. The purchase price
was approximately $3.8 million in a combination of cash and NCS
stock, plus contingent earn-out payments, and was allocated
principally to software products and goodwill.
Note E - In October, 1994, the Company completed the acquisition of
an international private banking product, DECBank APSYS, along with
certain related business assets and operations in Geneva,
Switzerland. The purchase price consisted of $2.9 million in cash
and assumption of certain liabilities and was allocated principally
to software products.
Note F - The Company has received a claim from a customer for
expenses and other damages related to performance under a loan
processing and servicing contract. 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 claim has not
yet been fully articulated, though the Company believes that any
such claim would be substantially covered by insurance and would
not have a material effect on the Company's financial position.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
National Computer Systems, Inc. is an information services
company serving the business, education, assessment and financial
markets. The Company's 1993 Annual Report contains a description
of its activities in each of its four primary business units:
NCS Technology, NCS Education, NCS Assessments, and NCS
Financial.
Recap of 1994 Results
For the quarter ended October 31, 1994, total revenues were up by
$17.0 million or 21.8% from the quarter ended October 31, 1993.
However, overall gross margin as a percentage of revenue
decreased 2.9 percentage points from the prior year, mitigating
the positive impact of the higher revenues. These factors, along
with reduced operating expenses, resulted in a $5.2 million or
150% increase in operating income over the same period in 1993.
For the nine months ended October 31, 1994, total revenues were
up $21.7 million or 9.8% over the prior year. Though overall
gross margin as a percentage of revenue declined by 1.9
percentage points, the increased revenues and lower overall
operating expenses generated a year-to-year increase in income
from operations of $7.2 million or 52%.
The third quarter and nine month operating income improvements
are the result of three significant factors: (1) significantly
improved performance at the Company's Iowa City service center
within NCS Education, (2) reduced sales and marketing and general
and administrative expenses across the Company, and (3) the
Ultrust product discontinuation, which contributed to substantial
improvement in the results of NCS Financial.
Interest expense increased by $.3 million and $.9 million,
respectively, for the three and nine-month periods ended October
31, 1994, as compared to the same periods of 1993. The Company's
1994 third quarter net income was $4.6 million ($.30 per share),
an increase of 204% over third quarter 1993's net income of $1.5
million ($.10 per share). On a year-to-date basis, the Company's
net income was $11.2 million ($.74 per share) in 1994, a 51%
increase over the prior year. A more detailed discussion of the
various income statement items follows.
Revenues by Primary Business
Total revenues for the quarter ended October 31, 1994 were up
21.8% to $94.6 million from $77.6 million in the comparable 1993
quarter. On a year-to-date basis, revenues were up 9.8% to
$243.5 million from $221.8 million in the prior year. Total
third quarter and year-to-date revenues in the Company's four
major business units compared to the prior year were as follows:
Third Quarter Year-to-Date
NCS Technology +13% - 1%
NCS Education +37% +23%
NCS Assessments + 9% --
NCS Financial + 3% + 3%
Total revenues for NCS Technology were up for the quarter
principally due to higher sales of forms and scanning systems.
This increase, however, was partially offset by lower third-party
maintenance revenues. Year-to-date NCS Technology revenues were
down slightly as higher forms and scanners sales were more than
offset by the lower third-party maintenance revenues. Total
revenues for NCS Education were up for both the quarter and year-
to-date periods primarily due to significantly higher processing
volumes at the Company's Iowa City service center. NCS
Assessments revenue increased for the quarter, as result of a
higher volume of clinical assessments, despite a difficult market
environment related to managed care cost containment pressures.
Year-to-year, however, revenue was essentially flat due to a slow
first quarter. Total revenues for NCS Financial increased at a
3% rate for both the three and nine-month periods ended October
31, 1994. This business also faces challenges related to certain
industry trends such as consolidation by financial institutions,
but the Company believes opportunities exist to expand its
offerings of products and services and to pursue asset management
organizations other than banks.
These revenue changes for the quarter and nine-month periods
ended October 31, 1994, are not necessarily indicative of the
revenue changes expected for the entire fiscal year ended January
31, 1995.
Cost of Revenues and Gross Margins
For the quarter ended October 31, 1994, the Company's overall
gross margin percentage on total revenues was 33.0%, down from
35.9% for the same period in the prior year. The gross margin as
a percent of sales revenue declined by 4.4 percentage points from
the same period in fiscal 1993. The quarter-to-quarter decline
was primarily due to lower processing margins in NCS Education's
Iowa City service center as a result of start-up costs on new
contracts and significant volume increases in the lower margin
test processing services. Gross margins on maintenance and
support revenues improved by 1.8 percentage points in the third
quarter as compared to the prior year quarter as a result of
improved hardware maintenance margins in NCS Technology and
improved software support margins in NCS Financial due primarily
to the discontinuance of Ultrust.
For the nine months ended October 31, 1994, the Company's overall
gross margin declined by 1.8 percentage points to 36.8%. This
decline is principally related to the factors cited above.
The Company has been notified of significant paper price
increases for the type of paper most commonly used in its
scannable forms product. This is consistent with paper price
movements in the general marketplace and the Company will attempt
to offset these increases, to the extent possible, with increases
in productivity and, where necessary, with price increases to its
customers. It is the Company's current belief that these paper
price increases will unfavorably impact gross margins to some
extent, but should not materially impact its overall
profitability.
Operating Expenses
Sales and marketing expenses decreased $1.3 million or 10.5% in
the quarter ended October 31, 1994, over the year earlier
quarter. Similarly, sales and marketing expenses decreased $2.8
million or 8.0% for the nine month period ended October 31, 1994,
as compared to the same period of 1993. These decreases are the
result of specific efforts to control these expenses to more
productive levels in 1994. For fiscal 1994, sales and marketing
expenses will continue to be below prior year levels as these
efforts continue.
Research and development costs increased by $1.0 million for the
quarter ended October 31, 1994, over the year earlier quarter.
For the nine months ended October 31, 1994, research and
development expenses were up $2.1 million over the same period of
1993. The increases came principally in NCS Financial and are
related to further development of software products. These
expenses are likely to continue at levels higher than the
previous year for all of fiscal 1994.
General and administrative expenses decreased by $1.5 million or
15.1% in the third quarter from the comparable prior year
quarter, resulting from lower expense levels in all the primary
businesses. On a year-to-date basis, general and administrative
expenses were down similarly, $2.6 million, or 8.9%. This
favorable comparison to the prior year should continue throughout
fiscal 1994.
Non-operating Expenses
Interest expense increased by $.3 million and $.9 million,
respectively, in the three and nine-month periods ended October
31, 1994, from the comparable prior year periods. These
increases are due to higher aggregate borrowing levels and higher
interest rates.
Provision for Income Taxes
The effective income tax rate of 39.0% for the first nine months
of fiscal 1994, was less than the 40.2% effective rate for the
first nine months of fiscal 1993. This year-to-year net decrease
in the effective income tax rate is the combined effect of a
number of factors, including lower foreign subsidiary losses.
Liquidity and Capital Resources
For the nine-month period ended October 31, 1994, the Company
generated $32.0 million of cash flow from operating activities.
This compares favorably to the corresponding prior-year period,
due to increased net income and improved collections of trade
receivables. Borrowings increased $4.0 million to fund, along
with cash provided from operations and cash on hand, $30.9
million of investment in property, plant and equipment, software
products and acquisitions. See also Notes D and E of Notes to
Consolidated Financial Statements. It is anticipated that the
Company's revolving credit borrowings and other borrowings will
fluctuate to fund seasonal operating needs and capital
expenditures, but should not change significantly for the
remainder of fiscal 1994. Funds to be generated from operations
and funds available from the Company's existing revolving credit
facility are expected to be adequate to meet current cash
requirements.
PART II. OTHER INFORMATION
Item 5. Other Information
Effective October 1, 1994, Russell A. Gullotti became President
and Chief Executive Officer of the Company. He succeeded Charles
W. Oswald who remains as Chairman of the Board of Directors. Mr.
Gullotti has held a variety of positions during his career,
including senior leadership positions in manufacturing, sales and
services.
Mr. Gullotti was most recently a senior executive with Digital
Equipment Corporation. He led the creation of Digital's
successful professional services organization and was President
of Digital's sales, service and marketing organization for all of
North and South America.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10(a). Agreement dated August 4, 1994 between NCS and
Russell A. Gullotti, as amended on August 8,1994.
10(b). Agreement dated August 22, 1994 between NCS and
Charles W. Oswald.
27. Financial Data Schedule.
(b) There were no reports on Form 8-K filed for the three
months ended October 31, 1994.
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: December 9, 1994
FORM 10-Q
NATIONAL COMPUTER SYSTEMS, INC.
For the quarterly period ended October 31, 1994
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EXHIBIT INDEX
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Exhibit 10(a). Agreement dated August 4, 1994 between NCS and
Russell A. Gullotti, as amended on August 8,
1994.
10(b). Agreement dated August 22, 1994 between NCS and
Charles W. Oswald.
27. Financial Data Schedule.