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 31,1995
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, 1995, was 15,537,325.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months
Ended October 31,
-----------------
1995 1994
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(In thousands, except
per share amounts)
REVENUES
Net sales $81,580 $78,680
Maintenance and support 15,741 15,928
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Total revenues 97,321 94,608
COST OF REVENUES
Cost of sales 51,722 52,043
Cost of maintenance and support 10,562 11,326
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Gross margin 35,037 31,239
OPERATING EXPENSES
Sales and marketing 11,310 10,649
Research and development 3,312 3,477
General and administrative 9,728 8,510
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INCOME FROM OPERATIONS 10,687 8,603
Interest expense 700 840
Other (income) expense, net (285) 260
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INCOME BEFORE INCOME TAXES 10,272 7,503
Income tax provision 4,100 2,925
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NET INCOME $ 6,172 $ 4,578
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NET INCOME PER SHARE $ .39 $ .30
AVERAGE SHARES OUTSTANDING 15,821 15,361
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months
Ended October 31,
-----------------
1995 1994
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(In thousands, except
per share amounts)
REVENUES
Net sales $212,592 $195,348
Maintenance and support 47,468 48,141
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Total revenues 260,060 243,489
COST OF REVENUES
Cost of sales 130,791 120,015
Cost of maintenance and support 31,161 33,989
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Gross margin 98,108 89,485
OPERATING EXPENSES
Sales and marketing 33,177 32,467
Research and development 10,450 9,019
General and administrative 28,713 27,003
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INCOME FROM OPERATIONS 25,768 20,996
Interest expense 2,672 2,390
Other (income) expense, net (335) 163
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INCOME BEFORE INCOME TAXES 23,431 18,443
Income tax provision 9,250 7,200
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NET INCOME $ 14,181 $ 11,243
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NET INCOME PER SHARE $ .90 $ .74
AVERAGE SHARES OUTSTANDING 15,688 15,160
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
October 31, January 31,
1995 1995
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(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,312 $ 1,195
Receivables:
Trade 62,903 77,209
Other 1,801 1,940
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Total receivables 64,704 79,149
Inventories:
Finished products 6,894 6,408
Scoring services and work in process 14,000 8,974
Raw materials and purchased parts 3,995 5,073
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Total inventories 24,889 20,455
Prepaid expenses and other 9,527 9,925
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TOTAL CURRENT ASSETS 103,432 110,724
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 49,761 48,202
Machinery and equipment 105,365 101,336
Rotable service parts 8,497 9,256
Equipment held for lease 7,815 7,583
Accumulated depreciation (90,606) (83,648)
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Net property, plant and equipment 80,832 82,729
OTHER ASSETS
Acquired and internally developed
software products 24,943 27,234
Non-current receivables, investments
and other assets 14,158 17,027
Goodwill 2,575 3,043
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Total other assets 41,676 47,304
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TOTAL ASSETS $225,940 $240,757
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See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
October 31, January 31,
1995 1995
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(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 3,590 $ 5,212
Accounts payable 14,606 20,655
Accrued expenses 29,452 29,495
Deferred income 17,684 18,645
Income taxes 2,172 1,103
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TOTAL CURRENT LIABILITIES 67,504 75,110
DEFERRED INCOME TAXES 8,329 7,211
LONG-TERM DEBT -- less current maturities 24,717 45,313
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,562 and 15,310 shares,
respectively 465 459
Paid-in capital 7,219 3,795
Retained earnings 123,709 114,546
Deferred compensation (6,003) (5,677)
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Total stockholders' equity 125,390 113,123
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $225,940 $240,757
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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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1995 1994
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(In thousands)
OPERATING ACTIVITIES
Net income $14,181 $11,243
Depreciation, amortization and other
noncash expenses 22,038 18,131
Provision for deferred income taxes 1,118 316
Changes in operating assets and liabilities:
Decrease in accounts receivable 15,290 14,795
Increase in inventory and other
current assets (5,468) (4,016)
Decrease in accounts payable and
accrued expenses (5,030) (6,221)
Decrease in deferred income (1,027) (2,200)
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Net cash provided by
operating activities 41,102 32,048
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (10,623) (23,038)
Capitalized software products (3,785) (4,648)
Acquisitions, net - (3,216)
Other - net 113 (2,737)
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Net cash used in investing activities (14,295) (33,639)
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FINANCING ACTIVITIES
Net increase (decrease) in revolving
credit borrowing (19,600) 1,700
Net proceeds (repayments) of other borrowings (1,618) 2,265
Issuance of common stock, net 1,700 730
Dividends paid (4,172) (4,074)
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Net cash provided (used)
by financing activities (23,690) 621
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Increase (decrease) in cash 3,117 (970)
CASH AND CASH EQUIVALENTS - beginning of period 1,195 1,724
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CASH AND CASH EQUIVALENTS - beginning of period $ 4,312 $ 754
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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, 1995, are not necessarily indicative of the
operating results that may be expected for the entire fiscal year ending January
31, 1996.
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 - The Company has received a claim from a customer for expenses, alleged
loan defaults, 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 Company and its insurer intend to vigorously contest this claim.
While the claim has not yet been fully articulated, 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
education; business, government, and health care; and banking and financial
markets. The Company's 1994 Annual Report contains descriptions of its
activities in each of these markets.
Recap of 1995 Results
For the quarter ended October 31, 1995, total revenues were up by $2.7 million
or 2.9% from the quarter ended October 31, 1994. Overall gross margin, as a
percentage of revenues, increased by 3.0 percentage points from the prior year.
These factors, somewhat offset by higher operating expenses, resulted in a $2.1
million or 24% increase in operating income over the same period in 1994. Sales
to Business and Government customers continued to increase significantly as the
Company's focus on certain key application areas such as quality measurement and
human resources produced positive results. The Company's Financial Systems
business also continued to report improved results in the third quarter.
Total revenues for the nine months ended October 31, 1995, increased by $16.6
million or 6.8% over the same period of the prior year. Net income rose 26.1% to
$14.2 million or $.90 per share. The year-to-date increases are the result of
the same business developments described above. In addition, on a year-to-date
basis, the Company's Education business also reported improved results, with
growth in the test processing and administrative software businesses. A more
detailed discussion of the various income statement items follows.
Revenues
Total revenues for the quarter ended October 31, 1995 were up 2.9% to $97.3
million from $94.6 million in the comparable 1994 quarter. On a year-to-date
basis, revenues were up 6.8% to $260.1 million from $243.5 million in the prior
year. Total third quarter and year-to-date revenues as compared to the prior
year, by the Company's major business areas, were as follows:
Third Quarter Year-to-Date
Education - 12% + 4%
Business, Government
Health Care and Other + 10% + 7%
Banking and Financial + 41% + 15%
Total revenues from the Education market were down for the quarter as a result
of the timing of certain educational test processing at the Company's Iowa City
service center. For the nine-month period, higher volumes of student financial
aid processing and higher software licensing revenues from administrative
software generated the year-to-year increase in revenues from Education. Total
revenues from Business, Government, and Healthcare were up for both the quarter
and year-to-date periods as higher forms sales, proprietary hardware sales and
services revenues were partially offset by lower third-party maintenance
revenues. Total revenues in the Banking and Financial market were also up for
both periods, as higher software licensing and support revenues generated from a
fiscal 1994 third quarter acquisition of an international private banking
software business, plus improved domestic hardware revenues, resulted in the
period-to-period increases. The revenue increases for the three and nine-month
periods ended October 31, 1995, are not necessarily indicative of the revenue
increases expected for the entire fiscal year ended January 31, 1996.
Cost of Revenues and Gross Margins
For the quarter ended October 31, 1995, the Company's overall gross margin
improved to 36.0% from 33.0% for the same period in the prior year. The gross
margin on net sales revenue increased by 2.7 percentage points from the same
period in fiscal 1994. Improved processing margins in Education's Iowa City
service center as a result of new contracts being in full production cycles, and
higher margins on other services revenues accounted for the quarter-to-quarter
improvement. Gross margins on maintenance and support revenues improved by 4.0
percentage points in the third quarter as compared to the prior year quarter as
a result of improved software support margins across the Company's major
businesses.
For the nine months ended October 31, 1995, the Company's overall gross margin
improved by .9 percentage points to 37.7%. Gross margin on net sales revenue was
essentially flat year-to-year. However, gross margins on maintenance and support
revenues improved by 5.0 percentage points, also as a result of improved
software support margins across the Company's major businesses.
Operating Expenses
Sales and marketing expenses increased $.7 million for the three and nine-month
periods ended October 31, 1995, over the prior year periods. As a percentage of
revenue, sales and marketing expenses increased by .3 percentage points for the
three-month period ended October 31, 1995, as compared to the same prior year
period. However, on a year-to-date basis, sales and marketing expenses have
declined by .5 percentage points as a percent of revenue. For the remainder of
fiscal 1995, the Company expects sales and marketing expenditures to trend
slightly higher than fiscal 1994. Research and development costs decreased $.2
million for the quarter ended October 31, 1995, over the year earlier quarter.
For the nine months ended October 31, 1995, research and development expenses
were up $1.4 million over the same period of 1994. The year-to-date increase
relates principally to Banking and Financial software and enhancements to the
Company's scanning and imaging technology. On a full-year basis, these expenses
are likely to continue at higher levels than the previous year.
General and administrative expenses increased by $1.2 million and $1.7 million,
respectively, in the three and nine-month periods ended October 31, 1995, from
the comparable prior year periods. On a year-to-date basis, these expenses are
relatively constant as a percentage of revenues. This should continue to be the
case for the full fiscal year.
Non-operating Expenses
Interest expense decreased slightly for the quarter ended October 31, 1995, as
compared to the prior year quarter, as a result of lower aggregate debt levels.
For the nine months ended October 31, 1995, interest expense increased by $.3
million, from the comparable prior year period. This increase is primarily the
result of slightly higher interest rates.
Provision for Income Taxes
The effective income tax rate of 39.5% for the first nine months of fiscal 1995
was greater than the 39.0% effective tax rate for the first nine months of
fiscal 1994. This year-to-year increase in the effective income tax rate is the
result of losses from its foreign subsidiaries which the Company is unable to
realize as a benefit in the current tax provision. The Company expects its
annual effective income tax rate for fiscal 1995 to approximate 39.5%.
Liquidity and Capital Resources
For the nine-month period ended October 31, 1995, the Company generated $41.1
million of cash flow from operating activities. This compares favorably to the
corresponding prior year period as a result of increased net income and higher
noncash expenses, primarily software product amortization. Cash provided from
operations and cash on hand were used to fund investments in property, plant and
equipment and product software, as well as reduce the Company's revolving credit
borrowings. The Company's revolving credit borrowings were zero at October 31,
1995, but that facility will be utilized as day-to-day operating requirements
dictate. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
*10.1 -- NCS 1990 Employee Stock Option Plan, as amended
*10.2 -- NCS 1995 Employee Stock Option Plan, as amended
*10.3 -- NCS 1990 Long-Term Incentive Plan, as amended
27 -- Financial Data Schedule
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* Indicates management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
(b) There were no reports on Form 8-K filed for the three months ended
October 31, 1995.
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
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Jeffrey W. Taylor
Vice President and
Chief Financial Officer
Dated: December 13, 1995
FORM 10-Q
NATIONAL COMPUTER SYSTEMS, INC.
For the quarterly period ended October 31, 1995
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EXHIBIT INDEX
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Exhibit 10.1 -- NCS 1990 Employee Stock Option Plan, as amended
10.2 -- NCS 1995 Employee Stock Option Plan, as amended
10.3 -- NCS 1990 Long-Term Incentive Plan, as amended
27 -- Financial Data Schedule