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, 1996
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 May 31, 1996, was 15,456,247.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months
Ended April 30,
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1996 1995
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(In thousands, except
per share amounts)
REVENUES
Net sales $60,812 $53,786
Maintenance and support 9,695 10,223
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Total revenues 70,507 64,009
COST OF REVENUES
Cost of sales 37,140 31,374
Cost of maintenance and support 6,629 6,682
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Gross margin 26,738 25,953
OPERATING EXPENSES
Sales and marketing 9,692 9,534
Research and development 2,164 2,290
General and administrative 8,301 8,028
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INCOME FROM OPERATIONS 6,581 6,101
Interest expense 568 1,043
Other expense, net 652 371
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INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 5,361 4,687
Income taxes 2,160 1,835
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INCOME FROM CONTINUING OPERATIONS 3,201 2,852
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Loss from discontinued operations,
net of tax benefit of $260 and
$320, respectively (370) (487)
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NET INCOME $2,831 $2,365
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EARNINGS PER SHARE
Continuing operations $0.20 $0.18
Discontinued operations (0.02) (0.03)
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Net income $0.18 $0.15
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AVERAGE SHARES OUTSTANDING 15,631 15,497
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 30, January 31,
1996 1996
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(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,316 $ 5,154
Receivables 57,912 68,713
Inventories:
Finished products 5,544 6,012
Scoring services and work in process 13,354 8,694
Raw materials and purchased parts 4,214 3,630
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Total inventories 23,112 18,336
Prepaid expenses and other 8,481 8,460
Investment in discontinued operations 19,118 17,557
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TOTAL CURRENT ASSETS 115,939 118,220
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 49,401 49,350
Machinery and equipment 105,630 104,551
Accumulated depreciation (81,286) (79,072)
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Net property, plant and equipment 73,745 74,829
OTHER ASSETS
Acquired and internally developed
software products 10,964 11,865
Non-current receivables, investments
and other assets 11,987 12,384
Goodwill 2,271 2,426
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Total other assets 25,222 26,675
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TOTAL ASSETS $214,906 $219,724
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See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 30, January 31,
1996 1996
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(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 3,565 $ 2,473
Accounts payable 17,208 16,416
Accrued expenses 20,203 23,137
Deferred income 14,596 16,148
Income taxes 1,352 4,458
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TOTAL CURRENT LIABILITIES 56,924 62,632
DEFERRED INCOME TAXES 3,915 4,359
LONG-TERM DEBT -- less current maturities 23,228 24,535
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,442 and 15,365 shares,
respectively 463 461
Paid-in capital 4,269 3,427
Retained earnings 131,596 130,007
Deferred compensation (5,489) (5,697)
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Total stockholders' equity 130,839 128,198
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $214,906 $219,724
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See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
April 30,
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1996 1995
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(In thousands)
OPERATING ACTIVITIES
Net income from continuing operations $ 3,201 $ 2,852
Loss from discontinued operations (370) (487)
Depreciation, amortization and other
noncash expenses 7,091 6,731
Provision for deferred income taxes (444) (49)
Changes in operating assets and liabilities:
Decrease in accounts receivable 11,390 2,357
Increase in inventory and other
current assets (4,902) (3,017)
Decrease in accounts payable and
accrued expenses (7,412) (5,657)
Decrease in deferred income (2,082) (3,195)
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Net cash provided (used) by
operating activities 6,472 (465)
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,431) (3,734)
Capitalized software products (711) (1,051)
Other, net (386) (1,133)
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Net cash used in investing activities (3,528) (5,918)
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FINANCING ACTIVITIES
Net increase in revolving credit borrowing - 6,400
Net proceeds (repayments) of other borrowings (240) 309
Issuance of common stock, net 844 473
Dividends paid (1,386) (1,380)
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Net cash provided (used)
by financing activities (782) 5,802
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Increase (decrease) in cash 2,162 (581)
CASH - beginning of period 5,154 1,195
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CASH - end of period $ 7,316 $ 614
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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 April 30, 1996, are not necessarily indicative of the
operating results that may be expected for the entire fiscal year ending January
31, 1997.
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.
Note E - On May 30, 1996, the Company entered into an agreement to sell its
Financial Systems business for $95 million in cash. NCS Financial Systems
business provides software and services for asset management, primarily to bank
trust departments. Revenues of this business were $11.1 million and $10.3
million for the three-month periods ending April 30, 1996 and 1995,
respectively. The completion of the sale is subject to certain regulatory
approvals and other closing conditions and is expected to be completed during
the month of July 1996. The accompanying consolidated statements have been
presented to report separately the net assets and operating results of these
discontinued operations. In addition, Management's Discussion and Analysis of
Results of Operations and Financial Condition is a discussion of continuing
operations only.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
National Computer Systems, Inc. is an information services company providing
data collection services and systems to selected segments of the education,
business, government and healthcare markets.
Recap of 1996 First Quarter Results
For the quarter ended April 30, 1996, total revenues were up by $6.5 million or
10.2% from the quarter ended April 30, 1995. Though overall gross margin as a
percent of revenue decreased by 2.6 percentage points from the prior year, and
overall operating expenses increased slightly, the higher revenues generated a
quarter-to-quarter increase in income from operations of $.5 million or 7.9%. A
more detailed discussion of the various income statement items follows.
Revenues
Total revenues for the quarter ended April 30, 1996 were up 10.2% to $70.5
million from $64.0 million in the prior year. Total revenues increased in the
quarter primarily as a result of higher volumes of student financial aid and
educational assessment processing at the Company's Iowa City service center. In
addition, revenues were positively impacted by higher data collection systems
sales in the commercial market and higher forms revenue in the education market.
Cost of Revenues and Gross Margins
For the quarter ended April 30, 1996, the Company's overall gross margin
declined to 37.9% from 40.5% for the same period in the prior year. The gross
margin on net sales revenue declined by 2.8 percentage points from the same
period in fiscal 1995. The quarter-to-quarter decline was principally due to
lower relative margins on student financial aid and assessment revenues at the
Company's Iowa City service center. Gross margins on maintenance and support
revenues declined by 3.0 percentage points in the first quarter as compared to
the prior year quarter as a result of lower margins on a decreasing base of
third-party hardware maintenance.
Operating Expenses
Sales and marketing expenses increased $.2 million or 1.7 % in the quarter ended
April 30, 1996, over the prior year quarter. As a percentage of revenues,
however, sales and marketing expenses declined quarter to quarter by 1.1
percentage points. For the remainder of fiscal 1996, the Company expects sales
and marketing expenses to be slightly higher than fiscal 1995; as a percentage
of revenues, these expenses are expected to remain relatively constant year to
year. Research and development costs declined slightly in the quarter ended
April 30, 1996 as compared to the quarter ended April 30, 1995. This decline is
the result of the timing of certain expenditures. For the full year, these
expenses are expected to be at higher levels for fiscal 1996 than fiscal 1995,
as the Company intends to increase its investment in, among other things, new
data collection technologies and services.
General and administrative expenses increased by $.3 million or 3.4% for the
quarter ended April 30, 1996, from the prior year quarter. For fiscal 1996,
these expenses are expected to be comparable or slightly higher than the
previous year.
Non-operating Expenses
Interest expense decreased by $.5 million in the quarter ended April 30, 1996,
from the comparable prior year period. This decrease is the result of
substantially lower debt levels in fiscal 1996 than fiscal 1995.
Provision for Income Taxes
The effective income tax rate of 40.2% for the three months ended April 30, 1996
was higher than the effective rate applied for the same period in the prior year
primarily as a result of the statutory expiration of research and development
credits.
Liquidity and Capital Resources
For the three-month period ended April 30, 1996, the Company generated $6.5
million of cash flow from operating activities. This compares favorably to the
corresponding prior year period primarily as a result of improved collections of
trade receivables. Cash provided from operations was used primarily to fund
investments in property, plant and equipment of $2.4 million, as well as pay
dividends of $1.4 million. As of April 30, 1996, the Company had accumulated
cash and cash equivalents of $7.3 million, an increase of $2.2 million from
January 31, 1996. The Company expects for the remainder of fiscal 1996 that its
cash flows will be adequate to fund operations and investing activities for its
continuing operations. In addition, the Company anticipates funding internal
growth and possible acquisitions with its excess cash flows from operations, its
existing revolving credit facility and proceeds from the sale of its Financial
Systems business (see Note E of Notes to Consolidated Financial Statements).
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 23,
1996.
(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
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Russell A. Gullotti 12,619,015 2,784,622
David C. Cox 12,302,585 3,101,052
Jean B. Keffeler 12,309,028 3,094,609
Charles W. Oswald 12,282,924 3,120,713
Stephen G. Shank 12,307,527 3,096,110
John E. Steuri 12,320,273 3,083,364
Jeffrey E. Stiefler 12,377,346 3,026,291
John W. Vessey 12,601,861 2,801,776
(ii) Approval of the appointment of Ernst & Young LLP as auditors
for the year ending January 31, 1996
For 12,570,472
Against 45,588
Abstain 25,611
Broker Non-Vote 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2.0 -- Stock Purchase and Sale Agreement, dated as of May 30, 1996,
by and among SunGard Data Systems Inc., NCS and NCS Holdings;
no Schedules thereto are being filed by the registrant but the
registrant will furnish a copy of any such Schedule to
the Commission upon request.
*10.1 -- Amended and Restated Severance Agreement,
dated May 23, 1996, by and between NCS and
Russell A. Gullotti.
*10.2 -- Change of Control Agreement, dated April 15,
1996, by and between NCS and certain executives
of NCS.
27.0 -- 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
April 30, 1996.
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: June 13, 1996
FORM 10-Q
NATIONAL COMPUTER SYSTEMS, INC.
For the quarterly period ended April 30, 1996
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EXHIBIT INDEX
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Exhibit
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2.0 -- Stock Purchase and Sale Agreement, dated as of May 30, 1996,
by and among SunGard Data Systems Inc., NCS and NCS Holdings;
no Schedules thereto are being filed by the registrant but the
registrant will furnish a copy of any such Schedule to the
Commission upon request.
10.1 -- Amended and Restated Severance Agreement, dated May 23,
1996, by and between NCS and Russell A. Gullotti.
10.2 -- Change of Control Agreement, dated April 15, 1996, by and
between NCS and certain executives of NCS.
27.0 -- Financial Data Schedule.