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, 1997
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, 1997, was 15,318,488.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months
Ended April 30,
-------------------
1997 1996
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(In thousands, except
per share amounts)
REVENUES
Information services $33,864 $31,004
Product sales 34,037 29,808
Maintenance and support 11,070 9,695
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Total revenues 78,971 70,507
COST OF REVENUES
Cost of information services 25,496 23,352
Cost of product sales 15,235 13,788
Cost of maintenance and support 7,429 6,629
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Gross margin 30,811 26,738
OPERATING EXPENSES
Sales and marketing 12,438 9,692
Research and development 2,153 2,164
General and administrative 8,920 8,301
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INCOME FROM OPERATIONS 7,300 6,581
Interest expense 325 568
Other expense, net 227 652
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INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 6,748 5,361
Income taxes 2,700 2,160
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INCOME FROM CONTINUING OPERATIONS 4,048 3,201
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Loss from discontinued operations,
net of tax benefit of $260 - (370)
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NET INCOME $ 4,048 $2,831
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EARNINGS PER SHARE
Continuing operations $0.26 $0.20
Discontinued operations - (0.02)
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Net income $0.26 $0.18
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AVERAGE SHARES OUTSTANDING 15,482 15,631
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 30, January 31,
1997 1997
--------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27,436 $ 58,079
Receivables 79,321 79,056
Inventories:
Finished products 4,615 4,765
Scoring services and work in process 14,932 9,221
Raw materials and purchased parts 3,602 4,190
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Total inventories 23,149 18,176
Prepaid expenses and other 5,782 5,526
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TOTAL CURRENT ASSETS 135,688 160,837
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 52,237 51,741
Machinery and equipment 116,381 111,921
Accumulated depreciation (90,901) (87,353)
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Net property, plant and equipment 77,717 76,309
OTHER ASSETS
Acquired and internally developed
software products 16,515 17,578
Non-current receivables, investments
and other assets 11,924 11,640
Goodwill 25,387 7,556
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Total other assets 53,826 36,774
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TOTAL ASSETS $267,231 $273,920
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See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
April 30, January 31,
1997 1997
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(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 3,725 $ 3,819
Accounts payable 18,918 20,886
Accrued expenses 28,233 28,832
Deferred income 19,190 23,079
Income taxes 1,764 5,556
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TOTAL CURRENT LIABILITIES 71,830 82,172
DEFERRED INCOME TAXES 6,890 5,385
LONG-TERM DEBT -- less current maturities 14,974 16,329
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,301 and 15,235 shares, respectively 459 457
Paid-in capital 1,279 -
Retained earnings 176,347 173,564
Deferred compensation (4,548) (3,987)
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Total stockholders' equity 173,537 170,034
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $267,231 $273,920
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
April 30,
------------------
1997 1996
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(In thousands)
OPERATING ACTIVITIES
Net income from continuing operations $ 4,048 3,201
Loss from discontinued operations - (370)
Depreciation, amortization and other
noncash expenses 6,780 7,091
Provision for deferred income taxes (161) (444)
Changes in operating assets and liabilities:
Accounts receivable (2) 11,390
Inventory and other current assets (5,099) (4,902)
Accounts payable and accrued expenses (7,516) (7,412)
Deferred income (4,006) (2,082)
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Net cash (used in) provided by
operating activities (5,956) 6,472
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,707) (2,431)
Acquisitions, net (2,742) -
Capitalized software products - (711)
Other, net (1,310) (386)
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Net cash used in investing activities (8,759) (3,528)
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FINANCING ACTIVITIES
Net increase in revolving credit borrowing - -
Net repayments of other borrowings (1,493) (240)
Issuance (repurchase) of common stock, net (13,072) 844
Dividends paid (1,363) (1,386)
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Net cash used by financing activities (15,928) (782)
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(Decrease) increase in cash (30,643) 2,162
CASH - beginning of period 58,079 5,154
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CASH - end of period $27,436 $ 7,316
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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, 1997, are not necessarily indicative of the
operating results that may be expected for the entire fiscal year ending January
31, 1998.
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 - On April 30, 1997, the Company was served with a summons and complaint
in a lawsuit from a former customer for expenses, alleged loan defaults, and
other damages related to performance under three loan processing and servicing
agreements. This action formalized the claim that had previously been filed
against the Company as had been disclosed in the Company's Annual Report on Form
10-K since January 31, 1995. 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's position with respect to the lawsuit is the
same as its position with respect to the original claim. The Company has
carefully reviewed the claims set forth in the complaint, denies such claims,
and will vigorously defend against the lawsuit. In addition, the Company intends
to file all appropriate counterclaims. The Company does not believe that any
adverse outcome in the lawsuit would result in a material adverse effect on the
Company's financial position or results of operations.
Note E - In April 1997, the Company acquired all of the common and preferred
stock of Virtual University Enterprises (VUE), an electronic course registration
and training administration company. The purchase price was approximately $14.6
million and consisted of stock of the Company and cash, and was allocated
principally to goodwill. Also, the Company's 51%-owned Australian subsidiary
acquired a local company in the quarter ended April 30, 1997. The purchase
price, which was approximately $2 million, was primarily allocated to goodwill.
The impact of these acquisitions on revenue and net income for the first quarter
was not significant.
Note F - The Company sold its Financial System segment in July 1996 for $95.0
million of cash. The gain on the sale, recorded in the second quarter 1996, was
$38.1 million. The segment's revenue in the quarter ended April 30, 1996 was
$11.1 million, and the segment's loss for that quarter was $370,000, or $.02 per
share.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
National Computer Systems, Inc. is an information services company providing
services and systems for the collection, management and interpretation of data.
The Company markets these products and services predominantly in the education
market, but also in the business, government and health care markets through its
various operating units. The discussion below covers only the Company's
continuing operations and not the discontinued operations of its Financial
Systems business that was sold in July 1996.
Recap of 1997 First Quarter Results
For the quarter ended April 30, 1997, total revenues were up by $8.5 million or
12.0% from the quarter ended April 30, 1996. Overall gross margin improved by
1.1 percentage points as a percent of revenue and gross margin dollars increased
$4.1 million or 15.2%. Operating expenses, principally sales and marketing,
increased by 16.6%, however, as a percent of revenue, these expenses increased
only 1.2 percentage points. Income from operations increased $.7 million or
10.9%. Non-operating items, primarily related to interest income and expense,
compares favorably to the prior year. Pre-tax income was 25.9% higher than the
quarter ended April 30, 1996, and earnings per share were up by 30.0%.
Revenues
Total revenues for the quarter ended April 30, 1997 were up 12.0% to $79.0
million from $70.5 million in the prior year. By revenue category, first quarter
1997 compares to first quarter 1996 as follows:
Information services + 9.2%
Product sales +14.2%
Maintenance and support +14.2%
The increase in information services revenues is the result of a long-term
service contract in Mexico awarded in the third quarter of fiscal 1996 as well
as two small international acquisitions which the Company completed in the
second and third quarters of fiscal 1996. These increases in international
information services revenues were partially offset by timing of volumes of
student financial aid and educational assessment processing at the Company's
Iowa City service center. The increase in product sales and maintenance and
support revenues are primarily due to higher education administrative software
sales and software support revenues from internal growth as well as a result of
incremental revenues attributable to the fourth quarter 1996 acquisition of
Macro Educational Systems, Inc.
Cost of Revenues and Gross Margins
For the quarter ended April 30, 1997, the Company's overall gross margin
improved by 1.1 percentage points to 39.0% from 37.9% for the same period in the
prior year. The gross margin on information services revenues remained
relatively constant quarter-to-quarter. Gross margins on product sales improved
by 1.5 percentage points as a result of increased sales of education
administrative software as discussed above. The gross margin on maintenance and
support revenues improved by 1.3 percentage points as a result of higher
revenues of education software support as mentioned above.
Operating Expenses
Sales and marketing expenses increased $2.7 million or 28.3% in the quarter
ended April 30, 1997, over the prior year quarter. As a percentage of revenues,
sales and marketing expenses increased by 2.1 percentage points. This
quarter-to-quarter increase is primarily the result of the acquisitions the
Company made in fiscal 1996.
Research and development costs were essentially flat in the quarter ended April
30, 1997 as compared to the quarter ended April 30, 1996. For the full year,
these expenses are expected to be at modestly higher levels for fiscal 1997 than
fiscal 1996, as the Company continues its investment in imaging technology,
software products and test development, as well as research and development
expenditures in the electronic testing field.
General and administrative expenses increased by $0.6 million for the quarter
ended April 30, 1997, from the prior year quarter. This quarter-to-quarter
increase is principally the result of the acquisitions the Company made in
fiscal 1996. As a percent of revenues, general and administrative expenses
declined by .5 percentage points. For fiscal 1997, these expenses are expected
to be higher than the previous year, but remain relatively constant as a percent
of revenues.
Non-operating Expenses
Interest expense decreased by $.2 million in the quarter ended April 30, 1997,
from the comparable prior year period. This decrease is the result of
substantially lower debt levels in the first quarter of 1997 than the first
quarter of 1996. Other income and expense, net, for the three months ended April
30, 1997 compares favorably to the prior year period as a result of $.6 million
of interest income.
Provision for Income Taxes
The effective income tax rate of 40.0% for the quarter ended April 30, 1997 was
essentially equal to the 40.3% effective tax rate for the first quarter of the
prior year.
Liquidity and Capital Resources
For the three-month period ended April 30, 1997, the Company used $6.0 million
of cash to fund operating activities as contrasted with funds provided by
operations of $6.5 million in the same period of the prior year. This
quarter-to-quarter comparison is predominantly the result of slower collections
on trade accounts receivable in the first quarter of 1997, principally from
government agencies. Cash on hand at the beginning of the year was used to fund
operating activities, investment in property, plant and equipment of $4.7
million, acquisitions of $2.7 million, stock repurchases of $13.1 million as
well as pay dividends of $1.4 million. The Company expects for the remainder of
fiscal 1997 that its positive cash flows from operations will be adequate to
fund its normal financing and investing activities. In addition, the Company
anticipates funding internal growth and acquisitions with its cash and cash
equivalents on hand, excess cash flows from operations, and existing revolving
credit facility. The Company plans to hold relatively constant the number of
shares of common stock outstanding and will, therefore, generally repurchase
shares only to offset new issuances, if any.
The statements which are not historical facts or are "goals" or "expectations"
contained in this Quarterly Report constitute "forward-looking" information, as
defined in the Private Securities Litigation Reform Act of 1995. The Cautionary
Statements filed by the Company as Exhibit 99 to the Annual Report on Form 10-K
for the year ended January 31, 1997, are incorporated herein by reference, and
shareholders 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5 - Other Events of the Company's Report on Form 8-K dated April
30, 1997 is incorporated herein by reference.
Item 2. Changes in Securities
On April 10, 1997, the Company issued 542,632 shares of Common Stock
to former shareholders of Virtual University Enterprises, Inc. ("VUE")
in connection with the Company's acquisition of VUE pursuant to the
acquisition agreement between the Company and VUE. The Company
acquired certain of the issued and outstanding shares of common and
preferred stock of VUE in exchange for the Company's Common Stock. See
Note E of Notes to Consolidated Financial Statements for the quarter
ended April 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of
Stockholders on May 22, 1997.
(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
---- --- ---------
Russell A. Gullotti 13,024,641 47,041
David C. Cox 12,729,617 342,065
Moses S. Joseph 12,871,584 200,098
Jean B. Keffeler 13,032,153 39,529
Charles W. Oswald 12,703,590 368,092
Stephen G. Shank 12,745,312 326,370
John E. Steuri 13,035,113 36,569
Jeffrey E. Stiefler 13,035,599 36,083
John W. Vessey 13,024,128 47,554
(ii) Appproval of the 1997 Employee Stock Option Plan
For 12,021,870
Against 140,734
Abstain 783,044
Broker Non-Vote 126,034
(iii) Approval of the 1997 Long-Term Incentive Plan
For 11,405,423
Against 746,287
Abstain 793,938
Broker Non-Vote 126,034
(iv) Approval of the appointment of Ernst & Young LLP
as auditors for the year ending January 31, 1998
For 13,033,443
Against 26,964
Abstain 11,276
Broker Non-Vote 0
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K filed for the three months ended April 30, 1997.
Form 8-K dated March 18, 1997
Item 5. Other Events
- Authorization for the repurchase of up to
1 million shares of the Company's stock
Item 7. Financial Statements and Exhibits
- Press Release, dated March 18, 1997
Form 8-K dated April 30, 1997
Item 5. Other Events
- Legal proceedings filed against the Company by
University Support Services, Inc.
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 13, 1997