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, 1997
Commission File Number: 0-3713
NATIONAL COMPUTER SYSTEMS, INC.
- --------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0850527
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11000 Prairie Lakes Drive
Eden Prairie, Minnesota 55344
- ---------------------------------------- ----------
(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, 1997 was 15,399,353.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months
Ended October 31,
-------------------
1997 1996
------ ------
(In thousands, except
per share amounts)
REVENUES
Information services $ 56,821 $44,227
Product sales 45,846 34,351
Maintenance and support 12,720 10,205
-------- -------
Total revenues 115,387 88,783
COST OF REVENUES
Cost of information services 47,502 37,641
Cost of product sales 18,256 15,661
Cost of maintenance and support 8,886 6,836
-------- -------
Gross margin 40,743 28,645
OPERATING EXPENSES
Sales and marketing 14,993 10,331
Research and development 2,324 2,595
General and administrative 13,419 7,937
-------- ------
INCOME FROM OPERATIONS 10,007 7,782
Interest expense 330 232
Other (income) expense, net (449) (850)
-------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 10,126 8,400
Income taxes 4,100 3,450
-------- -------
INCOME FROM CONTINUING OPERATIONS 6,026 4,950
-------- -------
Loss from discontinued operations - -
Gain on disposition - -
-------- -------
NET INCOME $ 6,026 $ 4,950
======== =======
EARNINGS PER SHARE
Continuing operations $0.38 $0.32
Discontinued operations - -
Gain on disposition - -
-------- -------
Net income $0.38 $0.32
======== =======
AVERAGE SHARES OUTSTANDING 15,795 15,463
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months
Ended October 31,
-------------------
1997 1996
------ ------
(In thousands, except
per share amounts)
REVENUES
Information services $136,173 $112,247
Product sales 118,740 98,256
Maintenance and support 35,474 29,751
-------- --------
Total revenues 290,387 240,254
COST OF REVENUES
Cost of information services 105,150 88,658
Cost of product sales 51,295 44,988
Cost of maintenance and support 24,321 19,937
-------- -------
Gross margin 109,621 86,671
OPERATING EXPENSES
Sales and marketing 41,119 30,440
Research and development 6,026 7,091
General and administrative 33,296 24,901
-------- ------
INCOME FROM OPERATIONS 29,180 24,239
Interest expense 965 1,425
Other (income) expense, net (270) (730)
-------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 28,485 23,544
Income taxes 11,400 9,500
-------- -------
INCOME FROM CONTINUING OPERATIONS 17,085 14,044
-------- -------
Loss from discontinued operations,
net of tax benefit of $1,360 - (2,229)
Gain on disposition, net of taxes of $29,031 - 38,143
-------- -------
NET INCOME $ 17,085 $49,958
======== =======
EARNINGS PER SHARE
Continuing operations $1.09 $0.90
Discontinued operations - (0.14)
Gain on disposition - 2.44
------- -------
Net income $1.09 $3.20
======= =======
AVERAGE SHARES OUTSTANDING 15,637 15,575
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
October 31, January 31,
1997 1997
----------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,084 $ 58,079
Receivables 80,854 79,056
Inventories:
Finished products 5,331 4,765
Scoring services and work in process 13,082 9,221
Raw materials and purchased parts 3,431 4,190
-------- --------
Total inventories 21,844 18,176
Prepaid expenses and other 7,204 5,526
-------- --------
TOTAL CURRENT ASSETS 131,986 160,837
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 55,386 51,741
Machinery and equipment 121,476 111,921
Accumulated depreciation (95,902) (87,353)
-------- --------
Net property, plant and equipment 80,960 76,309
OTHER ASSETS
Acquired and internally developed
software products, net 15,104 17,578
Assessment instruments and other assets, net 21,490 11,640
Goodwill, net 46,272 7,556
-------- --------
Total other assets 82,866 36,774
-------- --------
TOTAL ASSETS $295,812 $273,920
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
October 31, January 31,
1997 1997
---------- -----------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 4,399 $ 3,819
Accounts payable 21,831 20,886
Accrued expenses 31,036 28,832
Deferred income 29,785 23,079
Income taxes 2,495 5,556
-------- --------
TOTAL CURRENT LIABILITIES 89,546 82,172
DEFERRED INCOME TAXES 6,645 5,385
LONG-TERM DEBT -- less current maturities 13,954 16,329
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,372 and 15,235 shares, respectively 461 457
Paid-in capital 2,227 -
Retained earnings 186,243 173,564
Deferred compensation (3,264) (3,987)
-------- --------
Total stockholders' equity 185,667 170,034
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $295,812 $273,920
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
October 31,
------------------
1997 1996
------- -------
(In thousands)
OPERATING ACTIVITIES
Net income $17,085 $49,958
Less - gain on disposition - (38,143)
Depreciation, amortization and other
noncash expenses 21,628 20,344
Provision for deferred income taxes (406) (1,003)
Changes in operating assets and liabilities:
Accounts receivable 6,237 6,659
Inventory and other current assets (4,467) (1,272)
Accounts payable and accrued expenses (4,962) (438)
Deferred income 1,153 5,617
------- -------
Net cash provided by
operating activities 36,268 41,722
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (15,378) (9,661)
Acquisitions, net (35,216) (4,350)
Net proceeds from disposition - 64,071
Other, net (3,730) (1,057)
------- -------
Net cash provided (used) in
investing activities (54,324) 49,003
------- -------
FINANCING ACTIVITIES
Repayment of secured notes - (15,000)
Net repayments of other borrowings (1,167) (466)
Repurchase of common stock, net (12,647) (3,752)
Dividends paid (4,125) (4,149)
------- -------
Net cash used by financing activities (17,939) (23,367)
------- -------
(Decrease) increase in cash (35,995) 67,358
CASH AND CASH EQUIVALENTS - beginning of period 58,079 5,174
------- -------
CASH AND CASH EQUIVALENTS - end of period $22,084 $72,532
======= =======
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, 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. 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 has carefully reviewed the claims set forth in the complaint, denies
such claims, and will vigorously defend against the lawsuit. In addition, the
Company has filed a counterclaim against the former customer and a corporate
affiliate seeking compensatory damages in an amount to be determined at the
trial. 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 October 1997, the Company acquired all of the common stock of School
Research and Service Corporation, a business specializing in school curriculum
products and services. The purchase price was approximately $3.0 million, net of
cash acquired, and was allocated principally to goodwill of $2.3 million.
In July 1997, the Company acquired the assets of two businesses from The
McGraw-Hill Companies for $29.5 million in cash. The acquisition included London
House, a pre-employment assessment business, and McGraw Hill School Systems, a
school administrative software business. The purchase price was allocated
primarily to goodwill, $19.8 million, and assessment instruments, included in
other assets, $9.3 million.
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 the assets of a local company in the quarter ended April 30, 1997. The
purchase price, which was approximately $2 million, was primarily allocated to
goodwill.
On the basis of an APB# 16 pro forma consolidation of all acquisitions since
January 31, 1997, as if the acquisitions had taken place at the beginning of the
fiscal year ended January 31, 1997, consolidated total revenue would have been
approximately $305 million and $269 million for the nine month periods ended
October 31, 1997 and 1996, respectively. These pro forma revenues do not purport
to be indicative of the revenues that would have occurred had the acquisitions
been made as of those dates, or future revenues. Pro forma operating results are
not presented, as the nature of the acquisitions and post-acquisition changes to
their operations and underlying cost and expense structures are collectively so
significant that such a presentation would not be meaningful.
Note F - The Company sold its Financial Systems 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 1996 revenues through the sale date were $17.1
million, and the segment's loss was $2.2 million or $.14 per share.
Note G - New Accounting Standards - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, which requires disclosure of
comprehensive income and its components in the Company's financial statements.
Additionally, the FASB also issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. Both statements require additional
disclosure only, and as such, are not expected to impact net income or
shareholders' equity as previously reported by the Company. The statements are
effective for the Company's fiscal year ended January 31, 1999.
Currently, earnings per share calculations are performed pursuant to Accounting
Principles Board Opinion No. 15, "Earnings Per Share". Commencing with the
fourth quarter of fiscal 1997, the Company will be required to present earnings
per share data in accordance with SFAS No. 128, "Earnings Per Share". Statement
No. 128 will require the presentation of basic earnings per share and diluted
earnings per share. Basic earnings per share is calculated as net earnings
divided by the weighted average outstanding common shares. Diluted earnings per
share includes the effect of all outstanding dilutive securities, such as stock
options, and is calculated similarly to the current fully-diluted earnings per
share. While early adoption of Statement No. 128 is not permitted, the following
pro forma supplemental data is presented using the Statement No. 128 approach:
Three months ended Nine months ended
October 31 October 31
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
Basic
Continuing operations $ .39 $ .32 $1.12 $ .92
Discontinued operations - - - (.15)
Gain on disposition - - - 2.48
----- ----- ----- -----
Net income $ .39 $ .32 $1.12 $3.25
===== ===== ===== =====
Diluted
Continuing operations $ .38 $ .32 $1.09 $ .90
Discontinued operations - - - (.14)
Gain on disposition - - - 2.45
----- ----- ----- -----
Net income $ .38 $ .32 $1.09 $3.21
===== ===== ===== =====
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
National Computer Systems, Inc. is a global information services company
providing systems and services for education, testing, assessment and complex
data management solutions. The Company markets these products and services
predominantly in the education market, but also in the business, government and
health care markets. 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 Third Quarter Results
For the quarter ended October 31, 1997, total revenues were up by $26.6 million
or 30.0% from the quarter ended October 31, 1996, with slightly less than half
of the growth coming from acquisitions. The overall gross margin improved by 3.0
percentage points as a percent of revenue and gross margin dollars increased
$12.1 million or 42.2%. Operating expenses increased 3.1 percentage points as a
percent of revenue. Income from operations increased $2.2 million or 28.6%.
Because non-operating items, primarily interest income, were unfavorable to the
prior year, net income was 21.7% higher than the quarter ended October 31, 1996.
Earnings per share were up by 18.8%.
For the nine months ended October 31, 1997, revenues increased $50.1 million or
20.9% over the same period of the prior year, with approximately half the growth
coming from acquisitions. The gross margin percentage increased 1.7 percentage
points. Operating expenses increased by 28.8%, however, as a percent of revenue,
these expenses increased only 1.7 percentage points. Pre-tax income was 21.0%
higher than the nine months ended October 31, 1996 and earnings per share were
up 21.1%.
Revenues
Total revenues for the three and nine-month periods ended October 31, 1997 were
up 30.0% and 20.9%, respectively. By revenue category, 1997 compares to 1996 as
follows:
Quarter Year-to-date
------- ------------
Information services +28.5% +21.3%
Product sales +33.5% +20.8%
Maintenance and support +24.6% +19.2%
For the quarter ended October 31, 1997, increases in information services were
primarily as a result of higher educational assessment volumes (new business and
favorable timing of existing business), and incremental revenues from
acquisitions both international and domestic since July 31, 1996. The increases
in product sales were primarily due to higher education administrative software
and professional assessment sales resulting from internal growth as well as
incremental revenues attributable to the fourth quarter 1996 acquisition of
Macro Educational Systems, Inc. and, the second quarter 1997 acquisition of the
two businesses from The McGraw-Hill Companies, London House and McGraw Hill
School Systems. The growth in maintenance and support revenues follows the
growth in the education software product installed base. The overall quarterly
growth in revenues attributable to acquisitions is difficult to determine due to
the total integration of many of these operations into existing Company
operations, the elimination of duplicate or overlapping product lines, and the
packaging of existing and acquired offerings into new offerings, not previously
possible. However, the Company's estimation is that slightly less than half the
quarterly growth in total revenues is attributable to acquisitions completed
since last year's third quarter.
By market, substantially all the third quarter revenue growth was in the
education market (public and private). This is due to a strong seasonal peak of
state (K-12) assessment volumes as well as the fact that most of the acquisition
impact was education related.
On a year-to-date basis, increases in revenues were the result of essentially
the same factors. The revenue growth attributable to acquisitions is estimated
to be approximately half of the total revenue growth for the first nine months.
By market, revenues from Education, public and private, grew approximately 25%
on a year-to-date basis. Revenues from large-scale data management systems and
services outside of the education market increased approximately 11%.
Cost of Revenues and Gross Margins
For the quarter ended October 31, 1997, the Company's overall gross margin
improved by 3.0 percentage points to 35.3% from 32.3% for the same period in the
prior year. The gross margin improvement on information services revenues was
primarily the result of higher margins on student financial aid outsourcing
services in the Company's Iowa City service center. Gross margins on product
sales increased by 5.8 percentage points on a quarter-to-quarter basis as a
result of higher margins on education administrative software and professional
assessments. These higher margin offerings also make up a larger portion of
total product sales due to the aforementioned acquisitions. The gross margin on
maintenance and support revenues increased $.5 million, but decreased by 2.8
percentage points reflecting the general mix of revenues toward software support
as well as higher costs in that area related to the commencement of the school
year.
For the nine months ended October 31, 1997, gross margins increased $23.0
million, or 26.5%. As a percent of revenue, the gross margin improved 1.7
percentage points. The gross margin on information services revenues reflected
higher margins on testing and assessment services and student financial aid
outsourcing services. Changes in gross margins on product sales and maintenance
and support revenues were the result of the same factors mentioned above.
Operating Expenses
Sales and marketing expenses increased $4.7 million or 45.1% in the quarter
ended October 31, 1997, over the prior year quarter. As a percentage of
revenues, sales and marketing expenses increased quarter-to-quarter by 1.4
percentage points. For the nine-month period ended October 31, 1997, these
expenses increased 35.1% and increased 1.5 percentage points as a percent of
revenues. Increases in spending, both in dollars and as a percentage of
revenues, were primarily due to acquisitions since July 31, 1996.
Research and development costs decreased $0.3 million in the quarter ended
October 31, 1997 as compared to the prior year quarter. Year-to-date
expenditures were also down $1.1 million. The reduction in these expenditures
reflects the Company's more recent approach of adding new offerings through
acquiring other companies, as opposed to developing new products and services
internally.
General and administrative expenses increased by $5.5 million and $8.4 million
for the three and nine-month periods ended October 31, 1997, respectively, from
the comparable prior year periods. As a percentage of revenues, these expenses
increased by 2.7 and 1.1 percentage points for the quarter and nine-month
periods, respectively. Increases in spending were primarily the result of
acquisitions, including the related amortization of goodwill, in addition to
increased spending for internal information systems.
Non-operating Expenses
Interest expense increased slightly for the quarter ended October 31, 1997, over
the prior year quarter. On a year-to-date basis, interest expense decreased by
$0.5 million as a result of lower average debt levels in fiscal 1997 than fiscal
1996. Other income and expense, net, for the three and nine month periods ended
October 31, 1997 compare unfavorably to the prior year periods principally as a
result of interest income earned on the proceeds of the sale of the Financial
Systems business in the 1996 periods.
Provision for Income Taxes
The Company is providing taxes at an estimated income tax rate of approximately
40% in 1997 as it did through the first nine months of 1996.
Liquidity and Capital Resources
For the nine-month period ended October 31, 1997, the Company generated $36.3
million of cash from operating activities as compared to $41.7 million in the
same period of the prior year. Cash on hand at the beginning of the year was
used to fund acquisitions of $35.2 million, investment in property, plant and
equipment of $15.4 million, stock repurchases (net) of $12.6 million as well as
to pay dividends of $4.1 million. The Company expects for the remainder of
fiscal 1997 that its positive cash flows from operations will be adequate to
fund its expected financing and investing activities. In the future, the Company
anticipates funding internal growth and acquisitions with its cash on hand,
excess cash flows from operations, and an available revolving credit facility.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4. Credit Agreement dated as of November 17, 1997
between National Computer Systems, Inc. and
The First National Bank of Chicago; Norwest Bank
Minnesota, National Association; SunTrust Bank,
Central Florida, National Association; and
The Bank of Tokyo - Mitsubishi, Ltd., Chicago Branch.
27. Financial Data Schedule
(b) There were no reports on Form 8-K filed for the three months ended
October 31, 1997.
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 12, 1997