-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VIa9LTo0HAzUJYq5x60D4xwEV+R1tnGwg67dA1LSQxyrllHMLgUeMmjcjuLXyNFB SnJTnYyJfyr6rXatVrReDQ== 0000069999-99-000012.txt : 19990615 0000069999-99-000012.hdr.sgml : 19990615 ACCESSION NUMBER: 0000069999-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990501 FILED AS OF DATE: 19990608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 410850527 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03713 FILM NUMBER: 99641911 BUSINESS ADDRESS: STREET 1: 11000 PRAIRIE LAKES DR CITY: MINNEAPOLIS STATE: MN ZIP: 55344 BUSINESS PHONE: 6128293000 MAIL ADDRESS: STREET 1: P O BOX 9365 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 10-Q 1 QUARTERLY REPORT ON FORM 10-Q 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: May 1, 1999 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 June 1, 1999, was 31,692,000. PART I. FINANCIAL INFORMATION Item 1. Financial Statements NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended May 1, April 30, 1999 1998 -------- --------- (In thousands, except per share amounts) REVENUES Information services $ 71,864 $ 48,786 Product sales 40,152 36,508 Maintenance and support 13,801 12,621 -------- -------- Total revenues 125,817 97,915 COST OF REVENUES Cost of information services 53,320 36,390 Cost of product sales 15,648 16,014 Cost of maintenance and support 8,718 7,989 -------- -------- Gross margin 48,131 37,522 OPERATING EXPENSES Sales and marketing 16,572 15,072 Research and development 3,673 2,332 General and administrative 16,255 11,157 -------- -------- INCOME FROM OPERATIONS 11,631 8,961 Interest expense 162 318 Other expense, net 366 148 -------- -------- INCOME BEFORE INCOME TAXES 11,103 8,495 Income taxes 4,450 3,400 -------- -------- NET INCOME $ 6,653 $ 5,095 ======== ======== EARNINGS PER SHARE Basic $0.21 $0.17 Diluted 0.20 0.16 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 31,480 30,814 Diluted 32,849 32,309 See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) May 1, January 31, 1999 1999 -------- ----------- (In thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 16,385 $ 16,310 Receivables 108,278 128,751 Inventories: Finished products 4,786 5,096 Scoring services and work in process 27,668 14,442 Raw materials and purchased parts 2,786 2,253 -------- -------- Total inventories 35,240 21,791 Prepaid expenses and other 8,568 7,225 -------- -------- TOTAL CURRENT ASSETS 168,471 174,077 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 65,333 63,018 Machinery and equipment 162,671 152,414 Accumulated depreciation (115,135) (109,416) -------- -------- Net property, plant and equipment 112,869 106,016 INTELLECTUAL PROPERTIES, NET Acquired and internally developed software products 11,733 12,170 Assessment instruments 8,488 8,835 -------- -------- Total intellectual properties 20,221 21,005 OTHER ASSETS, NET Goodwill 52,132 52,840 Other assets 9,795 8,533 -------- -------- Total other assets 61,927 61,373 -------- -------- TOTAL ASSETS $363,488 $362,471 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) May 1, January 31, 1999 1999 -------- ----------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 3,768 $ 3,758 Accounts payable 34,826 35,809 Accrued expenses 48,919 51,779 Deferred income 29,103 32,209 Income taxes 3,759 3,883 -------- -------- TOTAL CURRENT LIABILITIES 120,375 127,438 LONG-TERM DEBT -- less current maturities 5,384 5,597 DEFERRED INCOME TAXES 2,559 2,570 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Preferred stock - - Common stock--issued and outstanding - 31,638 and 31,467 shares, respectively 949 944 Paid-in capital 12,921 10,760 Retained earnings 225,700 220,625 Accumulated other comprehensive income - Foreign currency translation adjustment (2,877) (3,880) Deferred compensation (1,523) (1,583) -------- -------- TOTAL STOCKHOLDERS' EQUITY 235,170 226,866 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $363,488 $362,471 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended May 1, April 30, 1999 1998 -------- --------- (In thousands) OPERATING ACTIVITIES Net income $ 6,654 $ 5,095 Depreciation, amortization and other noncash expenses 8,664 7,225 Provision for deferred income taxes (11) (822) Changes in operating assets and liabilities: Accounts receivable 20,422 10,780 Inventory and other current assets (14,792) (12,391) Accounts payable and accrued expenses (3,928) 1,260 Deferred income (3,106) (4,818) ------- ------- Net cash provided by operating activities 13,903 6,329 ------- ------- INVESTING ACTIVITIES Purchases of property, plant and equipment (10,211) (7,800) Purchases of business systems (2,582) (1,796) Other, net (120) 483 ------- ------- Net cash used in investing activities (12,913) (9,113) ------- ------- FINANCING ACTIVITIES Net repayment of borrowings (103) (1,515) Issuance (repurchase) of common stock, net 765 (327) Dividends paid (1,577) (1,551) ------- ------- Net cash used by financing activities (915) (3,393) ------- ------- Increase (decrease) in cash and cash equivalents 75 (6,177) CASH AND CASH EQUIVALENTS - beginning of period 16,310 23,267 ------- ------- CASH AND CASH EQUIVALENTS - end of period $16,385 $17,090 ======= ======= 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 consolidated financial position, results of operations and cash flows for all periods presented have been made. The consolidated results of operations for the period ended May 1, 1999 are not necessarily indicative of the operating results that may be expected for the entire fiscal year ending January 29, 2000. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in National Computer Systems, Inc. and Subsidiaries' Annual Report on Form 10-K for the year ended January 31, 1999. Note B - Effective February 1, 1999, the Company adopted a 4-4-5, 13-week quarterly accounting cycle with the fiscal year ending on the Saturday nearest to January 31. The four fiscal quarters in the current year will end on May 1, 1999, July 31, 1999, October 30, 1999 and January 29, 2000. The impact of this change in the Company's quarterly and annual financial results in 1999 will be insignificant. Note C - Earnings per share are calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." The following table is a reconciliation of the earnings numerator and the weighted-average shares denominator used in the calculations of basic and diluted earnings per share (in thousands, except per share data): First Quarter Ended May 1, April 30, 1999 1998 ------- --------- Earnings: Net income for basic earnings per share $ 6,653 $ 5,095 Adjustments for dilutive securities: Interest expense on convertible debentures, net of tax 41 51 ------- ------- Adjusted net income for diluted earnings per share $ 6,694 $ 5,146 ======= ======= Weighted Average Share: Basic average shares 31,480 30,814 Adjustments for dilutive securities: Employee stock options, net of tax proceeds 945 899 Contingent stock awards, net of tax proceeds 33 86 Convertible debentures 391 510 ------- ------- Diluted average shares 32,849 32,309 ======= ======= Basic earnings per share $ 0.21 $ 0.17 ======= ======= Diluted earnings per share $ 0.20 $ 0.16 ======= ======= Note D - The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized of which none is outstanding. 100,000,000 shares of $.03 par value Common Stock are authorized. Note E - The components of comprehensive income for the three month periods ended May 1, 1999 and April 30, 1998 are as follows (in thousands): 1999 1998 ------ ------ Net income $6,653 $5,095 Foreign currency translation adjustments 1,003 15 ------ ------ Comprehensive income $7,656 $5,110 ====== ====== Note F - As previously disclosed, the Company was served with a summons and complaint in a lawsuit filed against the Company by a former customer. The lawsuit alleges certain claims against the Company in connection with certain loan processing and servicing agreements and seeks out-of-pocket damages, lost profits and compensation for extraordinary defaults and lost interest that it claims resulted from breaches of these agreements by the Company. The customer also seeks to have the Company acquire certain student loans with unpaid principal, interest and late charges, which loans it claims are, or have been, in default and were incorrectly processed or serviced by the Company. The Company has tendered the defense of the claims to its insurer and the insurer accepted the defense subject to a reservation of rights. The Company has filed an answer to the complaint denying the claims, and the Company intends to vigorously defend against the lawsuit. In addition, the Company has filed a counterclaim against the former customer and a corporate affiliate seeking compensatory damages and contribution and indemnity. The Company does not believe that the outcome of this litigation would result in a material adverse effect on the Company's consolidated financial position or results of operations. Note G - On May 28, 1999 the Company acquired NovaNET Learning, Inc. (NLI), an interactive, online curriculum content company. NLI's annual revenues for its full fiscal year ending December 31, 1999 are expected to approximate $20 million. The transaction will be accounted for as a purchase and, accordingly, NLI's operations subsequent to the closing date will be consolidated with the Company's. The purchase price was approximately $20 million in cash. The transaction is expected to be slightly accretive to consolidated earnings of the Company in fiscal 1999. Note H - The Company has five reportable business segments; the table below presents information by segment.
Assessments Education Data & Testing Software & NCS Collection Services Services Services Systems International Totals ----------- ----------- ---------- ---------- -------------- --------- Period Ended 5/1/99 Revenues $ 31,927 $28,326 $33,797 $20,830 $10,937 $125,817 Income from operations 3,734 1,131 5,486 5,246 1,028 16,625 Depreciation & Amortization 2,524 2,053 628 1,251 761 7,217 Segment assets 110,682 87,847 45,175 37,396 27,907 309,007 Period Ended 4/30/98 Revenues $ 24,438 $21,447 $21,812 $18,541 $11,677 $ 97,915 Income from operations 3,634 503 2,264 4,359 595 11,355 Depreciation & Amortization 2,423 1,764 586 1,351 528 6,652 Total assets 105,645 69,744 37,211 38,761 31,264 282,625
The difference between segment totals and the Company's consolidated totals consist of central general and administrative expenses, non-operating expenses, and corporate assets, all of which are not allocated to the segments. 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 software, services and systems for the collection, management and interpretation of data. The Company markets these products and services to the education, commercial, and government markets through its five operating segments. Recap of 1999 First Quarter Results For the quarter ended May 1, 1999, total revenues increased by $27.9 million or 28.5% from the quarter ended April 30, 1998. Overall gross margin remained constant as a percent of revenue, and gross margin dollars increased $10.6 million. Income from operations for the quarter increased $2.7 million or 29.8% over the prior year first quarter. Net income increased 30.6% over the quarter ended April 30, 1998, and earnings per share (diluted) increased 25.0% to $.20 per share from $.16 in the prior year first quarter. Revenues Total revenues for the three month period ended May 1, 1999 and April 30, 1998 were up 28.5%. By revenue category, 1999 compares to 1998 as follows: Quarter ------- Information services +47.3% Product sales +10.0% Maintenance and support + 9.3% Eighty-three percent of the $27.9 million of overall revenue increase in the first quarter of 1999 was attributable to growth in information services. That growth came from several sources: assessment and testing services; government and commercial outsourcing; and K-12 networking and professional services related to education software. First quarter increases in product sales came principally from education software licensing and related network hardware. Increased maintenance and support revenues were also the result of increased support revenues from education software. By major market, for the first quarter, revenues grew 33% from the education market and over 16% from the large scale data management (non-education) market. Cost of Revenues and Gross Margins For the quarter ended May 1, 1999 and April 30, 1998, the Company's overall gross margin remained constant at 38.3%. On a quarter-to-quarter basis, the gross margin in each revenue category (information services, product sales, and maintenance and support) improved as a percentage of revenue, but the overall gross margin remained constant at 38.3% due to changes in mix of revenues toward information services, which has a lower gross margin. Operating Expenses Sales and marketing expenses increased $1.5 million or 10.0% in the quarter ended May 1, 1999, over the prior year first quarter. As a percentage of revenues, first quarter sales and marketing expenses declined by 2.2 percentage points, due primarily to the relatively lower selling costs associated with information services revenues. Research and development costs increased $1.3 million in the quarter ended May 1, 1999 as compared to the quarter ended April 30, 1998. For the full year, these expenses are expected to continue at higher levels for fiscal 1999 than fiscal 1998, as the Company continues its investment in software products and test processing technology. General and administrative expenses increased by $5.1 million for the quarter ended May 1, 1999 from the prior year quarter. As a percentage of revenue, first quarter general and administrative expense increased 1.5 percentage points from 11.4% to 12.9%. These expenses increased due to general growth and costs related to an improvement of the Company's employee benefit package (particularly vacation) and variable compensation accrued because of favorable operating results. Non-operating Expenses Interest expense decreased on a quarter-to-quarter comparison due to lower average borrowing levels. Other expense, net, was insignificant for the quarter ending May 1, 1999 and April 30, 1998. Provision for Income Taxes The effective income tax rate was a constant 40% for the quarters ended May 1, 1999 and April 30, 1998. Liquidity and Capital Resources For the three-month period ended May 1, 1999, the Company generated $13.9 million of cash flow from operating activities as compared to $6.3 million in the same period of the prior year. Cash was used principally to fund investments in property, plant and equipment of $10.2 million and business systems of $2.6 million, and to pay dividends of $1.6 million. The Company expects for the remainder of fiscal 1999 that its positive cash flows from operations will be adequate to fund its normal financing and investing activities. In addition, the Company generally anticipates funding internal growth and acquisitions with its cash and cash equivalents on hand, excess cash flows from operations, and an existing revolving credit facility. Impact of Year 2000 Many currently installed computer systems and software are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. This problem could result in system failures or miscalculations causing disruptions of business operations (including, among other things, a temporary inability to process transactions, send invoices or engage in other similar business activities). As a result, many companies' computer systems and software will need to be upgraded or replaced in order to comply with Year 2000 requirements. The potential global impact of the Year 2000 problem is not known, and, if not corrected in a timely manner, could affect the Company and the U.S. and world economy generally. The Company's product development processes currently contain steps to include Year 2000 compliance verification for all current and future products. Most of the Company's products are currently Year 2000 compliant, and all continuing products are expected to be compliant before December 31, 1999. The Company has a full-time Year 2000 program leader and a team (consisting of representatives from each of its business units) to address internal and external Year 2000 issues. The Company's internal financial and other "IT" computer systems have been reviewed to assess and remediate Year 2000 problems, as have other "non-IT" systems such as security, HVAC and telephone systems. In addition, executive management regularly monitors the status of the Company's Year 2000 remediation plans. The Company's Year 2000 compliance program includes the following phases: identifying systems with date sensitive points that will need to be addressed; carrying out remediation work to modify those systems or convert to new systems; conducting validation testing of systems and applications to ensure compliance; and transition preparedness activities. As of May 1, 1999, the Company believes it was approximately 80% completed with its total Year 2000 effort. The Company expects to be substantially complete by July, 1999, with the exception of transition activities described below. Through May 1, 1999, the Company has spent approximately $5.5 million addressing Year 2000 issues ($1.5 million in fiscal 1997, $3.3 million in fiscal 1998, and $.7 million thus far in fiscal 1999.) The Company expects to incur a total of approximately $1.3 million of Year 2000 expenses during the remainder of fiscal 1999. These costs are below original estimates and consist primarily of internal resources, with relatively minor external costs. All amounts are being expensed currently and are included in the Company's future operating plans and expectations. In addition, the Company has also made, and will continue to make, significant capital investments to enhance its internal business and service delivery systems. However, these investments are not driven principally by Year 2000 considerations. In addition, the Company is requesting assurances from its major suppliers that they are addressing the Year 2000 issue and that products purchased by the Company from such suppliers will function properly in the Year 2000. Also, contacts are being made with the Company's major customers. These actions are intended to help mitigate the possible external impact of the Year 2000 problem. However, it is impossible to fully assess the potential consequences to the Company of the Year 2000 problem in the event service interruptions from suppliers occur or in the event that there are disruptions in such infrastructure areas as utilities, communications, transportation, banking and government. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 problems in internal processes, information processing or interfaces with major customers, or with processing orders and billing. However, if certain critical third-party providers, such as those providers supplying electricity, water or telephone service, experience difficulties resulting in disruption of service to the Company, a shutdown of the Company's operations at individual facilities could occur for the duration of the disruption. While the Company currently believes such disruptions of basic services and facility shutdowns are unlikely, there can be no absolute assurance that they will not occur. The Company believes that the most likely worst case Year 2000 scenario will be that NCS products do not operate properly for customers who have not installed Year 2000 compliant versions of NCS products or have not updated their own computing platform or network infrastructure to be operational in the Year 2000. The Company has developed, and continues to refine, transition preparedness plans to respond to a significantly increased number of customer calls at all its support locations to address these Year 2000 problems. The Company is also developing contingency plans to provide for continuity of processing in Year 2000 based on the outcome of its validation phase of its Year 2000 compliance program and the results of surveying its major suppliers and customers. Assuming no major disruption in service from utility companies or other critical third-party providers, the Company believes that it will be able to manage its total Year 2000 transition without any material effect on the Company's consolidated results of operations or financial condition. The statements which are not historical or current facts or are "goals" or "expectations" contained in this report constitute "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially. The Cautionary Statements filed by the Company as Exhibit 99 to the Annual Report on Form 10-K for the year ended January 31, 1999, are incorporated herein by reference, and stockholders 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 4. Submission of Matters to a Vote of Security Holders (a) The registrant held its Annual Meeting of Stockholders on May 27, 1999. (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 ---- --- --------- William J. Cadogan 27,938,603 122,190 David C. Cox 27,931,624 129,169 Delores M. Etter 27,929,092 131,701 Russell A. Gullotti 27,929,203 131,590 Moses S. Joseph 27,521,213 539,580 Jean B. Keffeler 27,938,648 122,145 Stephen G. Shank 27,626,415 434,378 John E. Steuri 27,947,587 113,206 (ii) Approval of the 1999 Employee Stock Option Plan For 24,942,092 Against 1,891,138 Abstain 1,227,563 Broker Non-Vote 600 (iii) Approval of the 1999 Non-Employee Director Stock Option Plan For 24,257,551 Against 2,498,302 Abstain 1,304,940 Broker Non-Vote 600 (iv) Approval of the appointment of Ernst & Young LLP as auditors for the year ending January 29, 2000 For 27,973,809 Against 50,722 Abstain 36,262 Broker Non-Vote 600 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 27. Financial Data Schedule (b) No reports on Form 8-K were filed for the three months ended May 1, 1999. 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 8, 1999 FORM 10-Q NATIONAL COMPUTER SYSTEMS, INC. FOR THE QUARTERLY PERIOD ENDED MAY 1, 1999 EXHIBIT INDEX EXHIBIT 27 Financial Data Schedule. EX-27 2 FDS --
5 This schedule contains summary information extracted from the financial statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal year ended January 29, 2000, and is qualified in its entirety by reference to such financial statements. 1000 U.S. Dollars 3-MOS JAN-29-2000 FEB-1-1999 MAY-01-1998 1 16385 0 108278 0 35240 168471 228004 (115135) 363488 120375 0 0 0 949 234221 363488 40152 125817 15648 77686 36500 0 162 11103 4450 6653 0 0 0 6653 0.21 0.20
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