<PAGE>
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 Quarterly Period Ended February 28, 1999.
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-12392
---------
NATIONAL DATA CORPORATION
-------------------------
(Exact name of registrant as specified in charter)
DELAWARE 58-0977458
-------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
National Data Plaza, Atlanta, Georgia 30329-2010
-------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 404-728-2000
------------
NONE
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last year)
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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, Par Value $.125 - 33,801,569 shares
-------------------------------------------------
Outstanding as of March 31, 1999
--------------------------------
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended February 28,
-------------------------------------------
1999 1998
--------------------- --------------------
<S> <C> <C>
Revenues $ 195,735 $ 171,546
- -------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 96,387 83,986
Sales, general and administrative 64,518 59,659
Non-recurring charge - 120,163
-------------------------------------------
160,905 263,808
-------------------------------------------
Operating income (loss) 34,830 (92,262)
- -------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 359 316
Interest and other expense (3,723) (3,606)
Minority interest in earnings (834) (584)
-------------------------------------------
(4,198) (3,874)
-------------------------------------------
Income (loss) before income taxes 30,632 (96,136)
Provision for income taxes 11,946 176
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $ 18,686 $ (96,312)
===========================================
Basic earnings (loss) per share $ 0.55 $ (2.89)
===========================================
Diluted earnings (loss) per share $ 0.52 $ (2.89)
===========================================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Nine Months Ended February 28,
------------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
Revenues $ 578,939 $ 463,775
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 295,614 232,824
Sales, general and administrative 187,889 166,381
Non-recurring charge - 120,163
------------------------------------------
483,503 519,368
------------------------------------------
Operating income (loss) 95,436 (55,593)
- ------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 1,777 1,256
Interest and other expense (11,378) (9,675)
Minority interest in earnings (2,646) (1,892)
------------------------------------------
(12,247) (10,311)
------------------------------------------
Income (loss) before income taxes 83,189 (65,904)
Provision for income taxes 32,444 11,756
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 50,745 $ (77,660)
==========================================
Basic earnings (loss) per share $ 1.51 $ (2.45)
==========================================
Diluted earnings (loss) per share $ 1.44 $ (2.45)
==========================================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended February 28,
-------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 50,745 $ (77,660)
Adjustments to reconcile net income to
cash provided by operating activities:
Non-recurring charges - 110,340
Depreciation and amortization 21,508 17,450
Amortization of acquired intangibles and goodwill 20,448 17,795
Deferred income taxes 6,387 (19,278)
Minority interest in earnings 2,646 1,892
Provision for bad debts 3,937 4,074
Other, net 1,749 473
Changes in current assets and liabilities which provided (used) cash,
net of the effects of acquisitions:
Accounts receivable, net (17,066) (19,063)
Merchant processing working capital (6,258) (585)
Inventory (1,956) 448
Prepaid expenses and other assets (3,522) (5,564)
Accounts payable and accrued liabilities (3,731) (9,805)
Income taxes payable 834 7,787
-------------------------------------------
Net cash provided by operating activities 75,721 28,304
-------------------------------------------
Cash flows from investing activities:
Capital expenditures (25,493) (16,587)
Decrease in investments 1,125 -
Business acquisitions, net of cash acquired (6,665) (44,894)
-------------------------------------------
Net cash used in investing activities (31,033) (61,481)
-------------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings under lines of credit (23,000) 35,417
Net payments on notes payable (1,502) (401)
Net principal payments under capital lease arrangements (9,380) (3,185)
Net proceeds from the issuance of stock for stock plans - 3,881
Net treasury stock purchased (1,491) -
Distributions to minority interests (3,092) (4,325)
Dividends paid (7,585) (6,504)
-------------------------------------------
Net cash (used in) provided by financing activities (46,050) 24,883
-------------------------------------------
Decrease in cash and cash equivalents (1,362) (8,294)
Cash and cash equivalents, beginning of period 3,241 18,909
-------------------------------------------
Cash and cash equivalents, end of period $ 1,879 $ 10,615
===========================================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
February 28, May 31,
1999 1998
------------------- -------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,879 $ 3,241
Billed accounts receivable 148,515 135,223
Unbilled accounts receivable 22,011 18,835
Allowance for doubtful accounts (10,502) (7,394)
-------------------- -------------
Accounts receivable, net 160,024 146,664
Income tax receivable - 635
Inventory 7,289 5,253
Deferred income taxes 1,281 -
Prepaid expenses and other current assets 23,440 16,333
-------------------- -------------
Total current assets 193,913 172,126
==================== =============
Property and equipment, net 94,154 74,234
Intangible assets, net 429,698 458,223
Deferred income taxes 26,106 20,145
Other 8,016 6,487
-------------------- -------------
Total Assets $ 751,887 $ 731,215
==================== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 52,000 $ 75,000
Current portion of long-term debt 6,177 1,621
Obligations under capital leases 12,627 11,053
Accounts payable and accrued liabilities 70,229 73,115
Income tax payable 188 -
Deferred income taxes - 92
Deferred income 24,852 25,216
-------------------- -------------
Total current liabilities 166,073 186,097
==================== =============
Long-term debt 149,479 155,477
Obligations under capital leases 15,729 12,390
Other long-term liabilities 11,991 10,313
-------------------- -------------
Total Liabilities 343,272 364,277
==================== =============
Commitments and contingencies
Minority interest in equity of subsidiaries 18,557 19,003
Shareholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issued - -
Common stock, par value $.125 per share; 100,000,000 shares authorized, 33,954,435
and 33,791,534 shares issued, respectively. 4,244 4,224
Capital in excess of par value 344,125 344,019
Treasury stock, at cost, 156,833 and 159,200 shares, respectively (4,872) (5,980)
Retained earnings 52,600 9,537
Cumulative translation adjustment (2,678) (2,011)
Deferred compensation (3,361) (1,854)
-------------------- -------------
Total Shareholders' Equity 390,058 347,935
-------------------- -------------
Total Liabilities and Shareholders' Equity $ 751,887 $ 731,215
==================== =============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED
-------------------------------
FINANCIAL STATEMENTS
--------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In addition, certain reclassifications
have been made to the fiscal 1998 consolidated financial statements to conform
to the fiscal 1999 presentation.
It is suggested that these financial statements are read in conjunction with the
financial statements and notes thereto included in the Company's latest annual
report on Form 10-K for the fiscal year ended May 31, 1998.
In the opinion of management, the information furnished reflects all adjustments
necessary to present fairly the financial position, results of operations, and
cash flows for such interim periods.
NOTE 2 - EARNINGS PER SHARE:
Basic earnings per share is computed by dividing reported earnings available to
common shareholders by weighted average shares outstanding during the period.
Diluted earnings per share is computed by dividing reported earnings available
to common shareholders by weighted average shares outstanding during the period
and the impact of securities that, if exercised, and convertible debt, if
converted, would have a dilutive effect on earnings per share. All options with
an exercise price less than the average market share price for the period,
generally are assumed to have a dilutive effect on earnings per share.
The following table sets forth the computation of basic and diluted earnings (In
thousands):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------
February 28, 1999 February 28, 1998
------------------------------------------- ------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income $18,686 33,728 $ 0.55 ($96,312) 33,273 ($ 2.89)
============== =============
Effect of Dilutive Securities:
Stock Options --- 1,558 --- ---
---------------------------- ----------------------------
18,686 35,286 ( 96,312) 33,273
Convertible debt 1,185 2,752 --- ---
Diluted EPS:
--------------------------------------------------------------------------------------
Income available to common
stockholders plus assumed conversions $19,871 38,038 $ 0.52 ($96,312) 33,273 ($ 2.89)
======================================================================================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------------------------------------------
February 28, 1999 February 28, 1998
------------------------------------------- ------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income $50,745 33,711 $ 1.51 ($77,660) 31,678 ($ 2.45)
============== =============
Effect of Dilutive Securities:
Stock Options --- 1,334 --- ---
---------------------------- ----------------------------
50,745 35,045 (77,660) 31,678
Convertible debt 3,554 2,752 --- ---
Diluted EPS:
--------------------------------------------------------------------------------------
Income available to common
stockholders plus assumed conversions $54,299 37,797 $ 1.44 ($77,660) 31,678 ($ 2.45)
======================================================================================
</TABLE>
Basic and diluted earnings per share for the three and nine months ended
February 28, 1998 are the same, as the effect of any potentially dilutive
securities and convertible debt is antidilutive due to the loss generated by the
non-recurring charges.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow disclosures, including non-cash investing and financing
activities, for the nine months ended February 28, 1999 and 1998 are as follows
(In thousands):
1999 1998
---- ----
Income taxes paid, net of refunds $28,405 $ 23,156
Interest paid 8,773 7,883
Property and equipment capital leases 14,293 5,185
NOTE 4 - COMPREHENSIVE INCOME:
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and display of "comprehensive income"
and its components. Comprehensive income for the Company consists of net income
and foreign currency translation adjustments. Total comprehensive income (in
thousands of dollars) was $18,746 and ($96,396) for the three month periods
ended February 28, 1999 and 1998, respectively. Total comprehensive income (in
thousands of dollars) was $50,910 and ($77,736) for the nine month periods ended
February 28, 1999 and 1998, respectively.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The following tables summarize the Company's results of operations before and
after the effects of non-recurring charges:
<TABLE>
<CAPTION>
For the Three Months Ended February 28,
(in millions except per share data) 1999 1998 CHANGE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As Reported:
Revenue $195.7 $171.5 $24.2 14%
Operating Income (Loss) 34.8 (92.3) 127.1 *
Net Income (Loss) 18.7 (96.3) 115.0 *
Diluted Earnings (Loss) Per Share 0.52 (2.89) 3.41 *
Excluding Non-recurring Charges:
Revenue $195.7 $171.5 $24.2 14%
Operating Income 34.8 27.9 6.9 25%
Net Income 18.7 14.9 3.8 25%
Diluted Earnings Per Share 0.52 0.43 0.09 21%
- -------------------------------------------------------------------------------------------------------------
* - percentage change deemed not meaningful
<CAPTION>
For the Nine Months Ended February 28,
(in millions except per share data) 1999 1998 CHANGE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As Reported:
Revenue $578.9 $463.8 $115.1 25%
Operating Income (Loss) 95.4 (55.6) 151.0 *
Net Income (Loss) 50.7 (77.7) 128.4 *
Diluted Earnings (Loss) Per Share 1.44 (2.45) 3.89 *
Excluding Non-recurring Charges:
Revenue $578.9 $463.8 $115.1 25%
Operating Income 95.4 64.6 30.8 48%
Net Income 50.7 33.5 17.2 51%
Diluted Earnings Per Share 1.44 1.01 0.43 43%
- -------------------------------------------------------------------------------------------------------------
* - percentage change deemed not meaningful
</TABLE>
8
<PAGE>
In the third quarter ended February 28, 1998, the Company incurred
non-recurring charges of $120.2 million. After-tax, these charges were $111.2
million or $3.32 per share for the third quarter and $3.46 for the nine month
period ended February 28, 1998. In general, these charges were incurred in
connection with mergers and related restatements that occurred in the third
quarter of fiscal 1998. The components of the charges include merger transaction
costs, asset impairment losses, and restructuring activities. The charge also
includes a $67.0 million in-process research and development charge related to
the acquisition of Source Informatics Inc. Restructuring activities reflect
charges for severance and other related costs associated with plans to
consolidate operations in areas of redundant operations and activities. The
remainder of the results of operations discussion will exclude the impact of the
non-recurring charge, as the Company believes that this will provide for more
meaningful comparisons.
REVENUE
(In millions)
<TABLE>
<CAPTION>
Third Quarter Ended February 28,
-----------------------------------------------------------------
1999 1998 Increase
------------------------- ------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Health Information Services $ 114.1 58% $ 100.0 58% 14%
Electronic Commerce:
Integrated Payment Systems 48.7 25% 39.7 23% 23%
Global Payment Systems 40.7 21% 38.6 23% 5%
Intercompany Revenue (7.8) (4%) (6.8) (4%) 15%
-----------------------------------------------------------------
81.6 42% 71.5 42% 14%
-----------------------------------------------------------------
Total Revenue $ 195.7 100% $ 171.5 100% 14%
=================================================================
</TABLE>
Total revenue for the third quarter of fiscal 1999 was $195.7 million,
an increase of $24.2 million (14%) from the same period in fiscal 1998. The
increase resulted from increased revenue in Health Information Services, $14.1
million (14%); and in the Electronic Commerce business, specifically, Integrated
Payment Systems, $9.0 million (23%), and Global Payment Systems, $2.1 million
(5%).
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended February 28,
-----------------------------------------------------------------
1999 1998 Increase
------------------------ ------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Health Information Services $ 336.0 58% $ 247.8 53% 36%
Electronic Commerce:
Integrated Payment Systems 143.2 25% 117.2 25% 22%
Global Payment Systems 122.9 21% 118.9 26% 3%
Intercompany Revenue (23.2) (4%) (20.1) (4%) 15%
-----------------------------------------------------------------
242.9 42% 216.0 47% 12%
-----------------------------------------------------------------
Total Revenue $ 578.9 100% $ 463.8 100% 25%
=================================================================
</TABLE>
9
<PAGE>
Total revenue for the nine month period of fiscal 1999 was $578.9 million,
an increase of $115.1 million (25%) from the same period in fiscal 1998. The
increase resulted from increased revenue in Health Information Services, $88.2
million (36%); and in the Electronic Commerce business, specifically, Integrated
Payment Systems, $26.0 million (22%), and Global Payment Systems, $4.0 million
(3%).
Health Information Services. Health Information Services revenue growth in
---------------------------
fiscal 1999 was a result of increases from internally developed products and
services and the expansion of distribution channels. In addition, revenue growth
for the nine month period includes the impact of two third quarter fiscal 1998
acquisitions, Source Informatics Inc. ("Source") and a subsidiary of
Pharmaceutical Marketing Services Inc. ("PMSI").
Electronic Commerce. Electronic Commerce revenue growth in fiscal 1999
-------------------
reflects the impact of growth of the industry, programs directed at new vertical
industry offerings and the expansion of distribution channels, in addition to
growth in basic market demand. This growth was reflected in an increase in the
volume of merchant sales processed, due to a larger customer base and higher
consumer credit card spending. In addition, revenue growth for the nine month
period includes the impact of the fourth quarter fiscal 1998 acquisition of
CheckRite International, Inc. Also, Global Payment Systems' new back office
services continue to contribute to the revenue growth.
COSTS AND EXPENSES
Cost of service increased $12.4 million (15%) in the third quarter and
$62.8 million (27%) in the nine month period ended February 28, 1999 from the
same periods in fiscal 1998. The increase was primarily a result of increased
operating costs associated with revenue growth and a higher cost of service in
companies acquired in fiscal 1998, primarily Physician Support Systems, Inc.
("PHSS"), to support current and expected revenue growth in the physician and
hospital management services area. Total cost of service, as a percentage of
revenue, remained constant at 49% for both third quarter periods. Total cost of
service, as a percentage of revenue, increased from 50% to 51% for the nine
month periods ended February 28, 1999 and 1998. The Company continues to make
investments to leverage its computer operations, telecommunications
infrastructure and operating costs, and new market opportunities.
Sales, general and administrative expenses ("SG&A") increased $4.9 million
(8%) in the third quarter and $21.5 million (13%) in the nine month period ended
February 28, 1999 from the same periods in fiscal 1998. This increase was
primarily due to expenses associated with continuing investments in product
development, Year 2000 compliance initiatives, and distribution channel
expansion (i.e. sales and customer support) for continued revenue growth.
However, as a percentage of revenue, these expenses decreased to 33% from 35%
for the third quarter of fiscal 1999 from the same period in fiscal 1998. For
the nine month periods ended February 28, these expenses, as a percentage of
revenue, decreased to 32% from 36% in 1999 and 1998, respectively. The decrease
as a percentage of revenue also reflects synergies realized from the integration
of acquisitions.
10
<PAGE>
OPERATING INCOME
Operating income, excluding non-recurring charges, increased to $34.8
million from $27.9 million (25%) in the third quarter of fiscal 1999 from the
same period in fiscal 1998. As a percentage of revenue, the Company's operating
income margin increased 9.2% to 17.8% in the third quarter of fiscal 1999 from
16.3% in the same period in fiscal 1998.
Operating income, excluding non-recurring charges, increased 48% to
$95.4 million from $64.6 million for the nine month period ended February 28,
1999 from the same period in fiscal 1998. As a percentage of revenue, the
Company's operating income margin increased 18.7% to 16.5% from 13.9% for the
nine month periods ended February 28, 1999 and 1998.
These improvements reflect improved margins in operations and
profitability through execution of strategies to reposition the base business
and investments in new market opportunities.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
Earnings before interest, taxes, depreciation and amortization
("EBITDA"), excluding non-recurring charges, was $49.6 million for the third
quarter of fiscal 1999 and $40.3 million for the same period in fiscal 1998. As
a percentage of revenue, EBITDA was 25.4% for the third quarter of fiscal 1999
and 23.5% for the same period in fiscal 1998.
EBITDA, excluding non-recurring charges, was $137.4 million for the
nine months ended February 28, 1999 and $100.8 million for the same period in
fiscal 1998. As a percentage of revenue, EBITDA increased to 23.7% from 21.7%
for the nine month periods ended February 28, 1999 and 1998.
The Company's EBITDA formula and results as a percentage of revenue
may not be comparable to similarly titled measures reported by other companies.
However, management believes this statistic is a relevant measurement and
provides a comparable operating income measure, excluding the impact of the
amortization of acquired intangibles, potential timing differences associated
with capital expenditures and the related depreciation charges.
Earnings Per Share
Diluted earnings per share for the third quarter ended February 28,
1999 was 52 cents per share versus 43 cents per share for the same period in the
prior year, excluding non-recurring charges. The dilutive effect of stock
options, if exercised, and convertible debt, if converted, was 2 cents and 1
cent, respectively, for the quarter ended February 28, 1999.
Diluted earnings per share for the nine month period ended February
28,1999 was $1.44 per share versus $1.01 per share for the same period in the
prior year, excluding non-recurring charges. The dilutive effect of stock
options, if exercised, and convertible debt, if converted, was 6 cents and 1
cent, respectively, for the nine month period ended February 28, 1999.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations provides the Company with a
significant source of liquidity to meet its needs. Net cash provided by
operating activities increased 167.5% to $75.7 million from $28.3 million for
the nine month periods ended February 28, 1999 and 1998. Cash provided by
operations before changes in working capital was $107.4 million for the nine
month period ended February 28, 1999, an increase of $52.3 million (95%)
compared to the same period of the prior year. This difference is primarily
driven by the $36.6 million increase in EBITDA and the net cash flow impact of
the fiscal 1998 non-recurring charges. Cash required to fund net changes in
working capital were $31.7 million and $26.8 million for the nine month periods
ended February 28, 1999 and 1998, respectively. The changes in working capital
resulted primarily from changes in net merchant processing funds and the timing
and payments of income taxes, accounts payable and accrued liabilities. The
changes in net merchant processing funds reflect normal fluctuations in the
timing of credit card sales processed and vary from month to month. The changes
due to accounts payable and accrued liabilities primarily relate to the timing
of payroll and related liabilities. The timing associated with income taxes
payable was due to the estimated tax liability relating to the fiscal year 1998
acquisitions, non-recurring charges and changes in tax laws.
For the nine month period ended February 28, 1999, cash used in
investing activities was $31.0 million, compared to $61.5 million in the same
period of fiscal 1998. The decrease is primarily due to the first quarter fiscal
1998 investment in the acquisition of two pharmacy systems companies in the
United Kingdom and the third quarter fiscal 1998 mergers with PHSS and Source
Informatics Inc., which included a division of Pharmaceutical Marketing Services
Inc. The decrease is partially offset by the third quarter fiscal 1999
acquisition of John Richardson Computers and an increase in capital
expenditures. The Company continues to invest in capital expenditures related to
growth in the business and acceleration of certain strategic and Year 2000
compliance initiatives. The Company has financed its investing activities
through cash flows from operations, equity, borrowings on its line of credit and
debt offerings.
Net cash used in financing activities was $46.1 million for the nine
month period ended February 28, 1999 compared to net cash provided of $24.9 in
the same period of fiscal 1998. During this period, the Company repaid $23.0
million on the $75.0 million borrowed in fiscal 1998. Principal payments under
capital lease arrangements increased to $9.4 million for the nine month period
ended February 28, 1999 from $3.2 million in the same period of fiscal 1998 due
to capital leases acquired through 1998 acquisitions and current year property
and equipment acquired under capital leases. The Company purchased $7.5 million
of its own common stock during the nine month period ended February 28, 1999,
offset by the reissuance of stock valued at $6.0 million under Company stock
plans. Dividends of $7.6 million and $6.5 million were paid during the nine
month periods ended February 28, 1999 and 1998, respectively.
The Company has a committed, unsecured $125.0 million revolving line of
credit that expires in December 2002. At February 28, 1999, there was $47.0
million outstanding under the facility. The Company also has a $15.0 million
uncommitted line of credit to fund working capital requirements, under which
there was $5.0 million outstanding at February 28, 1999. Management believes
that its current level of cash and borrowing capacity, along with future cash
flows from operations are sufficient to meet the needs of its existing
operations and its planned requirements for the foreseeable future. The Company
regularly evaluates cash requirements for current operations, commitments,
development activities and strategic acquisitions. The Company may elect to
raise additional funds for these purposes, either through the issuance of
additional debt or equity or otherwise, as appropriate.
12
<PAGE>
YEAR 2000 COMPLIANCE
INTRODUCTION
The Year 2000 issue is the result of the potential for computer
programs to improperly interpret dates in the year 2000 and beyond. Certain of
the Company's computer systems used for product or internal use that have
time/date-sensitive software and hardware may misinterpret dates resulting in a
system failure or miscalculation. The Company presently believes that, with
modification to existing computer systems as scheduled, the Year 2000 issue
should not pose significant operational problems for the Company's products and
internal systems, as so modified and converted.
The Company has a corporate Program Office to define, evaluate and
conduct audits of the Company and its progress toward Year 2000 compliance. The
Company also has a Year 2000 Senior Advisory Board comprised of members of
senior management and a Year 2000 Task Force comprised of representatives from
various departments from each of the Company's operating units. The Task Force
is charged with evaluating the Company's Year 2000 efforts, managing
implementation teams, and regularly reporting results to the corporate Program
Office. The corporate Program Office monitors the progress of the operating
units in their implementation plans to resolve Year 2000 issues, tracks
dependencies and provides reports to the Senior Advisory Board. The Senior
Advisory Board is charged with evaluating the progress reported by the corporate
Program Office and addressing any significant issues as they arise.
STATUS OF PROGRESS
The corporate Program Office has established an implementation plan to
address the Year 2000 issue. The implementation plan phases are stated and
defined as follows:
Phase I - Inventory/Assessment. List and classify software, hardware, networks,
--------------------
products, services, facilities, environment, third party relationships and any
additional items that could be affected by the Year 2000 issue. For each item on
the inventory, assess the likelihood of meeting the target dates to be corrected
for Year 2000 data processing and ready for testing. This phase includes
developing plans to manage each item on the inventory and assessment. Certain of
the Company's products/services utilize third party software and/or hardware
products in conjunction with proprietary software. In these cases, due diligence
is being performed on the third party vendors and the Company has made or is in
the process of making clients aware of upgrades/replacements that may be
required if the third party products are not compliant. The Company has
completed this phase for all key systems.
Phase II - Remediation. Determine and implement methodology for correcting Year
-----------
2000 issues via coding, upgrades, replacements, etc. and deliver to testing. The
Company's estimated completion date for this phase is June 1999.
The Company's major systems in the core operational networks were substantially
completed by March 31, 1999. These networks include communications and
transaction processing, database management for healthcare applications,
electronic commerce including credit, debit, and check, and Health Information
Services' pharmacy transaction submission, eligibility verification, data
capture and editing. Key systems in Health Information Services' practice
management, management services and EDI services will be materially completed by
June 1999, with a limited number of systems requiring extended migration,
installation or conversion activity beyond this date. All efforts have an
anticipated conclusion by October 1999.
13
<PAGE>
Phase III - Internal Testing. Perform testing from developed plans as a result
----------------
of remediation, upgrades and/or testing of indicated Year 2000 compliant third
party applications or services. At the completion of this phase, the Company's
computer systems are deemed to be Year 2000 ready subject to implementation. The
Company's estimated completion date for this phase is June 1999.
The Company anticipates that Phase III will be substantially completed for its
core operational networks by June 1999. The Company's various other Health
Information Services' practice management, management services and EDI systems
are at varying levels of completion.
Phase IV - External Testing. Perform end to end connection point testing with
----------------
third parties the Company relies upon for certain operating elements via
interfaces and service providers as required. The Company targets this phase to
be completed by September 1999 for various systems. The Company anticipates that
continued testing with third parties may be required past the September date
based on their availability.
External testing is being performed as required. This testing is dependent on
third parties. The Company continues to actively pursue these dependencies to
schedule required testing.
Phase V - Implementation and Proactive Management. Transition Year 2000
---------------------------------------
compliant computer systems into a production/live environment. The Company
estimates completion of this phase by October 1999. As testing is successfully
completed, systems are implemented into a production/live environment.
Management believes that its key systems will be Year 2000 ready by October
1999.
COSTS TO ADDRESS
As it relates to internal computer systems, the Company is incurring
internal staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare its systems for
the Year 2000. Given the nature of the Company's ongoing system development
activities throughout its businesses, it is difficult to quantify, with
specificity, all of the costs and capital expenditures being incurred to address
this issue. A significant portion of these costs is not likely to be incremental
costs to the Company, but will represent the redeployment of existing
information technology resources. The Company's employees have performed the
majority of the work completed thus far on the implementation plans. The costs
incurred to date, excluding capital expenditures, are approximately $20 million.
The Company's estimated costs to complete its Year 2000 compliance program
ranges between $5-10 million spanning the remainder of the current fiscal year
and the next fiscal year. The capital expenditures incurred to date are
approximately $10 million and estimated capital expenditures to complete
comprise an additional $5 million. These capital expenditures amounts include
only those initiatives undertaken specifically to resolve Year 2000 issues.
However, some Year 2000 issues were successfully corrected by other capital
projects that addressed many of the Company's initiatives such as consolidation
of information, productivity improvements and leveraging fixed costs. The total
cost estimate for the implementation plan may be revised because the plan is
constantly evaluated and revised as a result of many factors. These factors
include, but are not limited to, the results of any phase of the implementation
plan, customer requirements, or recommendations by contractors retained by the
Company. These cost estimates also do not include the cost of contingency
planning and proactive maintenance as the Year 2000 approaches. Currently, the
Company is expecting this cost to be an additional $3-5 million. The Company
does not expect that the opportunity costs of executing the implementation plan
will have a material effect on the financial condition of the Company or its
results of operations.
14
<PAGE>
RISKS
The Year 2000 issue creates risk for the Company from unforeseen
problems in its own computer systems and from third parties upon which the
Company relies. Accordingly, the Company is requesting assurances from certain
software vendors from which it has acquired, or from which it may acquire
software, that the software will correctly process all date information at all
times. In addition, the Company is querying certain of its customers and
suppliers as to their progress in identifying and addressing problems that their
computer systems will face in correctly processing date information as the Year
2000 approaches and is reached. The Company is heavily reliant upon customers
and other third parties in the health care, banking and credit card industries,
in terms of electronic interfaces. Failure to appropriately address the Year
2000 issue by major customers or suppliers or a material percentage of the
smaller customers could have a material adverse effect on the financial
condition and results of operations of the Company. At this time, the Company
does not expect any material research and development activities to be delayed
due to the Year 2000 compliance efforts. However, if certain initiatives are
delayed, the result could have an adverse effect to the Company.
In order for the testing phase of the Year 2000 plan to be completed,
the Company is reliant upon its customers and other third party connection
points to prepare their systems for testing. The Company could be affected if a
significant number of customers delay testing or conversions until the end of
1999. In order to address this issue, the Company is evaluating the impact of
those customers who have not yet coordinated with the Company for upgrades,
certification/verification, and testing. The customers with the greatest revenue
impact have been identified and their testing/certification process is being
analyzed. Where possible, coordination for testing is targeted by June 1999. If
coordination of a preset testing time is not possible, the revenue impact for
the accommodation of last minute testing is being evaluated. The goal is to
protect major revenues before October 1999, so that the Company's overall
revenue is not impacted.
The Company's business is also heavily reliant upon external suppliers
to provide certain operating elements of its business. Some of these providers
include telecommunication services, computer systems, banks and utility
companies. Currently, due diligence is being performed on suppliers to the
Company. Inquiries are made regarding suppliers' Year 2000 efforts and
contingency plans are developed as necessary. However, the Company exerts no
control over the efforts of these companies to become Year 2000 compliant. The
services provided by these parties are critical to the operations of the Company
and the Company is heavily reliant upon these parties to successfully address
the Year 2000 issue. Therefore, if any of these parties fail to provide the
Company with services, the Company's ability to conduct business could be
materially impacted. The result of such impact may have a material adverse
effect on the financial condition and results of operations of the Company.
15
<PAGE>
CONTINGENCY
The Company's Year 2000 compliance activities are being regularly
monitored and evaluated. Contingency plans are being established and implemented
as the risks are identified. In general, contingency and proactive maintenance
plans will address, at a minimum, key third party dependencies, facilities,
utilities and staffing. On-site audits are being performed to evaluate the
progress of the operating units toward meeting their goals. The results of these
audits are compared to the implementation plan and presented to the Senior
Advisory Board and the Company's Board of Directors.
SUMMARY
There are no assurances that the Company will identify all
date-handling problems in its business systems or those of its customers and
suppliers in advance of their occurrence or that the Company will be able to
successfully remedy all Year 2000 compliance issues that are discovered.
However, the Company, in good faith, is working to identify all issues. To the
extent that the Company is unable to resolve its Year 2000 issues prior to
January 1, 2000, operating results could be adversely affected. In addition, the
Company could be adversely affected if other entities (i.e. vendors or
customers) not affiliated with the Company do not appropriately address their
own Year 2000 compliance issues in advance of their occurrence.
16
<PAGE>
FORWARD-LOOKING INFORMATION
When used in this Quarterly Report on Form 10-Q, in documents
incorporated herein and elsewhere by management or National Data Corporation
("NDC" or the "Company") from time to time, the words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements concerning the Company's business operations, economic performance
and financial condition, including in particular, the Company's business
strategy and means to implement the strategy, the Company's objectives, the
amount of future capital expenditures, the likelihood of the Company's success
in developing and introducing new products and expanding its business, and the
timing of the introduction of new and modified products or services. For those
statements, the Company claims the protection of the safe harbor for forward
looking statements contained in the Private Securities Litigation Reform Act of
1995. These statements are based on a number of assumptions and estimates which
are inherently subject to significant risks and uncertainties, many of which are
beyond the control of the Company and reflect future business decisions which
are subject to change. A variety of factors could cause actual results to differ
materially from those anticipated in the Company's forward-looking statements,
including the following factors: (a) those set forth in Exhibit 99.1 to the
Registrant's Quarterly Report on Form 10-Q for the period ended August 31, 1998
and, incorporated herein by reference, and elsewhere herein; and (b) those set
forth from time to time in the Company's press releases and reports and other
filings made with the Securities and Exchange Commission. The Company cautions
that such factors are not exclusive. Consequently, all of the forward-looking
statements made herein are qualified by these cautionary statements and readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions of such forward-looking statements
that may be made to reflect events or circumstances after the date hereof, or
thereof, as the case may be, or to reflect the occurrence of unanticipated
events.
17
<PAGE>
PART II
ITEM 1 - PENDING LEGAL PROCEEDINGS
- ----------------------------------
The Company is party to a number of claims and lawsuits incidental to
its business. In the opinion of management, the ultimate outcome of such
matters, in the aggregate, will not have a material adverse impact on the
Company's financial position, liquidity or results of operations.
ITEM 2 - CHANGES IN SECURITIES
- -------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- --------------------------
None
ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
(27) Financial Date Schedule (for SEC use only)
(b) Reports Filed on Form 8-K:
None
18
<PAGE>
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 Data Corporation
-------------------------
(Registrant)
Date: April 14, 1999 By: /s/ Kevin C. Shea
--------------- ------------------------
Kevin C. Shea
Chief Financial Officer
(Principal Financial Officer)
Date: April 14, 1999 By: /s/ David H. Shenk
--------------- ------------------------
David H. Shenk
Corporate Controller
(Chief Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,879
<SECURITIES> 0
<RECEIVABLES> 170,526
<ALLOWANCES> 10,502
<INVENTORY> 7,289
<CURRENT-ASSETS> 193,913
<PP&E> 209,292
<DEPRECIATION> 115,138
<TOTAL-ASSETS> 751,887
<CURRENT-LIABILITIES> 166,073
<BONDS> 149,479
0
0
<COMMON> 4,244
<OTHER-SE> 385,814
<TOTAL-LIABILITY-AND-EQUITY> 751,887
<SALES> 0
<TOTAL-REVENUES> 578,939
<CGS> 0
<TOTAL-COSTS> 295,614
<OTHER-EXPENSES> 187,889
<LOSS-PROVISION> 3,937
<INTEREST-EXPENSE> 11,378
<INCOME-PRETAX> 83,189
<INCOME-TAX> 32,444
<INCOME-CONTINUING> 50,745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,745
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.44
</TABLE>
