<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 November 30, 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 - 32,906,381 shares
-----------------------------------------------------
Outstanding as of January 5, 2000
-------------------------------------
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
<TABLE>
<CAPTION>
(In thousands, except per share data)
=============================================================================================
Three Months Ended November 30,
---------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Revenues $ 196,042 $ 191,522
- ---------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 103,037 98,852
Sales, general and administrative 79,328 62,970
Restructuring and impairment charges 34,393 -
---------------------------------
216,758 161,822
---------------------------------
Operating income (loss) (20,716) 29,700
- ---------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 2,722 844
Interest and other expense (3,519) (3,929)
Minority interest in earnings (923) (817)
---------------------------------
(1,720) (3,902)
---------------------------------
Income (loss) before income taxes (22,436) 25,798
Provision (benefit) for income taxes (6,968) 10,061
- ---------------------------------------------------------------------------------------------
Net income (loss) $ (15,468) $ 15,737
=================================
Basic earnings (loss) per share $ (0.46) $ 0.47
=================================
Diluted earnings (loss) per share $ (0.46) $ 0.45
=================================
</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>
Six Months Ended November 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues $399,766 $383,204
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 204,833 199,227
Sales, general and administrative 148,268 123,371
Restructuring and impairment charges 34,393 -
--------------------------
387,494 322,598
--------------------------
Operating income 12,272 60,606
- ------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 4,400 1,418
Interest and other expense (6,713) (7,655)
Minority interest in earnings (1,994) (1,812)
-------------------------
(4,307) (8,049)
-------------------------
Income before income taxes and cumulative effect of change in accounting 7,965 52,557
principle
Provision for income taxes 4,736 20,497
- ------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle 3,229 32,060
Cumulative effect of change in accounting principle, net of income taxes (13,760) -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $(10,531) $ 32,060
---------------------------
Basic earnings (loss) per share:
Income before cumulative effect of change in accounting principle $ 0.10 $ 0.95
---------------------------
Cumulative effect of change in accounting principle, net of income $ (0.41) $ -
taxes
---------------------------
Basic earnings (loss) per share $ (0.31) $ 0.95
---------------------------
Diluted earnings (loss) per share:
Income before cumulative effect of change in accounting principle $ 0.09 $ 0.92
---------------------------
Cumulative effect of change in accounting principle, net of income $ (0.41) $ -
taxes
---------------------------
Diluted earnings (loss) per share $ (0.31) $ 0.92
---------------------------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION
(In thousands)
- -----------------------------------------------------------------------------------------------------------------
Six Months Ended November 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,531) $ 32,060
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Non-Cash restructuring and impairment charges 23,880 -
Cumulative effect of change in accounting principle 13,760 -
Depreciation and amortization 16,386 13,869
Amortization of acquired intangibles and goodwill 13,550 13,275
Deferred income taxes (13,554) (4,108)
Minority interest in earnings 1,994 1,812
Provision for bad debts 12,593 2,644
Gain on sale of marketable securities (1,599) -
Gain on business divestiture (2,295) -
Other, net (781) 1,191
Changes in assets and liabilities which provided (used) cash,
net of the effects of acquisitions:
Accounts receivable, net 402 (7,813)
Merchant processing working capital (6,346) (5,904)
Inventory (228) (1,143)
Prepaid expenses and other assets (7,554) (2,630)
Accounts payable and accrued liabilities 2,024 5,998
Deferred income 3,114 (76)
Income taxes 12,119 508
--------------------------------
Net cash provided by operating activities 56,934 49,683
--------------------------------
Cash flows from investing activities:
Capital expenditures (17,495) (18,732)
Sale of marketable securities 2,974 -
Business divestitures 3,500 -
Sale (Purchase) of investment (10,045) 1,126
--------------------------------
Net cash used in investing activities (21,066) (17,606)
--------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit 33,000 (8,000)
Net principal payments under capital lease arrangements
and other long-term debt (16,069) (7,615)
Net purchases related to stock activities (33,118) (5,757)
Distributions to minority interests (2,219) (1,053)
Dividends paid (5,009) (5,045)
--------------------------------
Net cash used in financing activities (23,415) (27,470)
--------------------------------
Increase in cash and cash equivalents 12,453 4,607
Cash and cash equivalents, beginning of period 4,295 3,241
--------------------------------
Cash and cash equivalents, end of period $ 16,748 $ 7,848
================================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION
(In thousands, except share and per share data)
- ----------------------------------------------------------------------------------------------------------
November 30, May 31,
1999 1999
---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,748 $ 4,295
Billed accounts receivable 143,322 163,193
Unbilled accounts receivable 3,172 22,305
Allowance for doubtful accounts (11,548) (10,728)
---------------- -----------------
Accounts receivable, net 134,946 174,770
---------------- -----------------
Income tax receivable 1,865 8,348
Inventory 8,154 7,927
Net merchant processing receivable 4,552 -
Deferred income taxes 4,610 1,191
Prepaid expenses and other current assets 21,504 16,297
---------------- -----------------
Total current assets 192,379 212,828
---------------- -----------------
Property and equipment, net 100,268 105,904
Intangible assets, net 395,221 424,324
Deferred income taxes 24,098 13,963
Investment securities available for sale 25,087 -
Other 9,675 7,909
---------------- -----------------
Total Assets $746,728 $764,928
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
liabilities:
Line of credit $ 68,000 $ 35,000
Current portion of long-term debt 167 6,245
Obligations under capital leases 9,711 13,113
Accounts payable and accrued liabilities 67,749 70,027
Net merchant processing payable - 1,794
Deferred income 35,131 30,258
---------------- -----------------
Total current liabilities 180,758 156,437
---------------- -----------------
Long-term debt 152,613 152,690
Obligations under capital leases 12,394 18,129
Other long-term liabilities 15,808 9,846
---------------- -----------------
Total liabilities 361,573 337,102
---------------- -----------------
Commitments and contingencies
Minority interest in equity of subsidiaries 18,507 18,732
Shareholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares - -
authorized, none issued
Common stock, par value $.125 per share; 200,000,000 shares authorized,
33,953,023 and 33,953,031 shares issued, respectively. 4,244 4,244
Capital in excess of par value 341,693 345,639
Treasury stock, at cost, 1,062,986 and 175,442 shares, respectively (27,922) (5,857)
Unrealized holding gain 4,756 -
Retained earnings 55,325 70,865
Deferred compensation (8,837) (3,215)
Cumulative translation adjustment (2,611) (2,582)
---------------- -----------------
Total shareholders' equity 366,648 409,094
---------------- -----------------
Total Liabilities and Shareholders' Equity $746,728 $764,928
================ =================
</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 are based on the Company's current
structure. The Company is undergoing a strategy review and recently announced a
proposal to spin-off the eCommerce business segment into a separate publicly
traded company with its own management and Board of Directors. For further
details on this proposal, please see Note 8 to the Unaudited Consolidated
Financial Statements and Management's Discussion and Analysis pages 13 through
15.
The financial statements included herein have been prepared by National Data
Corporation (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 1999
consolidated financial statements to conform to the fiscal 2000 presentation.
The Company's Investment in securities available for sale primarily represents
the Company's ownership of approximately 2.2 million shares of Medscape, Inc.
which had its initial public offering in September 1999. These securities are
carried at fair value and the related unrealized gain of $4.8 million, net of
income taxes of $3.0 million, is included in the Unrealized holding gain in
Shareholder's Equity.
It is suggested that these financial statements be 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, 1999.
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 (LOSS) PER SHARE:
Basic earnings (loss) per share is computed by dividing reported earnings (loss)
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.
6
<PAGE>
The following table sets forth the computation of basic and diluted earnings (In
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
November 30, 1999 November 30, 1998
--------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $(15,468) 33,376 $(0.46) $15,737 33,681 $0.47
=========== ===========
Effect of Dilutive
Securities:
Stock Options --- --- --- 1,127
--------------------------- ------------------------
(15,468) 33,376 15,737 34,808
Convertible debt --- --- --- ---
Diluted EPS:
---------------------------------------------------------------------------------
Income (loss) available to
common stockholders plus
assumed conversions $(15,468) 33,376 $(0.46) $15,737 34,808 $0.45
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended (Before cumulative effect of accounting change)
--------------------------------------------------------------------------------
November 30, 1999 November 30, 1998
--------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) before
cumulative effect of change
in accounting principle $ 3,229 33,627 $ 0.10 $32,060 33,702 $0.95
=========== ===========
Effect of Dilutive
Securities:
Stock Options --- 1,070 --- 1,221
--------------------------- ------------------------
3,229 34,697 32,060 34,923
Convertible debt ----- --- --- ---
Diluted EPS:
--------------------------------------------------------------------------------
Income (loss) available to
common stockholders plus
assumed conversions $ 3,229 34,697 $ 0.09 $32,060 34,923 $0.92
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------------------------------------------
November 30, 1999 November 30, 1998
--------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $(10,531) 33,627 $(0.31) $32,060 33,702 $0.95
=========== ===========
Effect of Dilutive
Securities:
Stock Options --- --- --- 1,221
---------------------------- ------------------------
(10,531) 33,627 32,060 34,923
Convertible debt ----- --- --- ---
Diluted EPS:
---------------------------------------------------------------------------------
Income (loss) available to
common stockholders plus
assumed conversions $(10,531) 33,627 $(0.31) $32,060 34,923 $0.92
================================================================================
</TABLE>
7
<PAGE>
For the three and six months ended November 30, 1999 and 1998, convertible debt
had no impact on the diluted earnings per share. Therefore, diluted earnings
per share was not adjusted for convertible debt.
Basic and diluted earnings per share for the three and six months ended November
30, 1999 are the same, as the effect of any potentially dilutive securities and
convertible debt is antidilutive due to the loss generated by the restructuring
and impairment charges.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow disclosures, including non-cash investing and financing
activities, for the six months ended November 30, 1999 and 1998 are as follows
(In thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income taxes paid (received), net of refunds $6,270 $21,090
Interest paid 6,192 7,217
Capital leases entered into in exchange
for property and equipment 776 13,511
Non-cash investment in Medscape 7,000 ---
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME (LOSS):
The components of comprehensive income (loss) are as follows (In thousands):
<TABLE>
<CAPTION>
Three months ended November 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $(15,468) $15,737
Foreign exchange effect 87 22
Unrealized holding gain, net of tax 4,756 ---
-------- -------
Total comprehensive income (loss) $(10,625) $15,759
======== =======
</TABLE>
<TABLE>
<CAPTION>
Six months ended November 30,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $(10,531) $32,060
Foreign exchange effect (29) (952)
Unrealized holding gain, net of tax 4,756 ---
-------- -------
Total comprehensive income (loss) $ (5,804) $31,108
======== =======
</TABLE>
8
<PAGE>
NOTE 5 - SEGMENT INFORMATION:
The segment information for the three-month and six-month periods ended November
30, 1999 and 1998 is presented below. The Company classifies its businesses
into two segments: Health Information Services and eCommerce. There has been no
change in the composition of the reportable segments from the presentation of
fiscal year 1999 segment information included in the most recent 10-K. EBITDA
excludes the restructuring and impairment charges.
<TABLE>
<CAPTION>
Restructuring
Health and All Other
Quarter Ended November 30, 1999 Information Impairment and
(In thousands) Services eCommerce Charges Corporate Totals
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $111,868 $ 84,174 $ - $ - $196,042
Depreciation and Amortization 9,021 5,291 - 531 14,843
EBITDA 9,210 21,591 - (2,281) 28,520
Income (loss) before income (253) 15,175 (34,393) (2,965) (22,436)
taxes
Segment assets 423,311 265,423 - 57,994 746,728
</TABLE>
<TABLE>
<CAPTION>
Restructuring
Health and All Other
Quarter Ended November 30, 1998 Information Impairment and
Services eCommerce Charges Corporate Totals
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $112,203 $ 79,319 $ - $ - $191,522
Depreciation and Amortization 8,331 5,264 - 438 14,033
EBITDA 24,699 22,517 - (3,483) 43,733
Income (loss) before income 15,873 16,125 - (6,200) 25,798
taxes
Segment assets 420,328 268,801 - 67,399 756,528
</TABLE>
<TABLE>
<CAPTION>
Restructuring
Health and All Other
Six Months Ended November 30, 1999 Information Impairment and
Services eCommerce Charges Corporate Totals
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $225,764 $174,002 $ - $ - $399,766
Depreciation and Amortization 18,170 10,637 - 1,129 29,936
EBITDA 32,277 48,599 - (4,275) 76,601
Income (loss) before income
taxes and cumulative effect of
change in accounting principle 13,214 35,520 (34,393) (6,376) 7,965
Segment assets 423,311 265,423 - 57,994 746,728
</TABLE>
<TABLE>
<CAPTION>
Restructuring
Health and All Other
Six Months Ended November 30, 1998 Information Impairment and
Services eCommerce Charges Corporate Totals
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $221,488 $161,716 $ - $ - $383,204
Depreciation and Amortization 16,036 10,243 - 865 27,144
EBITDA 44,589 48,701 - (5,540) 87,750
Income (loss) before income 27,864 35,951 - (11,258) 52,557
taxes
Segment assets 420,328 268,801 - 67,399 756,528
</TABLE>
9
<PAGE>
NOTE 6 - RESTRUCTURING AND IMPAIRMENT CHARGES AND OTHER UNUSUAL EXPENSES:
During the second quarter of fiscal year 2000, executive management
performed an update of its Health Information Services strategy. This included
addressing additional Internet opportunities. Management evaluated the Company's
current product and service offerings in light of changing market and
technological environments, as well as their leverage ability with related
product and service offerings. This resulted in the identification of obsolete
and/or non-strategic product offerings. The decision was made to focus
management attention on the core value-added network, information management,
and strategic point of use provider systems and related Internet initiatives.
This decision led to the evaluation of business areas, products and services,
the assets needed as part of the business strategy, their current and projected
revenue and profit growth rates, resource requirements, as well as management
time demands.
Accordingly, actions were initiated on non-core products and services which
included acceleration of clearing house integration, consolidation of locations,
associated staff and expense reductions, and elimination of obsolete and
redundant product and service offerings. Total charges related to the
restructuring and asset impairment were $34.4 million, and are categorized as
follows (In thousands):
<TABLE>
<CAPTION>
Item Total Cash Non-cash
---- ----- ---- --------
<S> <C> <C> <C>
Impairment of goodwill and other
intangibles $15,972 $ -- $15,972
Impairment of property and equipment 6,908 -- 6,908
Closed or planned closings of facilities 6,100 6,100 --
Estimated costs for settlements on
contracts 3,236 2,236 1,000
Severance and related costs 2,177 2,177 --
----------------------------------------------
Total $34,393 $10,513 $23,880
==============================================
</TABLE>
The items considered cash items were accrued at the time the charges were
incurred. In addition, the Company presently estimates that approximately $10
million in additional charges will be incurred during the next twelve months as
additional actions are finalized and implemented.
Based on management's assessment during the second quarter of fiscal 2000, the
Company evaluated whether events and circumstances had occurred that indicated
the carrying amount of property and equipment or goodwill and other intangibles
may warrant revision or may not be recoverable. The Company uses an estimate of
the future undiscounted net cash flows associated with the asset over the
remaining life of the asset in measuring whether the long-lived asset is
recoverable. Management believes this approach is consistent with Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). As a
result, it was determined the above impairment losses should be recognized under
SFAS 121.
The charges relating to facilities represent the locations that are either
already closed or have management approved plans to close within the next 12
months. These charges include future minimum lease and operating payments,
commencing upon the planned exit timing, for all noncancelable leases under
remaining terms of the 18 locations identified, net of current and estimated
future sublease income. The
10
<PAGE>
charges also include facility exit costs. Normal lease payments and operating
costs will continue to be charged to operating expenses prior to actually
vacating the specific facilities.
Estimated costs for fulfillment of contract provisions primarily represent
certain payments due upon termination of customer relationships relating to
eliminated products, services and locations. The impact of these actions on
future revenues and operating income is not expected to be material. The
activities being executed involve the consolidation of numerous sites into fewer
locations with resulting product specialization. The majority of the customers
will be transferred to the consolidated locations. The Company expects these
actions to be completed over the next three to six months.
The severance and related costs arise from the Company's actions to reduce
personnel staffing in areas of redundant operations and activities. The charges
reflect specifically identified executives and employees who were informed
during the second quarter of fiscal 2000. There are approximately 115 employees
in the consolidation efforts and approximately 35 as a part of reductions
related to project completions or phase-outs. Approximately $0.2 million was
expended during the second quarter of fiscal 2000.
As of November 30, 1999, $6.4 million of the cash portion of the restructuring
charges remains accrued as a current liability and $3.9 million is accrued as a
long-term liability in the respective other liabilities sections of the balance
sheet.
<TABLE>
<CAPTION>
Accrual as of November
----------------------
30, 1999
--------
Item Original Payments Current Long-Term
---- -------- -------- ------- ---------
Total To Date
----- -------
<S> <C> <C> <C> <C>
Closed or planned closings of facilities $ 6,100 --- $ 2,992 $ 3,108
Estimated costs for settlements on
contracts 2,236 --- 2,236 ---
Severance and related costs 2,177 244 1,134 799
-------------------------------------------------------------
Total $ 10,513 $ 244 $ 6,362 $ 3,907
=============================================================
</TABLE>
Additionally, as a result of business events and information arising during the
quarter, management evaluated certain significant business risks and exposures
that included bankrupt accounts and customer disputes. This resulted in the
following unusual expenses being recorded in the second quarter of fiscal 2000:
accounts receivable write-off of $8.0 million; allowance increases of $2.0
million; litigation settlement expenses of $1.3 million; write-off of $0.8
million of prepaid expenses and $1.2 million accrued expenses.
Accordingly, the results of the three and six months ended November 30, 1999
include approximately $47.7 million of charges related to restructuring and
asset impairment ($34.4 million) and other unusual expenses ($13.3 million).
11
<PAGE>
NOTE 7 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
For the Physician Management Services unit, the Company continued the accounting
policy followed by this business prior to its acquisition by the Company. The
Company maintained this generally accepted policy after the acquisition for
Physician Management Services offerings for which the Company invoices and
collects amounts on its customer's behalf. Previously, for customers where the
amount and timing of collection of their accounts receivable could be reasonably
estimated, the Company estimated the fees that it expected to invoice those
customers upon collection of their accounts receivable. It recognized such
revenues when substantially all services to be performed by the Company had been
completed. Estimated costs to complete were accrued separately.
Effective June 1, 1999, the Company elected to change its revenue recognition
policy. Effective with the change in policy, the Company will recognize revenue
when the services are billed to the customer, at which point all services to be
performed by the Company have been completed. The impact of this change results
in the elimination of estimated, or unbilled receivables and related accrued
collection costs. Management believes that this change is appropriate and is
consistent with recent authoritative literature, specifically SEC Staff
Accounting Bulletin No. 101, issued December 3, 1999.
The cumulative after tax effect of this change in accounting principle was $13.8
million, net of income taxes of $8.6 million, at June 1, 1999. The cumulative
after tax effect on both the basic and diluted earnings per share was $(0.41).
NOTE 8 - SUBSEQUENT EVENTS
The NDC Board of Directors approved several decisions related to the
structure of the Company and announced them in a press release dated December
20, 1999. These include the following:
1) Intention to create two companies to address the rapidly growing
eHealth and eCommerce markets.
2) A proposal to spin off the eCommerce line of business into a separate
publicly traded company with its own management and Board of Directors.
Subject to an opinion of counsel that it will receive tax free
treatment and any required shareholder approvals, NDC expects that
shareholders will receive shares of the new company at the time of the
spin-off. This plan is expected to take a minimum of six to nine
months.
3) Goldman, Sachs & Co. has been retained to advise the company.
4) Walter M. Hoff is expected to be the chief executive officer of the
eHealth company. He is currently chief executive officer of NDC Health
Information Services. The Board of Directors would be chaired by Robert
A. Yellowlees, and is expected to be comprised of the NDC Board as
constituted at the time of the completion of the transaction.
5) Paul R. Garcia is expected to be the chief executive officer of the new
eCommerce Company. He is currently chief executive officer of NDC
eCommerce. Thomas M. Dunn would serve as chief operating officer, a
position which he currently holds with NDC eCommerce. Robert A.
Yellowlees is expected to serve as chairman of a newly formed Board of
Directors for a period of time to assist in the transition.
6) Pursuit of strategic alternatives for the Health Management Services
business.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the Company's
results during the past two years, the following discussion should be read in
conjunction with the consolidated financial statements of the Company and
related notes appearing elsewhere in this report.
National Data Corporation classifies its businesses into two fundamental
business segments: Health Information Services and eCommerce.
Health Information Services
---------------------------
Health Information Services provides network based information solutions to
address administrative, clinical and decision support information needs
throughout the healthcare environment.
NDC has been in the forefront of Health Information Services for over 20
years. Over that period, management believes that it has built a unique
franchise in the market. The Company's management believes that its value-added
network is the world's largest and most comprehensive from both an application
and a market presence standpoint. This network is increasingly linked to the
company's data warehouse and mining capabilities as well as to its strategic
point of use platforms for end user interface to information sources.
The business is unique in terms of the breadth of its products and services
and the fact that its presence spans the pharmacy, physician, hospital, payer
and manufacturer segments of the market. The business continues to implement a
variety of new products and services to capitalize on the Internet. These
include extensions to its broad existing application base as well as products
and services addressing new market opportunities.
eCommerce
---------
NDC eCommerce provides a wide range of end-to-end information solutions
for the business to consumer and business to business markets offering multiple
payment-processing alternatives. NDC has been a leader in the eCommerce market
with its electronic payment and funds transfer capability for over 30 years.
eCommerce has distribution capability itself as well as through a range of
distribution and support relationships with financial institutions and
independent participants in the market.
NDC eCommerce offers a broad range of value added services. In recent
years, it has expanded its payment vehicles from credit cards to a full range of
credit, debit, check, electronic reimbursement and purchase card vehicles.
Concurrently, it has expanded from a credit card authorization company to one
offering a full range of services from business origination, terminal
deployment, credit card authorization, merchant accounting and other back office
services to customer support. eCommerce has been one of the leaders in
diversifying its distribution channels to complement the original financial
institution model. In concert with this, it has developed specific value added
applications for a range of vertical market segments.
13
<PAGE>
Transition Year
---------------
As the Health and eCommerce businesses have expanded, projects have been
initiated to consolidate various systems and network platforms to provide more
seamless operations in the future and to realize economies of scale. At the same
time, investments have been made to rationalize distribution channels and to
develop new strategic partnerships in various elements of both the Health
Information Services and eCommerce segments. Fiscal year 2000 is a major
transition year in the execution of this consolidation strategy.
Strategy Review
---------------
The year's transition has had another objective in addition to system
consolidation. That being a review of the Company's strategy and priorities in
light of changes in the marketplace and technology environment.
Corporate Restructuring
-----------------------
As a result, the Board of Directors decided to address issues arising from
the operation of multiple businesses within the same corporation by authorizing
management to restructure the Company into two separate businesses. This
restructuring should provide more singular management focus on the planning,
programs and resource demands of each segment. In addition, it is intended to
better align resources with the unique opportunities and requirements of each
business segment.
The Company believes that the separate focus on the unique requirements of
the two individual market segments will accelerate the success for each unit and
provide a wider range of new products and services in an Internet and eCommerce
enabled economy.
Strategy Implementation
-----------------------
This strategy review resulted in a decision to bring dedicated management
focus to the unique opportunities in each segment. In line with that decision,
it was decided to concentrate on those products and services within each that
are judged to be core to the long-term strategies of the respective segments.
During the second quarter, the management of the Health Information Services
segment began an active program to rationalize non-strategic product and service
offerings. These non-strategic offerings include certain point of use systems
and several recently consolidated networks and clearinghouses. The company has
already executed the first step in this plan via the sale of part of its dental
systems product line during the quarter. Additionally, during the quarter, sales
programs were curtailed for non-strategic areas. This curtailment resulted in
revenue declines while cost and expenses continued until planned actions could
be implemented.
Further, the Board reached the decision to evaluate strategic alternatives
for the Health Management Services areas. These consist principally of the units
that were acquired through the PHSS acquisition in December 1997. Over the last
year, the Company has made significant progress in implementing programs to
improve the underlying efficiency of the Management Services business
activities. The Company has made management changes. It has closed locations
which did not have the critical mass for long term profitable growth. And it has
implemented a number of new systems initiatives that will improve productivity
and offer the infrastructure to process greater volume. NDC believes that there
is significant demand for these services in the market and that these changes
represent steps that can improve the profitability from new revenue streams.
14
<PAGE>
However, the Company has concluded that Management Services does not
logically integrate with NDC's Internet oriented core network, information
management and strategic provider point of use platforms. Management and the
Board feel that the magnitude of opportunity in its core business requires
singular focus of management time and resources. Thus, the decision was made to
move to the next step of active assessment of alternatives for the Health
Management Services offerings.
The results for the second quarter and first half of fiscal year 2000
reflect the results of consolidation programs during this transition period.
They include certain restructuring and impairment charges and other unusual
expenses resulting from certain business events that occurred in the quarter.
These restructuring and impairment charges and unusual expenses represented
$47.7 million during the quarter. It is estimated that there is an additional
$10 million which will be incurred over the next twelve months as additional
actions are taken in those areas defined as non-strategic.
The second quarter results also include the effect of actions during the
quarter that resulted in decreased revenues from, and margin deterioration
related to, the non-core products over and above the restructuring and
impairment charges and other unusual expenses. To the extent that the Company is
successful in its plans to curtail non-core products and services, these losses
are not expected to continue at this level. Although management believes that
most of the rationalization efforts will be completed in the next six months,
the actual timing is dependent on a number of factors that can not be fully
determined at this time and that are not wholly within the control of the
Company. These factors include the timing of phase out of certain products,
sales of certain assets as well as completion of clearinghouse and product line
integration programs. Employee and customer considerations will also affect the
final timing of certain action programs.
Once the restructuring and actions regarding non-strategic assets are
complete, management expects that the core Health Information Services products
and services will demonstrate double digit revenue and earnings growth, with
improved operating margins in the high teens and EBITDA margins that exceed
twenty percent within the first year of independent operation. It is also
anticipated that it will be a business with sound cash flow creating the funds
necessary to invest in the continued internal growth of the business.
To the extent that the Company is successful in its plans to curtail non-
core products and services, the remaining Health Information Services business
would exhibit growth as reflected in the following historical amounts. For the
second quarter of fiscal 2000, these remaining businesses had revenues of
approximately $75 million versus $67 million in the same period in the prior
year. Similarly, these businesses had revenues of $149 million in the first half
of fiscal 2000 versus $133 million in the first half of fiscal 1999.
Similarly, the company expects the eCommerce core business to be able to
demonstrate double-digit revenue and earnings growth within the first year of
independent operation. It is anticipated that it will also have improved
operating margins in the high teens and EBITDA margins exceeding twenty percent.
And, it too should have the cash flow to support investments for internal
growth.
Finally, on December 3, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 regarding revenue recognition practices. The
bulletin addresses certain practices followed by a portion of the acquired PHSS
unit, Physician Management Services, which at the time of acquisition followed
general industry practices and which the Company continued. The Company's
revenues in this line of business affected by the provisions of this bulletin
represented
15
<PAGE>
approximately 9% of the Company's total revenue for the first half of fiscal
2000. The Company's management concluded that it should implement the guidance
of the bulletin. The cumulative after tax effect of this change in accounting
principle was $13.8 million, net of income taxes of $8.6 million, at June 1,
1999. However, the impact of the change on fiscal 2000 revenue is not material.
For more information regarding this change in accounting principle, refer to
Note 7 to the Unaudited Consolidated Financial Statements.
Results of Operations
<TABLE>
<CAPTION>
Second Quarter ended November 30,
--------------------------------------------------- ------------
(In millions) 1999 1998 Change
----------------------- ------------------------ ------------
<S> <C> <C> <C>
Revenue:
NDC Health Information Services $111.8 57% $112.2 59% -%
NDC eCommerce 84.2 43% 79.3 41% 6%
-------------------------------------------------------------------
Total Revenue $196.0 100% $191.5 100% 2%
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months ended November 30,
--------------------------------------------------- ------------
1999 1998 Change
----------------------- ------------------------ ------------
<S> <C> <C> <C>
Revenue:
NDC Health Information Services $225.8 56% $221.5 58% 2%
NDC eCommerce 174.0 44% 161.7 42% 8%
-------------------------------------------------------------------
Total Revenue $399.8 100% $383.2 100% 4%
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Second Quarter ended November 30,
--------------------------------------------------- ------------
1999 1998 Change
----------------------- ------------------------ ------------
<S> <C> <C> <C>
Depreciation and Amortization:
NDC Health Information $ 9.0 61% $ 8.3 59% 8%
Services
NDC eCommerce 5.3 36% 5.3 38% -%
All Other and Corporate 0.5 3% 0.4 3% 25%
-------------------------------------------------------------------
Total $14.8 100% $14.0 100% 6%
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months ended November 30,
--------------------------------------------------- ------------
1999 1998 Change
----------------------- ------------------------ ------------
<S> <C> <C> <C>
Depreciation and Amortization:
NDC Health Information $18.2 61% $16.0 59% 14%
Services
NDC eCommerce 10.6 35% 10.2 38% 4%
All Other and Corporate 1.1 4% 0.9 3% 22%
-------------------------------------------------------------------
Total $29.9 100% $27.1 100% 10%
===================================================================
</TABLE>
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating Income plus depreciation and amortization and
restructuring and impairment charges. This statistic and its 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 cash earnings measure, excluding
the impact of the amortization of acquired intangibles, potential timing
differences associated with capital expenditures and the related depreciation
charges, restructuring and impairment charges and non-recurring charges.
16
<PAGE>
<TABLE>
<CAPTION>
Second Quarter ended November 30,
----------------------------------------------- ----------
1999 1998 Change
--------------------- --------------------- ----------
<S> <C> <C> <C>
EBITDA:
NDC Health Information $ 9.2 32% $24.7 57% (63%)
Services
NDC eCommerce 21.6 76% 22.5 51% (4%)
All Other and Corporate (2.3) (8%) (3.5) (8%) 34%
--------------------------------------------------------------
Total EBITDA $28.5 100% $43.7 100% (35%)
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months ended November 30,
----------------------------------------------- ----------
1999 1998 Change
--------------------- --------------------- ----------
<S> <C> <C> <C>
EBITDA:
NDC Health Information $32.3 42% $44.6 51% (28%)
Services
NDC eCommerce 48.6 64% 48.7 55% -%
All Other and Corporate (4.3) (6%) (5.5) (6%) 22%
--------------------------------------------------------------
Total EBITDA $76.6 100% $87.8 100% (13%)
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Second Quarter ended November 30,
----------------------------------------------- ----------
1999 1998 Change
--------------------- --------------------- ----------
<S> <C> <C> <C>
Income before Income Taxes
(IBIT):
NDC Health Information ($ 0.2) 1% $15.9 62% (101%)
Services
NDC eCommerce 15.2 (68%) 16.1 62% (6%)
Restructuring and (34.4) 154% - - -%
Impairment
All Other and Corporate (3.0) 13% (6.2) (24%) 52%
--------------------------------------------------------------
Total IBIT ($22.4) 100% $25.8 100% (187%)
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months ended November 30,
----------------------------------------------- ----------
1999 1998 Change
--------------------- --------------------- ----------
<S> <C> <C> <C>
Income before Income Taxes
and cumulative effect of
change in accounting
principle (IBIT):
NDC Health Information $ 13.2 165% $ 27.9 53% (53%)
Services
NDC eCommerce 35.5 444% 36.0 68% (1%)
Restructuring and (34.4) (430%) - - -%
Impairment
All Other and Corporate (6.3) (79%) (11.3) (21%) 43%
--------------------------------------------------------------
Total IBIT $ 8.0 100% $ 52.6 100% (85%)
==============================================================
</TABLE>
Consolidated
Total revenue for the second quarter of fiscal 2000 was $196.0 million, an
increase of $4.5 million (2%) from the second quarter of fiscal 1999. The core
Healthcare and eCommerce direct merchant businesses grew at a double-digit rate
due to growth in customer base, transaction volumes and new services to our
customers, while other non-strategic business areas (including the Health
Management Services) declined.
Total revenue for the first half of fiscal 2000 was $399.8 million, an
increase of $16.6 million (4%) from the first half of fiscal 1999 due to growth
in customer base, transaction volumes and new
17
<PAGE>
services to our customers in both of our business segments. A similar pattern
existed relative to the core and non-strategic business areas.
Based on future operating plans within the healthcare segment, actions were
taken which included acceleration of clearinghouse integration, consolidation
of locations, associated staff reductions, lease expenses related to these
actions, impairment of assets related to the consolidations and elimination of
obsolete and redundant product offerings. Total charges related to the
restructuring and asset impairment were $34.4 million. Several software
platforms ($1.8 million) have been eliminated as a part of this restructuring
process. Eighteen facilities have been or are slated to be closed as a part of
this effort ($6.1 million). Impaired goodwill and other intangibles ($16.0
million), as well as various property and equipment ($5.1 million), are also
being written-off under the guidelines of SFAS 121 in the current quarter.
Specifically identified severance for executives and employees previously
informed is also included in these charges ($2.2 million). Estimated costs for
lost business and settlement expenses related to contracts tied to the closing
centers are $3.2 million.
The Company presently estimates that approximately $10 million in
additional charges will be incurred during the next 12 months as additional
action plans are finalized and implemented. These are explained further in Note
6 to the Unaudited Consolidated Financial Statements.
Additionally, as a result of business events and information arising
during the quarter, management evaluated certain significant business risks and
exposures in the businesses that included bankrupt accounts and customer
disputes. This resulted in the following unusual expenses being recorded in the
second quarter of fiscal 2000: accounts receivable write-off of $8.0 million;
allowance increases of $2.0 million; litigation settlement expenses of $1.3
million; write-off of $0.8 million of prepaid expenses and $1.2 million accrued
expenses. These expenses are included in the Sales, General and Administrative
expenses ($11.4 million) and Cost of Services ($1.9 million).
Accordingly, the results of the three and six months ended November 30,
1999 include approximately $47.7 million of charges related to restructuring and
asset impairment ($34.4 million) and unusual expenses ($13.3 million).
For the second quarter of fiscal 2000, total cost of service, as a
percentage of revenue, increased from 51.6% in the second quarter of fiscal 1999
to 52.6% which included one-time expenditures of $1.9 million related to
assessment of the Health Information Services business segment and, on a margin
basis, a decline in the non-core businesses. Cost of service increased $4.2
million (4%) in the second quarter of fiscal 2000 from the second quarter of
fiscal 1999. The ratio increase was a result of these one-time expenses, as well
as operating costs and reduced revenue for non-core products and services.
Total cost of service, as a percentage of revenue, decreased from 52.0% in
the first half of fiscal 1999 to 51.2% in the first half of fiscal 2000 due to
improved efficiencies. Cost of service increased $5.6 million (3%) in the first
half of fiscal 2000 from the first half of fiscal 1999. The increase was a
result of the same factors that affected results for the second quarter.
Sales, general and administrative expenses in the second quarter of fiscal
2000 increased $16.4 million (26%) from the same period last year. This included
approximately $11.4 million of unusual expenses described above. As a percentage
of revenue, these expenses, excluding the $11.4 million of unusual charges,
increased to 34.6% for the second quarter of fiscal 2000 as compared to the
32.9% for
18
<PAGE>
the second quarter of fiscal 1999 and 33.8% for the first quarter of fiscal
2000. This reflects declining revenue and increased expense as a percent of
revenue in non-core products and services.
Sales, general and administrative expenses in the first half of fiscal 2000
increased $24.9 million (20%) from the same period last year. Excluding the
$11.4 million described above, sales, general and administrative expenses
increased $13.5 million due to investments in sales staffing and programs,
customer service as well as Internet activities. We experienced margin
deterioration in our non-core businesses. This was the result of revenue
declines with continuing expenses. As a percentage of revenue, these expenses,
excluding the unusual charges, increased to 34.2% for the first half of fiscal
2000 from 32.2% for the first half of fiscal 1999.
Operating income decreased from earnings of $29.7 million in the second
quarter of fiscal 1999 to an operating loss of $20.7 million in the second
quarter of fiscal 2000. This is primarily due to the total charges of $47.7
million described previously as well as increased operating losses from
decreased revenues and margin decline in the non-core businesses. To the extent
that the Company is successful in its plans to curtail non-core products and
services, these losses are not expected to continue at this level. Excluding the
$47.7 million of charges, the Company's operating income margin, as a percentage
of revenue, decreased to 13.8% in the second quarter of fiscal 2000 from 15.5%
in the second quarter of fiscal 1999. This is due to the operating losses for
the non-core businesses. As mentioned in Note 6 to the notes to the Unaudited
Consolidated Financial Statements, the Company estimates that approximately $10
million in additional charges from these same non-core businesses will be
incurred in the next twelve months.
Operating income decreased from $60.6 million in the first half of fiscal
1999 to $12.3 million in the first half of fiscal 2000. This is primarily due to
the total charges of $47.7 million previously described. Excluding these items
and as a percentage of revenue, the Company's operating income margin decreased
to 15.0% in the first half of fiscal 2000 from 15.8% in the first half of fiscal
1999 due primarily to the operating losses in the non-core businesses.
EBITDA for the second quarter of fiscal 2000 decreased by $15.2 million or
35% to $28.5 million due to the reasons described above. The EBITDA margin
percentage was 14.5% in the second quarter of fiscal 2000, compared to 22.8% in
the second quarter of fiscal 1999. IBIT for the second quarter of fiscal 2000
was a loss of $22.4 million compared to earnings of $25.8 million in the second
quarter of fiscal 1999. The operating loss also reflects declining revenue and
operating losses for the non-core businesses. As mentioned in Note 6 to the
Unaudited Consolidated Financial Statements, the Company estimates that
approximately $10 million in additional charges will be incurred in the next
twelve months.
EBITDA for the first half of fiscal 2000 decreased by $11.1 million or 13%
to $76.6 million due to the reasons described above. The EBITDA margin
percentage was 19.2% in the first half of fiscal 2000, compared to 22.9% in the
first half of fiscal 1999. IBIT for the first half of fiscal 2000 declined to
$8.0 million from $52.6 million in the first half of fiscal 1999 due to the
unusual charges and other factors previously discussed.
Total other expense decreased $2.2 million for the second quarter of fiscal
2000 compared to the second quarter of fiscal 1999 due primarily to the net gain
of $2.3 million on the sale of certain assets of the dental system business.
Total other expense decreased $3.7 million for the first half of fiscal 2000
compared to the first half of fiscal 1999. This decrease was primarily the
result of the net
19
<PAGE>
gain on sale of a dental system business, as well as the net gain of $1.6
million received on the sale of marketable securities.
Diluted earnings per share in the second quarter of fiscal 2000 was a loss
of $0.46 versus a comparable earnings of $0.45 last year. Diluted earnings per
share before the cumulative effect of the change in accounting principle in the
first half of fiscal 2000 was $0.09 versus a comparable $0.92 last year.
Including the net loss of $0.41 related to the cumulative effect of the change
in accounting principle results in a net loss per share of $0.31 for the first
half of the fiscal year.
Basic and diluted earnings per share for the three and six month periods ended
November 30, 1999 are the same, as the effect of any potentially dilutive
securities and convertible debt is antidilutive due to the loss generated by the
restructuring and impairment charges.
NDC Health Information Services
NDC Health Information Services' revenue was flat in the second quarter of
fiscal 2000 compared to the second quarter of fiscal 1999. Core strategic
products and services including the value-added network, information management
and certain strategic systems businesses grew at a double-digit rate. Health
Management Services (primary the former PHSS) and non-strategic legacy systems
revenue declined - offsetting revenue increases in the core areas. NDC Health
Information Services revenue grew 2% in the first half of fiscal 2000 as
compared to the first half of fiscal year 1999.
EBITDA for the second quarter of fiscal 2000 was $9.2 million compared to
$24.7 million in the second quarter of fiscal 1999. This decline in EBITDA was
primarily due to the unusual charges as well as non-core business revenue
declines and expense ratio increases mentioned previously. Excluding just the
unusual charges, the EBITDA margin percentage changed from 22.0% in the second
quarter of fiscal 1999 to 20.1% in the second quarter of fiscal 2000. The
Company's EBITDA margins, excluding these charges, declined in the second
quarter due to operating losses in the non-core products and services. IBIT in
the second quarter of fiscal 2000 declined to loss of $0.2 million from $15.9
million in the second quarter of fiscal 1999.
EBITDA for the first half of fiscal 2000 was $32.3 million compared to
$44.6 million in the first half of fiscal 1999. This 28% decline was primarily
due to the revenue declines and unusual expenses described previously. Excluding
these charges, the EBITDA margin increased slightly from 20.1% in the first half
of fiscal 1999 to 20.2% in the first half of fiscal 2000. IBIT in the first half
of fiscal 2000 declined to $13.2 million from $27.9 million in the first half of
fiscal 1999.
NDC eCommerce
The NDC eCommerce revenue increase in the second quarter of fiscal 2000
(6%) over the same period last year reflects the impact of growth of the
industry, programs directed at new vertical industry offerings and new
distribution channels (including the Internet). The direct merchant acquiring
card business grew at a double-digit rate, offset by continued single digit
growth in the financial institution services business. The cash management
business declined from the same period last year. The NDC eCommerce revenue
increased in the first half of fiscal 2000 (8%) over the same period last year
reflecting the same patterns described above.
EBITDA for the second quarter of fiscal 2000 was $21.6 million compared to
$22.5 million in the second quarter of fiscal 1999. This 4% decline in EBITDA
was the result of the 6% increase in
20
<PAGE>
revenue, offset by a reduction in the EBITDA margin percentage from 28.4% for
the second quarter of fiscal 2000 to 25.7% for the period ended November 30,
1999. This reflects the factors described above as well as increased investments
in sales and new product development expense, as well as front-end costs
associated with customer growth. IBIT in the second quarter of fiscal 2000
declined 6% to $15.2 million from $16.1 million for the second quarter ended
November 30, 1998.
EBITDA for the first half of fiscal 2000 was $48.6 million compared to
$48.7 million in the first half of fiscal 1999. This was due to the 8% increase
in revenue that was offset by a reduction in the EBITDA margin percentage from
30.1% for the first half of fiscal 1999 to 27.9% for the first half of fiscal
year 2000 as discussed for the quarter. IBIT in the first half of fiscal 2000
declined 1% to $35.5 million from $36.0 million for the first half of fiscal
1999.
All Other and Corporate
The All Other and Corporate category is comprised primarily of corporate
overhead functions and other corporate activities. This net expense was $6.2
million in the second quarter of fiscal 1999 versus $3.0 million in the second
quarter of fiscal 2000 primarily due to the gain on the sale of the dental
assets. This net expense changed from $11.3 million in the first half of fiscal
1999 to $6.4 million in the first half of fiscal 2000 primarily due to the gain
on the sale of the dental assets and the sale of marketable securities.
21
<PAGE>
Liquidity and Capital Resources
Cash flow generated from operations provides the Company with a significant
source of liquidity to meet its needs. At November 30, 1999, the Company and its
subsidiaries had cash and cash equivalents totaling $16.7 million. Cash provided
by operations before changes in assets and liabilities was $53.4 million for the
six month period ended November 30, 1999, a decrease of $7.3 million (12%)
compared to the same period of the prior year. Cash provided from net changes in
assets and liabilities was $3.5 million for the six-month period ended November
30, 1999 versus cash required to fund net changes in assets and liabilities of
$11.1 million for the six-month period ended November 30, 1998. This decline in
the cash required to fund net changes in assets and liabilities resulted
primarily from changes in accounts receivables, an increase in prepaid expenses
and other assets, and changes in income taxes. The changes in accounts
receivables resulted from improved collections. The increase in prepaid expenses
and other assets primarily relates to timing of payments. The change in income
taxes was due to reduced taxable income. Net cash provided by operating
activities increased 15% to $56.9 million from $49.7 million for the six-month
periods ended November 30, 1999 and 1998.
Net cash used in investing activities was $21.1 million for the six month
period ended November 30, 1999 compared to $17.6 million for the six month
period ended November 30, 1998. This increase is primarily due to an investment
in Medscape, Inc. to complement the Company's Internet initiatives. This was
partially offset by proceeds from the sale of business divestiture related
marketable securities and proceeds from business divestitures. Additionally,
the Company continues to invest in capital expenditures related to growth in the
business and acceleration of certain strategic initiatives. The Company will
periodically include sales of assets and investments in the future.
Net cash used in financing activities decreased to $23.4 million for the
first six months ended November 30, 1999 from $27.5 million in the same period
of the prior year. The net effect of the payments and borrowings against the
lines of credit is a $33.0 million borrowing for the six month period ended
November 30, 1999 compared to a $8.0 million payment for the six month period
ended November 30, 1998. The net borrowings for the six months ended November
30, 1999 primarily consisted of payments of approximately $15.0 million, offset
by borrowings of $38.0 million to repurchase 1.5 million shares of the Company's
stock and $10.0 million related to the Medscape investment. Principal payments
under capital lease arrangements and other long term debt increased to $16.1
million for the six month period ended November 30, 1999 from $7.6 million in
the same period ended November 30, 1998 due primarily to the payoff of the $6.0
million Electronic Data Systems Corporation note payable related to prior
acquisitions. The Company repurchased 1.5 million shares of Treasury Stock
valued at $38.0 million and reissued $4.9 million under Company stock plans.
Dividends of $5.0 million were paid during the six month periods ended November
30, 1999 and 1998.
The Company has a committed, unsecured $125.0 million revolving line of
credit that expires in December 2002. At November 30, 1999, there was $68.0
million outstanding under this line of credit. The Company also has a $15.0
million uncommitted line of credit to fund working capital requirements.
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.
22
<PAGE>
Year 2000 Readiness
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 has a corporate Program Office to define, evaluate and conduct
audits of the Company and its progress toward Year 2000 readiness and to perform
the evaluation of the results of these preparations. 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 Year 2000 Task Force is charged with
evaluating the results of 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 and their
results, 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.
The date change to the year 2000 has occurred and the Company did not note
any significant problems or issues with its computer systems. Support teams were
on-hand around the clock at each major location during the December 31/January 1
weekend to monitor the results of the Company's year 2000 readiness programs.
Systems were monitored, tested and evaluated during the weekend with no
significant problems noted. The Company does not expect any significant future
revenue or net income implications due to the Year 2000 date change. The Company
continues to test and monitor the computer systems and will evaluate them
through the Company's third quarter of fiscal year 2000 (including the January
2000 close and the February 29, 2000 date change). Based on the work done to
date and the results of this work, the Company believes that the Year 2000 issue
does not pose significant operational problems for the Company's products and
internal systems.
State of Readiness
The corporate Program Office established an implementation plan to address
the Year 2000 issue with respect to its information technology systems, hardware
and software products and non-information technology products. The Company's
Year 2000 program has been implemented on a prioritized basis with systems most
critical to the enterprise being addressed with the highest degree of priority.
The implementation plan phases are stated and defined as follows:
Phase I - Inventory/Assessment. The Company listed and classified 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, the Company assessed the likelihood of
meeting the target dates to be corrected for Year 2000 data processing and ready
for testing. This phase also included developing plans to manage each item on
the inventory. 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 was performed on the third party products and the
Company has made 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 systems.
23
<PAGE>
Phase II - Remediation. Determine and implement methodology for correcting Year
-----------
2000 issues via coding, upgrades, replacements, etc. and deliver to testing.
These systems include communications and transaction processing, database
management for healthcare applications, electronic commerce including credit,
debit, and check, EDI services and NDC Health Information Services' pharmacy
transaction submission, eligibility verification, data capture and editing. The
Company has completed this phase for all systems.
Phase III - Internal Testing. Perform testing based upon developed plans as a
----------------
result of the remediation phase, upgrades and/or testing of indicated Year 2000
ready 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 has completed this phase for all systems.
Phase IV - External Testing. Perform end-to-end connection point testing with
----------------
third parties that the Company relies upon for certain operating elements via
interfaces and also service providers as required. The Company has completed
this phase for all key systems.
Phase V - Implementation and Proactive Management. Transition Year 2000 ready
---------------------------------------
computer systems into a production/live environment. As testing was successfully
completed, systems were implemented into a production/live environment. The
Company has completed this phase for all key systems.
The following status chart indicates the approximate percentage of work
completed for the mission-critical systems of the following material business
units by phase as of January 10, 2000:
<TABLE>
<CAPTION>
Phase I Phase II Phase III Phase IV Phase V
PRODUCT LINE
<S> <C> <C> <C> <C> <C>
Target Date 2/28/99 6/30/99 8/31/99 9/30/99 10/31/99
- ----------- ------- ------- ------- ------- --------
Health Information Services
Network Services 100% 100% 100% 100% 100%
Information Management 100% 100% 100% 100% 100%
eCommerce 100% 100% 100% 100% 100%
Corporate Information
Systems 100% 100% 100% 100% 100%
</TABLE>
Costs to Address
As it relates to internal computer systems, the Company incurred 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 was difficult to quantify, with specificity, all
of the costs and capital expenditures being discretely incurred to address this
issue. A significant portion of these costs is not likely to be incremental
costs to the Company, but represented 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. Based on experience
derived from work performed to date, the costs incurred to date, excluding
capital expenditures, are approximately $23 million. The funds were spent
primarily to remediate via coding, upgrades, testing of third party
24
<PAGE>
software and implementation costs. The Company's costs to complete its Year 2000
compliance program are estimated to be less than $3 million in the remainder of
fiscal year 2000. The capital expenditures incurred to date are approximately
$12 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 executing the contingency planning as the date
changes occur and the period following the date changes. 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.
Risks
There remain certain risks as the Company proceeds through calendar year
2000. These have been discussed in previous quarterly 10-Q reports.
Contingency Plans
The corporate Program Office worked with each business unit to develop
contingency plans based on corporate Program Office guidelines. There are two
types of plans.
First, all of the Company's business units had hardware/software business
continuity plans in case a supplier of hardware/software products or internally
developed systems used in the business does not have a Year 2000 version in time
for implementation and testing.
A second type of contingency plan focused on emergency recovery plans to
support the date change event. Each business unit contingency plan called for
obtaining goods or services from alternative sources, utilizing alternative
methods to perform functions, and establishing command centers and communication
procedures to manage the actual rollover to the Year 2000. The Company's units
developed staffing support plans to ensure the appropriate on-site staff were in
place to implement any emergency recovery plan and address any issues that may
arise.
Summary
The date change to the year 2000 has occurred and it appears that the
Company's initiatives addressed the needs.
Forward-Looking Information
When used in this Quarterly Report on Form 10-Q, in documents incorporated
herein and elsewhere by management of National Data Corporation ("NDC" or the
"Company"), from time to time, the words "believes," "anticipates," "expects,"
"intends" 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
25
<PAGE>
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 that are inherently subject to significant risks and
uncertainties, many of which are beyond the control of the Company and reflect
future business decisions that are subject to change. As a result of a variety
of factors, actual results could 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 Annual Report on Form 10-K for the
period ended May 31, 1999 which are incorporated herein by this 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.
26
<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 SECURITITES
- -------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 1999 Annual Meeting of Stockholders of National Data Corporation was held at
the Company's offices in Atlanta, Georgia on October 28, 1999. At the annual
meeting, the stockholders of the Company approved the following items:
1. Election of one director in Class I to serve until the annual meeting of
stockholders in 2002, or until his successor is duly elected and qualified.
Votes cast were as follows: For 29,018,719; Against 316,628; and
2. Adoption of the Company's 2000 Long-Term Incentive Plan. Votes cast were as
follows: For 16,349,524, Against 9,414,519, Abstain from voting 70,600,
Broker Non-Vote 3,500,704; and
3. Amendment of the Certificate of Incorporation of the Company to increase the
number of shares of Common Stock of the Company authorized for issuance from
100,000,000 to 200,000,000. Votes cast were as follows: For 21,101,620;
Against 8,188,997; Abstain from voting 44,730.
ITEM 5 - OTHER INFORMATION
- --------------------------
None
ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
(27) Financial Data Schedule (for SEC use only)
(b) Reports Filed on Form 8-K:
National Data Corporation's Form 8-K dated September 24, 1999, was filed on
September 29, 1999, relating to the Company's Board of Directors
authorizing a plan to repurchase up to an additional 2,000,000 shares of
the Company's Common Stock.
27
<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: January 12, 2000 By: /s/ Kevin C. Shea
----------------
-----------------------------
Kevin C. Shea
Chief Financial Officer
(Principal Financial Officer)
Date: January 12, 2000 By: /s/ David H. Shenk
----------------
-----------------------------
David H. Shenk
Corporate Controller
(Chief Accounting Officer)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 16,748
<SECURITIES> 0
<RECEIVABLES> 146,494
<ALLOWANCES> 11,548
<INVENTORY> 8,154
<CURRENT-ASSETS> 192,379
<PP&E> 220,430
<DEPRECIATION> 120,162
<TOTAL-ASSETS> 746,728
<CURRENT-LIABILITIES> 180,758
<BONDS> 152,613
0
0
<COMMON> 4,244
<OTHER-SE> 362,404
<TOTAL-LIABILITY-AND-EQUITY> 746,728
<SALES> 0
<TOTAL-REVENUES> 399,766
<CGS> 0
<TOTAL-COSTS> 204,833
<OTHER-EXPENSES> 182,661
<LOSS-PROVISION> 12,593
<INTEREST-EXPENSE> 6,713
<INCOME-PRETAX> 7,965
<INCOME-TAX> 4,736
<INCOME-CONTINUING> 3,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (13,760)
<NET-INCOME> (10,531)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
