-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IdOZ/8qr00QlN16Q0jBmxZacNdxZNUGjkJ3siieaVMrgsXUR+KlebuUYQEjuqYn9 l1ITW696F7owyTWoSa5JVg== 0000931763-99-001168.txt : 19990415 0000931763-99-001168.hdr.sgml : 19990415 ACCESSION NUMBER: 0000931763-99-001168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL DATA CORP CENTRAL INDEX KEY: 0000070033 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 580977458 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12392 FILM NUMBER: 99593350 BUSINESS ADDRESS: STREET 1: NATIONAL DATA COPRORATION STREET 2: NATIONAL DATA PLAZA CITY: ATLANTA STATE: GA ZIP: 30329 BUSINESS PHONE: 4047282000 MAIL ADDRESS: STREET 1: NATIONAL DATA PLZ CITY: ATLANTA STATE: GA ZIP: 30329-2010 10-Q 1 FORM 10-Q FOR PERIOD ENDED FEBRUARY 28, 1999 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 -------------------------------- UNAUDITED CONSOLIDATED STATEMENTS OF INCOME NATIONAL DATA CORPORATION (In thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------- Three Months Ended February 28, ------------------------------------------- 1999 1998 --------------------- -------------------- 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) ===========================================
See Notes to Unaudited Consolidated Financial Statements. 2 UNAUDITED CONSOLIDATED STATEMENTS OF INCOME NATIONAL DATA CORPORATION (In thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------- Nine Months Ended February 28, ------------------------------------------ 1999 1998 -------------------- ------------------- 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) ==========================================
See Notes to Unaudited Consolidated Financial Statements. 3 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL DATA CORPORATION (In thousands)
- -------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended February 28, ------------------------------------------- 1999 1998 ---- ---- 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 ===========================================
See Notes to Unaudited Consolidated Financial Statements. 4 CONSOLIDATED BALANCE SHEETS NATIONAL DATA CORPORATION (In thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------ February 28, May 31, 1999 1998 ------------------- ------------- 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 ==================== =============
See Notes to Unaudited Consolidated Financial Statements. 5 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):
Three Months Ended -------------------------------------------------------------------------------------- February 28, 1999 February 28, 1998 ------------------------------------------- ------------------------------------------ Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- 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) ======================================================================================
6
Nine Months Ended -------------------------------------------------------------------------------------- February 28, 1999 February 28, 1998 ------------------------------------------- ------------------------------------------ Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- 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) ======================================================================================
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 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:
For the Three Months Ended February 28, (in millions except per share data) 1999 1998 CHANGE - ------------------------------------------------------------------------------------------------------------- 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 For the Nine Months Ended February 28, (in millions except per share data) 1999 1998 CHANGE - ------------------------------------------------------------------------------------------------------------- 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
8 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)
Third Quarter Ended February 28, ----------------------------------------------------------------- 1999 1998 Increase ------------------------- ------------------------- ------------ 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% =================================================================
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)
Nine Months Ended February 28, ----------------------------------------------------------------- 1999 1998 Increase ------------------------ ------------------------- ------------ 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% =================================================================
9 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 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 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 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 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 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 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 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 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 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 EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS MAY-31-1999 JUN-01-1998 FEB-28-1999 1,879 0 170,526 10,502 7,289 193,913 209,292 115,138 751,887 166,073 149,479 0 0 4,244 385,814 751,887 0 578,939 0 295,614 187,889 3,937 11,378 83,189 32,444 50,745 0 0 0 50,745 1.51 1.44
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