-----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, T30KVR+JhhLEg7aoM7LX0kRbnU6cSmb33ZC7doGkDuQBtkVXtGi3eQpNe0kGHVKl zZo5q+qPdNSR+kycDNnMhA== 0000931763-00-000922.txt : 20000414 0000931763-00-000922.hdr.sgml : 20000414 ACCESSION NUMBER: 0000931763-00-000922 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000413 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: 600610 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 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 29, 2000 ----------------- 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 - 32,779,024 shares ----------------------------------------------------- Outstanding as of April 10, 2000 ------------------------------------ UNAUDITED CONSOLIDATED STATEMENTS OF INCOME NATIONAL DATA CORPORATION
(In thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------ Three Months Ended February 29/28, ---------------------------------------- 2000 1999 ---------- ----------- Revenues $ 167,695 $ 165,437 - ------------------------------------------------------------------------------------------------------------------ Operating expenses: Cost of service 83,101 78,513 Sales, general and administrative 56,843 53,491 ---------------------------------------- 139,944 132,004 ---------------------------------------- Operating income 27,751 33,433 - ------------------------------------------------------------------------------------------------------------------ Other income (expense): Interest and other income 600 336 Interest and other expense (3,352) (3,601) Minority interest in earnings (1,031) (834) ---------------------------------------- (3,783) (4,099) ---------------------------------------- Income before income taxes and discontinued operations 23,968 29,334 Provision for income taxes 9,228 11,440 - ------------------------------------------------------------------------------------------------------------------ Income before discontinued operations 14,740 17,894 Discontinued operations (13,546) 792 - ------------------------------------------------------------------------------------------------------------------ Net income $ 1,194 $ 18,686 ---------------------------------------- Basic earnings per share: Income before discontinued operations $ 0.45 $ 0.53 ---------------------------------------- Discontinued operations $ (0.41) $ 0.02 ---------------------------------------- Basic earnings per share $ 0.04 $ 0.55 ---------------------------------------- Diluted earnings per share: Income before discontinued operations $ 0.44 $ 0.50 ---------------------------------------- Discontinued operations $ (0.41) $ 0.02 ---------------------------------------- Diluted earnings per share $ 0.04 $ 0.52 ----------------------------------------
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 29/28, -------------------------------------- 2000 1999 ---------- ---------- Revenues $ 512,444 $ 492,164 - ------------------------------------------------------------------------------------------------------------------ Operating expenses: Cost of service 253,877 238,802 Sales, general and administrative 177,116 155,711 Restructuring and impairment charges 34,393 - -------------------------------------- 465,386 394,513 -------------------------------------- Operating income 47,058 97,651 - ------------------------------------------------------------------------------------------------------------------ Other income (expense): Interest and other income 4,991 1,710 Interest and other expense (9,835) (11,001) Minority interest in earnings (3,025) (2,646) -------------------------------------- (7,869) (11,937) -------------------------------------- Income before income taxes and discontinued operations 39,189 85,714 Provision for income taxes 16,757 33,429 - ------------------------------------------------------------------------------------------------------------------ Income before discontinued operations 22,432 52,285 Discontinued operations (31,769) (1,540) - ------------------------------------------------------------------------------------------------------------------ Net income (loss) $ (9,337) $ 50,745 ====================================== Basic earnings (loss) per share: Income before discontinued operations $ 0.67 $ 1.55 -------------------------------------- Discontinued operations $ (0.95) $ (0.05) -------------------------------------- Basic earnings (loss) per share $ (0.28) $ 1.51 -------------------------------------- Diluted earnings (loss) per share: Income before discontinued operations $ 0.65 $ 1.48 -------------------------------------- Discontinued operations $ (0.95) $ (0.05) -------------------------------------- Diluted earnings (loss) per share $ (0.28) $ 1.44 --------------------------------------
See Notes to Unaudited Consolidated Financial Statements. 3 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL DATA CORPORATION
(In thousands) - ------------------------------------------------------------------------------------------------------------------ Nine Months Ended February 29/28, --------------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net income (loss) $ (9,337) $ 50,745 Adjustments to reconcile net income (loss) to cash provided by operating activities before changes in assets and liabilities: Non-Cash restructuring and impairment charges 23,880 - Loss (income) on discontinued operations 31,769 1,540 Depreciation and amortization 21,319 19,361 Amortization of acquired intangibles and goodwill 16,763 17,394 Deferred income taxes (13,554) 6,387 Minority interest in earnings 3,026 2,646 Provision for bad debts 9,977 2,899 Gain on sale of marketable securities (1,599) - Gain on business divestiture (2,295) - Other, net 226 1,677 --------------------------------- Subtotal 80,175 102,649 --------------------------------- Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions: Accounts receivable, net 14,227 (7,155) Merchant processing working capital (10,012) (6,258) Inventory (1,472) (1,956) Prepaid expenses and other assets (3,423) (2,390) Accounts payable and accrued liabilities 13,955 1,316 Deferred income (3,183) (3,107) Income taxes 10,504 834 --------------------------------- Net cash provided by operating activities 100,771 83,933 --------------------------------- Cash flows from investing activities: Capital expenditures (25,668) (22,746) Business acquisitions, net of acquired cash - (6,665) Sale of marketable securities 2,974 - Business divestitures 3,500 - (Purchase) sale of investment (10,045) 1,125 --------------------------------- Net cash used in investing activities (29,239) (28,286) --------------------------------- Cash flows from financing activities: Net borrowings (repayments) under lines of credit (15,000) (23,000) Net principal payments under capital lease arrangements and other long-term debt (16,943) (10,057) Net purchases related to stock activities (33,779) (1,491) Distributions to minority interests (2,219) (3,092) Dividends paid (7,481) (7,585) ---------------------------------- Net cash used in financing activities (75,422) (45,225) ---------------------------------- Net cash provided by (used in) discontinued operations 1,425 (13,549) ---------------------------------- Increase (decrease) in cash and cash equivalents (2,465) (3,127) Cash and cash equivalents, beginning of period 3,414 1,189 --------------------------------- Cash and cash equivalents, end of period $ 949 $ (1,938) =================================
See Notes to Unaudited Consolidated Financial Statements. 4 CONSOLIDATED BALANCE SHEETS NATIONAL DATA CORPORATION
(In thousands, except share and per share data) - ---------------------------------------------------------------------------------------------------------------------------------- February 29, May 31, 2000 1999 ------------ ----------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 949 $ 3,414 Billed accounts receivable 101,200 124,072 Unbilled accounts receivable 3,098 3,048 Allowance for doubtful accounts (6,960) (5,184) ------------ ----------- Accounts receivable, net 97,338 121,936 ------------ ----------- Income tax receivable - 8,348 Inventory 9,396 7,927 Net merchant processing receivable 8,218 - Deferred income taxes 4,610 1,191 Prepaid expenses and other current assets 16,843 13,023 ------------ ----------- Total current assets 137,354 155,839 ------------ ----------- Property and equipment, net 95,929 94,368 Intangible assets, net 352,114 369,076 Deferred income taxes 24,098 13,963 Investment 25,768 - Other 5,325 5,397 Net assets of discontinued operations 49,183 104,454 ------------ ----------- Total Assets $ 689,771 $ 743,097 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 20,000 $ 35,000 Current portion of long-term debt 94 6,148 Obligations under capital leases 9,202 11,980 Accounts payable and accrued liabilities 70,641 58,562 Net merchant processing payable - 1,794 Income tax payable 5,134 - Deferred income 27,928 29,945 ------------ ----------- Total current liabilities 132,999 143,429 ------------ ----------- Long-term debt 147,070 147,190 Obligations under capital leases 8,252 15,469 Other long-term liabilities 15,758 9,183 ------------ ----------- Total liabilities 304,079 315,271 ------------ ----------- Commitments and contingencies Minority interest in equity of subsidiaries 19,539 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 and 100,000,000 shares authorized at February 29, 2000 and May 31, 1999, respectively, 33,953,008 and 33,953,031 shares issued, respectively. 4,244 4,244 Capital in excess of par value 341,542 345,639 Treasury stock, at cost, 1,095,320 and 175,442 shares, respectively (28,867) (5,857) Unrealized holding gain 5,176 - Retained earnings 54,047 70,865 Deferred compensation (7,380) (3,215) Cumulative translation adjustment (2,609) (2,582) ------------ ----------- Total shareholders' equity 366,153 409,094 ------------ ----------- Total Liabilities and Shareholders' Equity $ 689,771 $ 743,097 ============ ===========
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 are based on the Company's current structure. The Company is undergoing a strategy review and has announced its intent to spin-off the NDC eCommerce business segment into a separate publicly traded company with its own management and Board of Directors and to increase focus on its core businesses. Accordingly, the Company's Board of Directors decided to pursue the divestiture of its Physician and Hospital Support Services ("PHSS") business and to place this business into a discontinued operations category. For further details on these actions, please see Management Discussion and Analysis pages 15 through 18. 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 $5.2 million, net of income taxes of $3.2 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. 6 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 (loss) 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, except per share data):
Three Months Ended (Before Discontinued Operations) --------------------------------------------------------------------------- February 29, 2000 February 28, 1999 --------------------------------------------------------------------------- Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- Basic EPS: Income before discontinued operations $14,740 32,920 $ 0.45 $17,894 33,728 $ 0.53 ======= ======= Effect of Dilutive Securities: Stock Options --- 890 --- 1,558 -------------------- -------------------- 14,740 33,810 17,894 35,286 Convertible debt 1,195 2,752 1,185 2,752 ------------------------------------------------------------------------ Diluted EPS: Income available to common stockholders plus assumed conversions $15,935 36,562 $ 0.44 $19,079 38,038 $ 0.50 ======================================================================== Three Months Ended (After Discontinued Operations) --------------------------------------------------------------------------- February 29, 2000 February 28, 1999 --------------------------------------------------------------------------- Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- Basic EPS: Net income $ 1,194 32,920 $ 0.04 $18,686 33,728 $ 0.55 ======= ======= Effect of Dilutive Securities: Stock Options --- 890 --- 1,558 -------------------- -------------------- 1,194 33,810 18,686 35,286 Convertible debt --- --- 1,185 2,752 ------------------------------------------------------------------------ Diluted EPS: Net Income available to common stockholders plus assumed conversions $ 1,194 33,810 $ 0.04 $19,871 38,038 $ 0.52 ========================================================================
7
Nine Months Ended (Before Discontinued Operations) --------------------------------------------------------------------------- February 29, 2000 February 28, 1999 --------------------------------------------------------------------------- Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- Basic EPS: Income before discontinued operations $22,432 33,392 $ 0.67 $52,285 33,711 $ 1.55 ====== ====== Effect of Dilutive Securities: Stock Options --- 1,010 --- 1,334 --------------------- -------------------- 22,432 34,402 52,285 35,045 Convertible debt --- --- 3,554 2,752 -------------------------------------------------------------------------- Diluted EPS: Income available to common stockholders plus assumed conversions $22,432 34,402 $ 0.65 $55,839 37,797 $ 1.48 ========================================================================== Nine Months Ended (After Discontinued Operations) --------------------------------------------------------------------------- February 29, 2000 February 28, 1999 --------------------------------------------------------------------------- Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- Basic EPS: Net income (loss) $(9,337) 33,392 $(0.28) $50,745 33,711 $ 1.51 ====== ====== Effect of Dilutive Securities: Stock Options --- --- --- 1,334 --------------------- -------------------- (9,337) 33,392 50,745 35,045 Convertible debt --- --- 3,554 2,752 -------------------------------------------------------------------------- Diluted EPS: Net Income (loss) available to common stockholders plus assumed conversions $(9,337) 33,392 $(0.28) $54,299 37,797 $ 1.44 ==========================================================================
For the nine months ended February 29, 2000 documented above, as described in Note 4 to the Unaudited Consolidated Financial Statements, the Company incurred Restructuring and Impairment Charges of $34.4 million and other unusual expenses totaling $11.1 million. For the nine months ended February 29, 2000, 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 nine months ended February 29, 2000 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 and discontinued operations. 8 NOTE 3 - SEGMENT INFORMATION: The segment information for the three-month and nine-month periods ended February 29, 2000 and February 28, 1999 is presented below. The Company classifies its businesses into two segments: NDC Health Information Services and NDC 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 Company's most recent Report on Form 10-K, except that the NDC Health Information Services segment excludes the discontinued operations. For further information regarding discontinued operations, see note 5 to the Unaudited Consolidated Financial Statements. EBITDA excludes the restructuring and impairment charges.
Restructuring Health and All Other Quarter Ended February 29, 2000 Information Impairment and (In thousands) Services eCommerce Charges Corporate Totals - --------------------------------------------------------------------------------------------------------------------- Revenues $ 85,869 $ 81,826 $ - $ - $ 167,695 Depreciation and Amortization 6,450 4,843 - 380 11,673 EBITDA 24,271 19,859 - (4,706) 39,424 Income before income taxes and discontinued operations 17,617 13,810 - (7,459) 23,968 Segment assets 363,698 262,640 - 63,433 689,771 Quarter Ended February 28, 1999 - --------------------------------------------------------------------------------------------------------------------- Revenues $ 83,655 $ 81,782 $ - $ - $ 165,437 Depreciation and Amortization 7,352 5,176 - 499 13,027 EBITDA 26,046 24,114 - (3,700) 46,460 Income before income taxes and discontinued operations 18,438 17,757 - (6,861) 29,334 Segment assets 410,072 264,145 - 55,864 730,081 Nine Months Ended February 29, 2000 - --------------------------------------------------------------------------------------------------------------------- Revenues $256,615 $255,829 $ - $ - $ 512,444 Depreciation and Amortization 21,093 15,479 - 1,510 38,082 EBITDA 60,057 68,455 - (8,979) 119,533 Income before income taxes and discontinued operations 38,088 49,315 (34,393) (13,821) 39,189 Segment assets 363,698 262,640 - 63,433 689,771 Nine Months Ended February 28, 1999 - --------------------------------------------------------------------------------------------------------------------- Revenues $248,666 $243,498 $ - $ - $ 492,164 Depreciation and Amortization 19,972 15,419 - 1,364 36,755 EBITDA 70,831 72,815 - (9,240) 134,406 Income before income taxes and discontinued operations 50,125 53,708 - (18,119) 85,714 Segment assets 410,072 264,145 - 55,864 730,081
9 NOTE 4 - RESTRUCTURING AND IMPAIRMENT CHARGES AND OTHER UNUSUAL EXPENSES: During the second quarter of fiscal year 2000, executive management updated its Health Information Services strategy. This included management's evaluation of 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. 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. This resulted in the identification of obsolete and/or non-strategic product offerings. The company has already executed the first step in this plan via the sale of part of its dental systems product line during the second quarter. 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):
Item Total Cash Non-cash ---- ----- ---- -------- 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 =====================================
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 nine 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 nine 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 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 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 whose employment will be terminated who were informed during the second quarter of fiscal 2000. There were approximately 115 employees in the consolidation efforts and approximately 35 as a part of reductions related to project completions or phase-outs. As of February 29, 2000, $5.8 million of the cash portion of the restructuring charges remains accrued as a current liability and $3.3 million is accrued as a long-term liability in the respective other liabilities sections of the balance sheet.
Accrual as of February 29, -------------------------- 2000 ---- Original Payments -------- -------- Item Total To Date Current Long-Term ---- ----- ------- ------- --------- Closed or planned closings of facilities $ 6,100 417 $2,700 $2,983 Estimated costs for settlements on contracts 2,236 --- 2,236 --- Severance and related costs 2,177 976 863 338 ------------------------------------------------------ Total $10,513 $1,393 $5,799 $3,321 ======================================================
Additionally, as a result of business events and information arising during the second 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 of accrued expenses. During the third quarter, based on the decision to divest PHSS and move it to discontinued operations, approximately $2.2 million of these unusual Sales, General and Administrative expenses were related to the PHSS operation and are reflected in the results of the discontinued operations. Accordingly, the results of the nine months ended February 29, 2000 include approximately $45.5 million of charges related to restructuring and asset impairment ($34.4 million) and other unusual expenses ($11.1 million). These unusual expenses are included in the Sales, General and Administrative expenses ($9.2 million) and Cost of Services ($1.9 million). 11 NOTE 5 - DISCONTINUED OPERATIONS In the third quarter fiscal 2000, Management took action on a formal plan to divest non-core 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 these business activities. The result has been expected short term losses from the closed operations offsetting gains from those that would be the nucleus for longer term growth. The Company has made management changes. It has closed locations that did not have the critical mass for long-term profitable growth. It has implemented a number of new systems initiatives designed to improve productivity and offer the infrastructure to process greater volume in the future. NDC believes that there is a significant demand for these services in the market and that these changes represent steps that can improve profitability from new revenue streams. In spite of these investments and actions taken to strengthen the business for future growth, the Company has concluded that these operations are not strategically compatible with NDC's core Health Information Services business. The core business includes Internet oriented network, information management and strategic provider point of use platforms. Management and the Board believe 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 divest the line of business and account for it as discontinued operations in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations". Accordingly, results of these operations have been classified as discontinued and prior periods have been restated. The operating results of the discontinued operations are summarized as follows (In thousands, except per share data):
Three Months Ended Nine Months Ended February 29/28, February 29/28, ------------------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenue $ 26,250 $30,298 $ 81,270 $86,775 Operating income (loss) (5,053) 1,397 (12,088) (2,215) Income (loss) from operations (3,165) 792 (7,628) (1,540) Projected phase-out loss from operations, net of tax (10,381) -- (10,381) -- ------------------------------------------------------- Income (loss) on discontinued operations before cumulative effect of change in accounting principle (13,546) 792 (18,009) (1,540) Cumulative effect of change in accounting principle -- -- (13,760) -- ------------------------------------------------------- Net income (loss) on discontinued operations $(13,546) $ 792 $(31,769) $(1,540) ======================================================= Earnings (loss) per share: From operations $ (0.10) $ 0.02 $ (0.23) $ (0.05) Projected phase-out loss from operations (0.31) -- (0.31) -- Cumulative effect of change in accounting principle -- -- (0.41) -- ------------------------------------------------------- Total $ (0.41) $ 0.02 $ (0.95) $ (0.05) =======================================================
12 For the Physician Management Services component of the discontinued operation, 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). The net assets of discontinued operations are summarized as follows (In thousands): February 29, 2000 May 31, 1999 ----------------- ------------ Current assets $ 34,506 $ 56,989 Property and equipment, net 6,040 11,536 Intangible assets, net 36,453 55,248 Other assets 1,421 2,512 Current liabilities (10,885) (13,008) Long-term debt (5,500) (5,500) Other long-term liabilities (2,471) (3,323) Provision for estimated losses (10,381) -- ----------------------------------- Net assets of discontinued operations $ 49,183 $104,454 =================================== Management considers the carrying value of the net assets of the discontinued operations to be less than or equal to the approximate fair value to be received on disposal. NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash flow disclosures, including non-cash investing and financing activities, for the nine months ended February 29, 2000 and February 28, 1999 are as follows (In thousands): 2000 1999 ---- ---- Income taxes paid, net of refunds $6,709 $28,405 Interest paid 7,446 8,773 Capital leases entered into in exchange For property and equipment 776 14,293 Non-cash investment in Medscape 7,000 --- 13 NOTE 7 - COMPREHENSIVE INCOME (LOSS): The components of comprehensive income (loss) are as follows (In thousands): Three months ended February 29/28, ---------------------------------- 2000 1999 ---- ---- Net income $1,194 $18,686 Foreign exchange effect 2 285 Unrealized holding gain, net of tax 420 --- ------ ------- Total comprehensive income $1,616 $18,971 ====== ======= Nine months ended February 29/28, --------------------------------- 2000 1999 ---- ---- Net income (loss) $(9,337) $50,745 Foreign exchange effect (27) (667) Unrealized holding gain, net of tax 5,176 --- ------- ------- Total comprehensive income (loss) $(4,188) $50,078 ======= ======= 14 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: NDC Health Information Services and NDC eCommerce. NDC Health Information Services NDC 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. NDC eCommerce NDC eCommerce provides a wide range of end-to-end information solutions for the business to business markets offering multiple payment-processing alternatives. NDC has been a leader in the electronic commerce market with its electronic payment and funds transfer capability for over 30 years. NDC 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. NDC 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. 15 Transition Year As the NDC Health Information Services and NDC 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 NDC Health Information Services and NDC eCommerce segments. Fiscal year 2000 is a major transition year in the execution of this consolidation strategy. Strategy Review This transition year has had another objective in addition to system consolidation. That being the 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. 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 segment that are judged to be core to the long-term strategies of the respective segments. Third Quarter Progress The Company's major emphasis is to re-establish the revenue growth model. The Company believes that it is making excellent progress in repositioning the business for sustained long term growth from core operations. During the fiscal third quarter, a number of actions were taken to further rationalize non- strategic business activities. Although these steps may result in short-term revenue declines, when netted against core business revenue and earnings, management believes that they should improve results in the future. The Company has concentrated on three parallel priorities for the second half of this fiscal year. The first and highest priority has been revenue growth from the continued broadening of the Company's product offerings and increased acceptance for the core network-based information business. The second priority is the program to separate the Company into two companies so as to gain additional focus and speed in responding to new market opportunities in the new economy. Finally, the Company is rationalizing those business and product areas that do not fit with the core network-based information strategy so that the two new companies will be more lean and focused. 16 Progress has been made in all three areas. Acceptance has grown for new offerings and others have been announced during the quarter. The Company has completed a great deal of implementation planning since the decision in the second quarter to form the eHealth and eCommerce companies. The Company's internal planning has been focused on having the fiscal year 2001 operating plan aligned around the two new companies. Substantially all of the company's operations are expected to be conducting business in a pro-forma version of the new structure at the start of the Company's fiscal year 2001 on June 1. The Company has had initial discussions with the Internal Revenue Service regarding its proposed spin-off and has filed the request for a private letter ruling related to that transaction. Additionally, the Company is proceeding with preparations and other required filings and expects that the spin-off will be completed during the fall of 2000. The Company believes that the separate focus on the specific 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 electronic commerce enabled economy. Rationalization Efforts During the second quarter, management of the NDC 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 second quarter. Additionally, sales programs have been curtailed for non-strategic areas. This curtailment resulted in revenue declines while costs and expenses continue until planned actions are fully implemented. Further, management and the Board have completed the evaluation of strategic alternatives relating to the Health Management Services business. These include 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 these business activities. The result has been expected short term losses from the closed operations offsetting gains from those that would be the nucleus for longer term growth. The Company has made management changes. It has closed locations which did not have the critical mass for long term profitable growth. It has implemented a number of new systems initiatives designed to improve productivity and offer the infrastructure to process greater volume in the future. The Company believes that there is a significant demand for these services in the market and that these changes represent steps that can improve profitability from new revenue streams. In spite of these investments and actions taken to strengthen the business for future growth, the Company has concluded that these operations no longer logically integrate with the Company's core Health Information Services business. The Company believes that the development of this business requires a strong singular focus. Management and the Board believe that the size and diversity of opportunities in the Company's Internet oriented core network, information management and strategic provider point of use businesses demand the full measure of management time and resources. Therefore, the Board has decided to divest the PHSS business and the Company is actively pursuing this course of action. The Company is accounting for these businesses as discontinued operations in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations". Accordingly, results of these operations have been classified as discontinued and prior periods have been restated. 17 Even as the Company is pursuing divestiture, the Company is continuing to make investments in systems and facilities, as well as new marketing initiatives. These are centered around the key locations that now make up this business. Management believes that these steps will further enhance the ability of this business and its employees to deliver expanded services to its client base. These should also add to its value, as should the numerous initiatives undertaken in the last two years to strengthen operations. The results for the third quarter and nine months ended February 29, 2000 reflect the results of consolidation programs during this transition period. Additionally, the year to date results include certain restructuring and impairment charges and other unusual expenses resulting from certain business events that occurred in the second quarter. These restructuring and impairment charges and unusual expenses totaled $45.5 million during the second quarter. It is estimated that there is an additional $10 million which will be incurred over the next nine months as additional actions are taken in those areas defined as non-strategic. The third quarter and year to date results also include the effect of actions that resulted in decreased revenues from, and margin deterioration related to, these non-core products. 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, exclusive of PHSS, can 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 NDC 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 NDC Health Information Services business would exhibit growth as reflected in the following comparative financial results. For the third quarter of fiscal 2000, these remaining businesses had revenues of approximately $77.3 million versus $70.8 million in the same period in the prior year. Similarly, these businesses had revenues of $226.2 million in the nine months ended February 29, 2000 versus $204.2 million in the nine months ended February 28, 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. 18 Results of Operations
Third Quarter ended February 29/28, --------------------------------------------------- ------------ (In millions) 2000 1999 Change ----------------------- ------------------------ ------------ Revenue: NDC Health Information Services $ 85.9 51% $ 83.6 51% 3% NDC eCommerce 81.8 49% 81.8 49% -% ------------------------------------------------------------------- Total Revenue $167.7 100% $165.4 100% 1% =================================================================== Nine Months ended February 29/28, --------------------------------------------------- ------------ 2000 1999 Change ----------------------- ------------------------ ------------ Revenue: NDC Health Information Services $256.6 50% $248.7 51% 3% NDC eCommerce 255.8 50% 243.5 49% 5% ------------------------------------------------------------------- Total Revenue $512.4 100% $492.2 100% 4% =================================================================== Third Quarter ended February 29/28, --------------------------------------------------- ------------ 2000 1999 Change ----------------------- ------------------------ ------------ Depreciation and Amortization: NDC Health Information Services $ 6.5 56% $ 7.3 56% (11%) NDC eCommerce 4.8 41% 5.2 40% (8%) All Other and Corporate 0.4 3% 0.5 4% (20%) ------------------------------------------------------------------- Total $11.7 100% $13.0 100% (10%) =================================================================== Nine Months ended February 29/28, --------------------------------------------------- ------------ 2000 1999 Change ----------------------- ------------------------ ------------ Depreciation and Amortization: NDC Health Information Services $21.1 55% $20.0 54% 6% NDC eCommerce 15.5 41% 15.4 42% 1% All Other and Corporate 1.5 4% 1.4 4% 7% ------------------------------------------------------------------- Total $38.1 100% $36.8 100% 3% ===================================================================
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. 19
Third Quarter ended February 29/28, --------------------------------------------------- ------------ 2000 1999 Change ----------------------- ------------------------ ------------ EBITDA: NDC Health Information Services $24.3 62% $ 26.1 56% (7%) NDC eCommerce 19.8 50% 24.1 52% (18%) All Other and Corporate (4.7) (12%) (3.7) (8%) (27%) ------------------------------------------------------------------- Total EBITDA $39.4 100% $ 46.5 100% (15%) =================================================================== Nine Months ended February 29/28, --------------------------------------------------- ------------ 2000 1999 Change ----------------------- ------------------------ ------------ EBITDA: NDC Health Information Services $ 60.1 50% $ 70.8 53% (15%) NDC eCommerce 68.4 57% 72.8 54% (6%) All Other and Corporate (9.0) (7%) (9.2) (7%) 2% ------------------------------------------------------------------- Total EBITDA $119.5 100% $134.4 100% (11%) =================================================================== Third Quarter ended February 29/28, --------------------------------------------------- ------------ 2000 1999 Change ----------------------- ------------------------ ------------ Income before Income Taxes and discontinued operations (IBIT): NDC Health Information Services $17.6 73% $ 18.4 63% (4%) NDC eCommerce 13.8 58% 17.8 61% (22%) All Other and Corporate (7.4) (31%) (6.9) (24%) (7%) ------------------------------------------------------------------- Total IBIT $24.0 100% $ 29.3 100% (18%) =================================================================== Nine Months ended February 29/28, --------------------------------------------------- ------------ 2000 1999 Change ----------------------- ------------------------ ------------ Income before Income Taxes and discontinued operations (IBIT): NDC Health Information Services $ 38.1 97% $ 50.1 58% (24%) NDC eCommerce 49.3 126% 53.7 63% (8%) Restructuring and Impairment (34.4) (88%) - - -% All Other and Corporate (13.8) (35%) (18.1) (21%) 24% ------------------------------------------------------------------- Total IBIT $ 39.2 100% $ 85.7 100% (54%) ===================================================================
Consolidated Total revenue for the third quarter of fiscal 2000 was $167.7 million, an increase of $2.3 million (1%) from the third quarter of fiscal 1999. The core NDC Healthcare and NDC eCommerce direct merchant businesses grew due to growth in customer base and strong growth in transaction volumes, while other non- strategic business areas declined. Total revenue for the first nine months of fiscal 2000 was $512.4 million, an increase of $20.2 million (4%) from the first nine months of fiscal 1999 due to growth in customer base, transaction volumes and new services to our customers in both of the business segments. A similar pattern existed relative to the core and non-strategic business areas. 20 For the third quarter of fiscal 2000, total cost of service, as a percentage of revenue, increased to 49.6% from 47.5% in the third quarter of fiscal 1999. Cost of service increased $4.6 million (6%) in the third quarter of fiscal 2000 from the third quarter of fiscal 1999. These increases were the result of product mix in the third quarter, some of which spawn high margin recurring revenue and increased cost of service expense percentage in non-core businesses. Total cost of service, as a percentage of revenue, increased from 48.5% in the first nine months of fiscal 1999 to 49.5% in the first nine months of fiscal 2000 due to increased operating expense margin, reduced revenue for non-core products and services, and one-time expenditures of $1.9 million recorded in the second quarter described previously. Cost of service increased $15.1 million (6%) in the first nine months of fiscal 2000 from the first nine months of fiscal 1999. The increase was a result of the same factors described above and the 4% revenue growth. Sales, general and administrative expenses in the third quarter of fiscal 2000 increased $3.3 million (6%) from the same period last year. As a percentage of revenue, these expenses increased to 33.9% for the third quarter of fiscal 2000 as compared to 32.3% for the third quarter of fiscal 1999. This reflects increased investments in sales staffing and programs, and increased customer service expenses. Sales, general and administrative expenses in the first nine months of fiscal 2000 increased $21.4 million (14%) from the same period last year. Excluding the $9.2 million of unusual expenses recorded in the second quarter described previously, sales, general and administrative expenses increased $12.2 million due to investments in sales staffing and programs, customer service as well as Internet development activities. The Company experienced margin reduction in the non-core businesses, the result of revenue declines with continuing expenses as phase out activities progress. As a percentage of revenue, these expenses, excluding the unusual charges, increased to 32.8% for the first nine months of fiscal 2000 from 31.6% for the first nine months of fiscal 1999. Operating income decreased from $33.4 million in the third quarter of fiscal 1999 to $27.8 million in the third quarter of fiscal 2000. This is primarily due to increased investments in sales programs, the product mix in the third quarter as well as decreased revenues and margin in the non-core businesses. To the extent that the Company is successful in its plans to curtail non-core products and services, margins are not expected to continue at this level. Operating income decreased from $97.7 million in the first nine months of fiscal 1999 to $47.1 million in the first nine months of fiscal 2000. This is primarily due to the total charges of $45.5 million previously described. Excluding these items and as a percentage of revenue, the Company's operating income margin decreased to 18.1% in the first nine months of fiscal 2000 from 19.8% in the first nine months of fiscal 1999 due primarily to the operating losses in the non-core businesses. EBITDA for the third quarter of fiscal 2000 decreased by $7.1 million or 15% to $39.4 million due to the factors described above. The EBITDA margin percentage was 23.5% in the third quarter of fiscal 2000, compared to 28.1% in the third quarter of fiscal 1999. IBIT for the third quarter of fiscal 2000 was $24.0 million compared to $29.3 million in the third quarter of fiscal 1999. This decline reflects the reasons described previously. EBITDA for the first nine months of fiscal 2000 decreased by $14.9 million or 11% to $119.5 million due to the reasons described above. The EBITDA margin percentage was 23.3% in the first 21 nine months of fiscal 2000, compared to 27.3% in the first nine months of fiscal 1999. IBIT for the first nine months of fiscal 2000 was $39.2 million compared to $85.7 million in the first nine months of fiscal 1999 due to the unusual charges and other factors previously discussed. Total other expense decreased $0.3 million for the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 due primarily to decreased borrowings under the line of credit. Total other expense decreased $4.0 million for the first nine months of fiscal 2000 compared to the first nine months of fiscal 1999. This decrease was primarily the result of the net gain on sale of a dental system business in the second quarter, as well as the net gain received on the sale of marketable securities in the first quarter. Diluted earnings per share before discontinued operations in the third quarter of fiscal 2000 was $0.44 versus a comparable $0.50 last year. Including the net loss of $0.41 in fiscal 2000 and income of $0.02 in fiscal 1999 related to discontinued operations, diluted earnings per share in the third quarter of fiscal 2000 was $0.04 versus a comparable $0.52 last year. Diluted earnings per share before discontinued operations in the first nine months of fiscal 2000 was $0.65 versus a comparable $1.48 last year. Including net losses of $0.95 and $0.05 related to discontinued operations results in a net loss per share of $0.28 for the first nine months of the fiscal 2000 versus earnings of $1.44 in the prior year. Basic and diluted earnings per share for the nine month period ended February 29, 2000 are the same, as the effect of any potentially dilutive securities and convertible debt is antidilutive due to the loss generated by the discontinued operations. NDC Health Information Services NDC Health Information Services' revenue increased 3% in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. Revenue from the core strategic products and services including the value-added network, information management and certain strategic systems businesses grew in excess of 9%. Non-strategic legacy systems revenue declined - partially offsetting revenue increases in the core areas. NDC Health Information Services revenue grew 3% in the first nine months of fiscal 2000 as compared to the first nine months of fiscal year 1999. EBITDA for the third quarter of fiscal 2000 was $24.3 million compared to $26.1 million in the third quarter of fiscal 1999. This decline in EBITDA was primarily due to non-core business revenue declines and expense ratio increases mentioned previously. The EBITDA margin percentage was 31.2% in the third quarter of fiscal 1999 compared to 28.9% in the third quarter of fiscal 2000. The Company's EBITDA margins declined in the third quarter due to operating losses in the non-core products and services. IBIT in the third quarter of fiscal 2000 was $17.6 million compared to $18.4 million in the third quarter of fiscal 1999. EBITDA for the first nine months of fiscal 2000 was $60.1 million compared to $70.8 million in the first nine months of fiscal 1999. This decline was primarily due to the non-core revenue declines and unusual expenses described previously. Excluding the unusual charges, the EBITDA margin was 28.5% in the first nine months of fiscal 1999 compared to 27.7% in the first nine months of fiscal 2000. IBIT in the first nine months of fiscal 2000 was $38.1 million compared to $50.1 million in the first nine months of fiscal 1999. 22 NDC eCommerce NDC eCommerce revenue in the third quarter of fiscal 2000 was equal to the same period last year. The direct merchant and indirect acquiring card business grew, including offsets by declines in older product lines. NDC eCommerce revenue increased in the first nine months of fiscal 2000 by 5% over the same period last year with growth in the direct and indirect card business and declines in older product lines compared to the previous year. EBITDA for the third quarter of fiscal 2000 was $19.8 million compared to $24.1 million in the third quarter of fiscal 1999. This decline in EBITDA was the result of flat revenue combined with a reduction in the EBITDA margin percentage from 29.5% for the third quarter of fiscal 1999 to 24.2% for the period ended February 29, 2000. This reflects the mix of product sales as well as increased investments in sales and new product development expense. IBIT in the third quarter of fiscal 2000 was $13.8 million compared to $17.8 million for the third quarter ended February 28, 1999. EBITDA for the first nine months of fiscal 2000 was $68.4 million compared to $72.8 million in the first nine months of fiscal 1999. This was due to the 5% increase in revenue that was offset by a reduction in the EBITDA margin percentage from 29.9% for the first nine months of fiscal 1999 to 26.7% for the first nine months of fiscal year 2000 as discussed above. IBIT in the first nine months of fiscal 2000 was $49.3 million compared to $53.7 million for the first nine months 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 $6.9 million in the third quarter of fiscal 1999 versus $7.4 million in the third quarter of fiscal 2000. This net expense changed from $18.1 million in the first nine months of fiscal 1999 to $13.8 million in the first nine months of fiscal 2000 primarily due to the gain on the sale of the dental assets and the sale of marketable securities previously described. 23 Liquidity and Capital Resources Cash flow generated from operations provides the Company with a significant source of liquidity to meet its needs. Cash provided by operations before changes in assets and liabilities was $80.2 million for the nine month period ended February 29, 2000, a decrease of $22.5 million compared to the same period of the prior year. Cash provided from net changes in assets and liabilities was $20.6 million for the nine-month period ended February 29, 2000 versus cash required to fund net changes in assets and liabilities of $18.7 million for the nine month period ended February 28, 1999. This decline in the cash required to fund net changes in assets and liabilities resulted primarily from reductions in accounts receivable, an increase in accounts payable and accrued liabilities, and changes in income taxes. The reductions in accounts receivables resulted from improved collections, the change in accounting principle and unusual write- offs previously discussed. The increase in accounts payable and accrued liabilities primarily relates to timing of payments. The change in income taxes was due to reduced taxable income. Net cash provided by operating activities increased 20% to $100.8 million from $83.9 million for the nine-month periods ended February 29, 2000 and February 28, 1999. Net cash used in investing activities was $29.2 million for the nine month period ended February 29, 2000 compared to $28.3 million for the nine month period ended February 28, 1999. 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 a business divestiture. 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 increased to $75.4 million for the first nine months ended February 29, 2000 from $45.2 million in the same period of the prior year. The net effect of the payments and borrowings against the lines of credit is a $15.0 million payment for the nine month period ended February 29, 2000 compared to a $23.0 million payment for the nine month period ended February 28, 1999. The net borrowings for the nine months ended February 29, 2000 primarily consisted of payments of approximately $63.7 million, offset by borrowings of $38.7 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 $16.9 million for the nine month period ended February 29, 2000 from $10.1 million in the same period ended February 28, 1999 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 $38.7 million and reissued $4.9 million under Company stock plans. Dividends of $7.5 million were paid during the nine-month period ended February 29, 2000 versus $7.6 million for the same period last year. The Company has a committed, unsecured $125.0 million revolving line of credit that expires in December 2002. At February 29, 2000, there was $20.0 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. 24 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. 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 did not experience any significant problems in its January or February month-end close procedures. The Company does not expect any significant future revenue or net income implications due to the Year 2000 date change. Based on the work done to date, the Company believes that the Year 2000 issue does not pose significant operational problems for the Company's products and internal systems. 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 incurred to address this issue. A significant portion of these costs was not incremental costs to the Company, but represented the redeployment of existing information technology resources. The Company's employees performed the majority of the work.. The costs incurred, excluding capital expenditures, were approximately $25 million. The funds were spent primarily to remediate via coding, upgrades, testing of third party software and implementation costs. The capital expenditures incurred 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. Summary The date change to the year 2000 has occurred and it appears that the Company's initiatives addressed the needs. 25 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 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, cannot be foreseen, and reflect future business decisions that are subject to change. Actual revenues, revenue growth and margins will be dependent upon all such factors and their results subject to risks related to the implementation of changes by the Company, the failure to implement changes, customer acceptance of such changes or lack of 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 has announced its intention to divest units of its Health Information Services business that were acquired through the acquisition of PHSS in December 1997. The terms of this divestiture have not yet been determined and there can be no assurance that this divestiture and other plans to curtail non-core products and services in the business will have the effects anticipated by the Company. 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 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 Data Schedule (for SEC use only) (99.1) Unaudited restated Segment Information (b) Reports Filed on Form 8-K: National Data Corporation's Form 8-K dated December 20, 1999, was filed on December 28, 1999, relating to the Company's Board of Directors approving several decisions related to the structure of the company. 27 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 13, 2000 By: /s/ David H. Shenk ----------------- ---------------------------- David H. Shenk Interim Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 28 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS MAY-31-2000 JUN-01-1999 FEB-29-2000 949 0 104,298 6,960 9,396 137,354 203,903 107,974 689,771 132,999 147,070 0 0 4,244 361,909 689,771 0 512,444 0 253,877 211,509 9,977 9,835 39,189 16,757 22,432 (31,769) 0 0 (9,337) (0.28) (0.28)
EX-99.1 3 SEGMENT INFORMATION Exhibit 99.1 National Data Corporation Segment Information (Unaudited) (In Thousands)
Restated Health Restructuring Information and Impairment All Other and First Quarter ended August 31, 1999 Services eCommerce Charge Corporate Totals - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 85,719 $ 89,829 $ - $ - $ 175,548 Depreciation and Amortization 7,323 5,346 - 598 13,267 EBITDA 24,616 27,007 - (1,993) 49,630 Income before income tax and discontinued operations 16,948 20,330 - (3,399) 33,879 Net income (loss) on discontinued operations (15,900) (15,900) First Quarter ended August 31, 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 81,341 $ 82,397 $ - $ - $ 163,738 Depreciation and Amortization 6,058 4,979 - 427 11,464 EBITDA 20,646 26,184 - (2,057) 44,773 Income before income tax and discontinued operations 14,480 19,826 - (5,058) 29,248 Net income (loss) on discontinued operations (1,517) (1,517) Second Quarter ended November 30, 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 85,027 $ 84,174 $ - $ - $ 169,201 Depreciation and Amortization 7,320 5,291 - 531 13,142 EBITDA 11,170 21,591 - (2,281) 30,480 Income before income tax and discontinued operations 3,525 15,175 (34,393) (2,965) (18,658) Net income (loss) on discontinued operations (2,323) (2,323) Second Quarter ended November 30, 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 83,670 $ 79,319 $ - $ - $ 162,989 Depreciation and Amortization 6,561 5,264 - 438 12,263 EBITDA 24,138 22,517 - (3,483) 43,172 Income before income tax and discontinued operations 17,207 16,125 - (6,200) 27,132 Net income (loss) on discontinued operations (814) (814)
National Data Corporation Segment Information (Unaudited) (In Thousands)
Third Quarter ended February 29, 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 85,869 $ 81,826 $ - $ - $ 167,695 Depreciation and Amortization 6,450 4,843 - 380 11,673 EBITDA 24,271 19,859 - (4,706) 39,424 Income before income tax and discontinued operations 17,617 13,810 (7,459) 23,968 Net income (loss) on discontinued operations (13,546) (13,546) Third Quarter ended February 28, 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 83,655 $ 81,782 $ - $ - $ 165,437 Depreciation and Amortization 7,352 5,176 - 499 13,027 EBITDA 26,046 24,114 - (3,700) 46,460 Income before income tax and discontinued operations 18,438 17,757 - (6,861) 29,334 Net income (loss) on discontinued operations 792 792 Fourth Quarter ended May 31, 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 90,330 $ 86,553 $ - $ - $ 176,883 Depreciation and Amortization 6,723 5,346 - 788 12,857 EBITDA 26,730 27,854 - (599) 53,985 Income before income tax and discontinued operations 20,379 21,100 - (4,871) 36,608 Net income (loss) on discontinued operations (2,220) (2,220)
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