NATIONAL DATA CORPORATION Condensed Consolidated Statements of Income (In Thousands, Except Per Share Data) Quarter ended Nine Months Ended February 28, February 28, 1994 1993 1994 1993 ---- ---- ---- ---- Revenue $50,444 $49,519 $150,978 $151,077 Operating Expenses: Cost of service 29,168 29,791 87,843 91,265 Sales, general and administration 16,995 15,528 50,393 50,417 ------- ------- ------- ------- 46,163 45,319 138,236 141,682 Operating Income 4,281 4,200 12,742 9,395 Other Income (Expense): Investment and other income 105 223 401 1,322 Interest expense (316) (247) (1,179) (1,582) ------- ------- ------- ------- (211) (24) (778) (260) Income Before Income Taxes & Extraordinary Item 4,070 4,176 11,964 9,135 Provision for Income Taxes 1,428 1,754 4,636 3,837 ------- ------- ------- ------- Income before extraordinary item $2,642 $2,422 $7,328 $5,298 Extraordinary Item Settlement of shareholder's suit (net of tax effect of $1,050) See Note 3 - - (1,450) - ------- ------- ------- ------- Net Income $2,642 $2,422 $5,878 $5,298 ======= ======= ======= ======= Earnings per common share and common equivalent share (note 5) : Income before extraordinary item $0.20 $0.19 $0.56 $0.42 Extraordinary item - - (0.11) - ------- ------- ------- ------- Net Income $0.20 $0.19 $0.45 $0.42 ======= ======= ======= ======= Earnings per common share assuming full dilution (note 5) : Income before extraordinary item $0.20 $0.19 $0.56 $0.42 Extraordinary item - - (0.11) - ------- ------- ------- ------- Net Income $0.20 $0.14 $0.45 $0.42 ======= ======= ======= ======= See Notes to Unaudited Condensed Consolidated Financial Statements ============================================================================== NATIONAL DATA CORPORATION P. 1 of 2 Condensed Consolidated Balance Sheets (In Thousands) FEBRUARY 28, MAY 31, 1994 1993 ASSETS ------------ ----------- Current assets: Cash and cash equivalents $27,237 $17,150 Short-term investments 25 625 Accounts receivable: Trade receivables (less allowances of $1,050, and $1,044) 32,482 36,168 Other receivables (less allowances of $572, and $681) 16,178 17,418 Investment in sales-type leases, current portion, (less allowances of $554 and $968) 4,259 6,292 Inventory 4,510 2,663 Deferred income taxes 792 - Prepaid expenses and other current assets 4,548 5,824 ------- ------- Total current assets 90,031 86,140 Investment in sales-type leases (less allowances of $131 and $510) 1,160 3,377 Property and equipment, at cost: Land 402 402 Building 6,503 6,503 Equipment 73,593 76,067 Software 24,577 22,338 Leasehold Improvements 13,940 13,867 Furniture and fixtures 8,960 8,856 Work in progress 4,638 924 ------- ------- 132,613 128,957 Less-Accumulated depreciation and amortization (103,427) (100,930) ------- ------- 29,186 28,027 Property acquired under capital leases, net of accumulated amortization 4,801 3,918 ------- ------- 33,987 31,945 Deposits 2,029 2,019 Other assets: Acquired intangibles and goodwill, net of accumulated amortization of $28,894 and $24,901 42,729 46,299 Other 4,114 5,568 ------- ------- 46,843 51,867 Total Assets $174,050 $175,348 ========== ========== See Notes to Unaudited Condensed Consolidated Financial Statements NATIONAL DATA CORPORATION P. 2 of 2 Condensed Consolidated Balance Sheets (In Thousands) FEBRUARY 28, MAY 31, 1994 1993 LIABILITIES AND STOCKHOLDERS' EQUITY ------------ ----------- Current liabilities: Accounts payable $8,347 $8,466 Earnout payable on acquired businesses, current portion 2,698 3,032 Accrued compensation and benefits 2,835 4,792 Merchant processing payables 9,775 11,176 Other accrued liabilities 13,356 15,761 Income tax payable 3,166 3,363 Obligation under capital leases, current portion 1,317 1,033 Mortgage payable, current portion 146 135 ------- ------- Total current liabilities 41,640 47,758 Mortgage payable 11,138 11,261 Earnout payable on acquired businesses 1,639 3,011 Other long-term liabilities 2,104 2,556 Obligation under capital leases 3,401 2,860 Deferred income taxes 7,816 6,641 ------- ------- Total Liabilities 67,738 74,087 Stockholders' Equity: Preferred stock, par value $1.00 per share, 1,000,000 shares authorized; none issued - - Common stock, par value $.125 per share, 30,000,000 shares authorized; 12,575,143 and 12,226,732 shares issued 1,572 1,528 Capital in excess of par value 29,838 26,249 Retained earnings 76,418 74,658 Cumulative translation adjustment (520) (393) ------- ------- 107,308 102,042 Less: Deferred compensation (996) (781) ------- ------- Total Stockholders' Equity 106,312 101,261 Total Liabilities and Stockholders' Equity $174,050 $175,348 ========== ========== See Notes to Unaudited Condensed Consolidated Financial Statements ============================================================================== NATIONAL DATA CORPORATION Condensed Consolidated Statements of Cash Flows (In Thousands) Nine Months Ended February 28, 1994 1993 Cash flows from operating activities: ----- ----- Net income $5,878 $5,298 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,822 10,796 Amortization of acquired intangibles and goodwill 4,509 4,683 Provision for bad debt, sales allowances and operational losses 3,171 3,967 Loss on disposal of fixed assets 64 80 Changes in assets and liabilities, net of the effects of acquisitions: Decrease in trade accounts receivable 1,807 3,064 Decrease (increase) in other accounts receivable 132 (341) Decrease in investment in sales-type leases 4,027 325 Increase in inventory (1,847) (52) Decrease in prepaid expenses and other assets 1,506 1,926 Decrease in accounts payable and accrued liabilities (5,303) (2,355) Increase (decrease) in income taxes payable 972 (1,485) -------- -------- Net cash provided by operating activities 23,738 25,906 Cash flows from investing activities: Capital expenditures (8,726) (2,650) Sale of sales-type leases inventory - 17,157 Business acquisitions (400) - Decrease in investments & other non-current assets 600 5 -------- -------- Net cash (used in) provided by investing activities (8,526) 14,512 Cash flows from financing activities: Payments under lines of credit - (4,500) Payment on note payable - (20,000) Principal payments under mortgage, capital lease arrangements and other long-term debt (1,558) (1,552) Principal payments on earnout payable (2,278) (2,362) Dividends paid (4,116) (3,993) Net proceeds from the issuance of stock under employee stock plan 2,862 1,105 -------- -------- Net cash used in financing activities (5,090) (31,302) Effect of exchange rate changes on cash (35) - Increase in cash & cash equivalents 10,087 9,116 Cash, beginning of period 17,150 2,243 -------- -------- Cash, end of period $27,237 $11,359 ======== ======== Supplemental schedule of noncash investing and financing activities: Capital leases entered into in exchange for property and equipment $ 1,814 $ 2,813 ======== ======== See Notes to Unaudited Condensed Consolidated Financial Statements ============================================================================== NOTES TO UNAUDITED CONDENSED 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 1993 consolidated financial statements to conform to the fiscal 1994 presentation. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K for the fiscal year ended May 31, 1993. In the opinion of management, the information furnished reflects all adjustments necessary to present fairly the results for such interim periods. NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash flow disclosures for the nine months ended February 28, 1994 and 1993 are as follows (in thousands): Nine Months Ended February 28, 1994 1993 Income taxes paid $ 3,551 $ 4,256 Interest paid $ 1,338 $ 2,183 NOTE 3 - SHAREHOLDER SUIT: The Company and certain of its previous officers were party to three lawsuits, which were consolidated as National Data Corporation Shareholder Litigation. The Plantiffs, purporting to act on behalf of a class, alleged violations of Rule 10(b)(5) under the Securities Exchange Act of 1934 under a "fraud on the market" theory for alleged misrepresentations and omissions relating to expected earnings which resulted in, the plantiffs contend, the Company's common stock being overvalued in the market. The Company and the plantiffs signed an agreement on September 27, 1993 to settle this matter for $6,950,000. The Company's insurer bore two- thirds of the settlement and related future costs. The cost to the Company, net of income taxes and insurance proceeds is approximately $1,450,000. Both the Company and its insurer paid their full share of the settlement amount on December 1, 1993, and the settlement received final approval from the court on December 16, 1993. NOTE 4 - INCOME TAXES: Effective June 1, 1993, the Company adopted the provisions of Financial Accounting Standard Number 109, "Accounting for Income Taxes" (FAS 109). FAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of certain events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. There was no effect on the Company's net income related to the adoption of FAS 109 in the nine month period ended February 28, 1994. Prior years' financial statements have not been restated to reflect the provisions of FAS 109. The components of the net deferred tax liability as of June 1, 1993 were as follows (in thousands): Deferred tax assets: Accrued liabilities $ 919 Restructuring costs 635 -------- $ 1,554 -------- Valuation allowance --- -------- $ 1,554 Deferred tax liabilities: Property and equipment $ 6,033 Acquired intangibles 2,492 Other 127 -------- $ 8,652 -------- Deferred tax liability, net $ 7,098 ======== NOTE 5 - EARNINGS PER SHARE: Earnings per common share and common equivalent share (Primary EPS) are computed by dividing net income by the weighted average number of common shares and common stock equivalent shares outstanding during the period. Common stock equivalent shares represent stock options that if exercised 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 are assumed to have a dilutive effect on earnings per share. Earnings per share assuming full dilution (Fully Diluted EPS) are computed by the same method as described for Primary EPS except that the higher of, 1) the ending market share price or 2) the average market share price, is used to compute the fully diluted EPS as compared to the average market share price for Primary EPS. The weighted average number of common shares, as adjusted for Primary EPS and Fully Diluted EPS, is as follows: Quarter Ended Nine Months Ended February 28, February 28, -------------------- ------------------ 1994 1993 1994 1993 ---- ---- ---- ---- In Thousands In Thousands Primary EPS 13,141 12,595 13,049 12,581 Fully Diluted EPS 13,167 12,716 13,167 12,667 ============================================================================== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The third quarter of fiscal year 1994 ended February 28, 1994 compared to the same quarter last year is reflected as follows ($Millions): % FY 1994 FY 1993 Inc. (Dec.) $ % $ % of Dollars Revenue: ----- ---- ----- ---- ------ Healthcare 15.8 31 13.9 28 14 Retail 27.8 55 27.7 56 -- Other 6.8 14 7.9 16 (14) ----- ---- ----- ---- ------ Total Revenue 50.4 100 49.5 100 2 ----- ---- ----- ---- ------ Cost of Service: Operations 23.1 46 23.4 47 ( 1) Depreciation/Amortization 3.7 7 4.0 8 ( 8) Hardware Sales 2.3 5 2.4 5 ( 5) ----- ---- ----- ---- ------ Total Cost of Service 29.1 58 29.8 60 ( 2) ----- ---- ----- ---- ------ Gross Margin 21.3 42 19.7 40 8 Sales General & Administration 17.0 34 15.5 32 9 ----- ---- ----- ---- ------ Operating Margin 4.3 8 4.2 8 2 ===== ==== ===== ==== ====== Revenue Total revenue for the third quarter was $50,444,000, an increase of $925,000 (2%) from revenue of $49,519,000 for the same period of the prior year. The trends, as detailed in the Company's Form 10-K for the fiscal year ended May 31, 1993, continued in the three-month period ending February 28, 1994. The revenue increase in the period was principally the result of two offsetting factors. Revenue for the Healthcare business increased $1,937,000 (14%) to $15,791,000. The increase in Healthcare revenue was offset by a decrease in "Other" revenue of $1,125,000. Healthcare revenue growth was principally related to increases in Electronic Claims Processing. Electronic Claims revenue increased $2,503,000 (48%) in the period compared to the prior year. Revenue from the Company's governmental and institutional customers decreased 7%. The Company's Pharmacy/Dental practice management systems showed a revenue decrease of 6%. Retail revenue for the quarter showed modest growth over the prior year. Direct (merchant processing) revenue increased 8% in the current period compared to the same period last year. This increase is principally related to an increase in discount revenue and equipment sales. Revenue in the Company's Indirect (distribution through banks) side of the business decreased 6%. The voice authorization revenue with Indirect customers decreased 8%. The decrease in voice transactions is attributable to the continued shift from voice to electronic authorization processing. Indirect electronic authorization revenue decreased 6% as a result of lower revenue per transaction. The decrease in "Other" revenue of 14% is principally related to the Company's decision to exit certain segments of the Communication Services business in 1991. The Company expects this negative trend to continue through the balance of 1994 as the residual contracts with this customer base expire. Cost of Service Total Cost of Service for the third quarter was $29,168,000, a decrease of $623,000 (2%) from the same period of the prior year. This decrease was primarily the result of a reduction in cost of operations of $176,000 (1%) and a decrease in depreciation expense of $330,000 (8%). The depreciation decrease is principally a result of computer systems becoming fully depreciated in the fourth quarter of last fiscal year. The Company is in the process of replacing certain of its computer systems and adding enhanced peripheral equipment. In addition to significant processing performance enhancements to absorb anticipated growth in transaction volumes, the new systems carry lower maintenance costs and power consumption demands. Gross margin increased to 42% in the current quarter, up from 40% in the same period of the prior year. Sales, General and Administration Sales, General and Administration expense was $16,995,000 for the third quarter, an increase of $1,467,000 (9%) from the prior year. This increase reflects expansion in the size and scope of the Company's marketing and sales distribution capability. The increase in the sales force was partially offset by the effect of productivity improvement programs initiated in the second quarter of last year. These programs concentrated on elimination of redundant and non-essential activities. After netting these two factors Sales, General and Administration expense, as a percentage of revenue, was 34% for the current quarter compared to 31% for the same period the prior year. Investment and Other Income Investment and Other Income for the third quarter was $105,000, a decrease of $118,000 (53%) from the same period of the prior year. This decrease was the result of a decrease in interest income and was the result of the Company selling a substantial portion of its lease portfolio in the second half of the last fiscal year. The Company is now essentially out of the leasing business. New leases are sold to third parties. Interest Expense Interest Expense for the third quarter increased $69,000 (28%) from the same period last year. This increase was primarily attributable to a one-time adjustment of imputed interest expense on acquired merchant portfolios in the third quarter of fiscal 1993. Income Taxes The provision for income taxes, as a percentage of taxable income, was 35% and 42% for the nine months ending February 28, 1994 and 1993 respectively. The decreased rate in the current period reflects income tax credits received for research and development expenditures. Net Income Net income for the third quarter was $2,642,000, an increase of $219,000 (9%) from the same period last year. Earnings per share, both primary and fully diluted, for the third quarter was $0.20, an increase of $0.01 (5%) over the same period last year. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of outstanding shares. ============================================================================== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The nine months of fiscal year 1994 ended February 28, 1994 compared to the same period last year is reflected as follows ($Millions): % FY 1994 FY 1993 Inc. (Dec.) $ % $ % of Dollars Revenue: ----- ---- ----- ---- ------ Healthcare 45.4 30 40.0 26 13 Retail 84.0 56 84.6 56 ( 1) Other 21.6 14 26.5 18 (19) ----- ---- ----- ---- ------ Total Revenue 151.0 100 151.1 100 -- ----- ---- ----- ---- ------ Cost of Service: Operations 69.8 46 72.1 48 ( 3) Depreciation/Amortization 10.7 7 12.3 8 (14) Hardware Sales 7.3 5 6.9 5 8 ----- ---- ----- ---- ------ Total Cost of Service 87.8 58 91.3 61 ( 4) ----- ---- ----- ---- ------ Gross Margin 63.1 42 59.8 39 6 Sales General & Administration 50.4 34 50.4 33 -- ----- ---- ----- ---- ------ Operating Margin 12.7 8 9.4 6 35 ===== ===== ====== ==== ====== Revenue Total revenue for the nine-month period ending February 28, 1994 was $150,978,000, essentially flat with revenue of $151,077,000 for the same period of the prior year. The trends, as detailed in the Company's Form 10-K for the fiscal year ended May 31, 1993, continued in the nine-month period ending February 28, 1994. The reduction in revenue was the result of offsetting factors. Revenue for the Company's Healthcare business increased $5,352,000 (13%) to $45,392,000. The increased revenue in Healthcare was offset by a decrease in "Other" revenue of $4,917,000 and a decrease of $534,000 in the Retail business. Healthcare revenue growth was principally related to increases in Electronic Claims Processing. Electronic Claims revenue increased $7,013,000 (52%) in the period compared to the prior year. Revenue with the Company's governmental and institutional customers decreased 14%. The Company's Pharmacy/Dental practice management systems revenue decreased 4%. Retail revenue for the nine-month period showed a slight decrease from the prior year. Direct (merchant processing) revenue increased 5% in the current period compared to the same period last year. This increase is principally related to an increase in discount revenue and equipment sales. Revenue in the Company's Indirect (distribution through banks) side of the business decreased 6% The voice authorization revenue with Indirect customers decreased 7%. The decrease in voice transactions is attributable to the continued shift from voice to electronic authorization processing. Indirect electronic authorization revenue decreased 4%. The number of electronic authorization transactions grew 1%. The increase in volume was offset by a decrease in the revenue per transaction. The decrease in "Other" revenue is principally related to the Company's decision to exit certain segments of the Communication Services business in 1991. The Company expects this negative trend to continue through the balance of 1994 as the residual contracts with this customer base expire. Cost Of Service Total Cost of Service for the nine month period was $87,843,000, a decrease of $3,422,000 (4%) from the same period of the prior year. This decrease was primarily the result of a reduction in cost of operations of $2,291,000 (3%) and a decrease in depreciation expense of $1,687,000 (14%). The depreciation expense reduction is principally the result of computer systems becoming fully depreciated in the fourth quarter of last fiscal year. The Company is in the process of replacing certain of its computer systems and adding enhanced peripheral equipment. In addition to significant processing performance enhancements to absorb anticipated growth in transaction volumes, the new systems carry lower maintenance costs and power consumption demands. Hardware cost of sales increased $551,000 (8%) as a result of an increase in the number of healthcare practice management systems and point-of-sale terminals sold. Gross margin increased to 42% in the nine month period, up from 39% in the same period of the prior year. Sales, General and Administration Sales, General and Administration expense was $50,393,000 for the nine month period. This is essentially the same as the prior year. Sales, General and Administration expense, as a percentage of revenue, was 34% for both periods. Investment and Other Income Investment and Other Income for the nine month period was $401,000, a decrease of $921,000 (70%) from the same period of the prior year. This decrease was the result of a decrease in interest income. The lower interest income was the result of the Company selling a substantial portion of its lease portfolio in the second half of the last fiscal year. The Company is now essentially out of the leasing business. New leases are sold to third parties. Interest Expense Interest Expense for the nine months decreased $403,000 (25%) from the same period of the prior year. This decrease was primarily attributable to an absence of borrowings on the Company's lines of credit and a decrease in imputed interest expense associated with merchant bank portfolios acquired in prior years where certain payments were contingent on future revenues. Income Taxes The provision for income taxes, as a percentage of taxable income, was 39% and 42% for the nine-month periods ending February 28, 1994 and 1993 respectively. The decreased rate in the current year reflects income tax credits received for research and development expenditures. Extraordinary Item The Company took an extraordinary charge of $1,450,000 (net of income taxes) in the first quarter of the current year, representing the estimated settlement cost of a lawsuit brought against the Company. See Note 3 to the Unaudited Condensed Consolidated Financial Statements for further discussion. Net Income Net income, prior to the extraordinary charge, was $7,328,000, an increase of $2,030,000 (38%). Earnings per common share, both primary and fully diluted, for the first nine months, before the extraordinary item, was $0.56, an increase of $0.14 (33%) over the same period last year. Net income for the nine months, after the extraordinary charge of $1,450,000 for resolution of the shareholder litigation, was $5,878,000, an increase of $580,000 (11%) as compared to net income of $5,298,000 for the same period of the prior year. See Note 3 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the shareholder litigation. Earnings per common share, both primary and fully diluted, for the nine-month period, after the extraordinary charge, was $0.45, an increase of $0.03 (7%) over the same period last year. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of earnings per share and common equivalent share. Liquidity and Capital Resources Net cash provided by operating activities was $23,738,000 for the nine months ended February 28, 1994, a decrease of $2,168,000 (8%) compared to $25,906,000 for the same period of the prior year. Inventory held for resale increased $1,847,000 during the nine months ending February 28, 1994 as compared to no increase last year. The Company accelerated the purchase of inventory to take advantage of vendor volume discounts. Cash used in investing activities in the first nine months of 1994 was $8,526,000 compared to cash provided by investing activities of $14,512,000 for the same period of the prior year. Last year the Company sold approximately $17,157,000 of its lease portfolio inventory. The leases sold last year represented a one-time cash inflow for the initial sale of existing sales-type leases. In addition, capital expenditures of $8,726,000 were made in the current period versus $2,650,000 in the same period last year, an increase of $6,076,000. Net cash used in financing activities for the nine month period was $5,090,000, a decrease of $26,212,000 compared to $31,302,000 for the same period of the prior year. This decrease was principally the result of payments of $24,500,000 made by the Company against its line of credit and note payable last year. During the first nine months of the current year the bank lines of credit were not utilized. Dividends of $4,116,000 and $3,993,000 were made in the nine- month periods ending February 28, 1994 and 1993, respectively. The Company has entered into a $15,000,000 committed working capital line-of-credit with two banks originally expiring April 14, 1994. This line has been extended to June 30, 1994. The Company expects to enter into another twelve month arrangement upon the expiration of this agreement. The Company believes funds generated from operations along with its committed working capital line of credit and the $27,237,000 cash on hand at February 28, 1994 will be adequate to meet normal business operating needs. In addition to the working capital line of credit the Company has available a $15,000,000 committed acquisition line of credit expiring June 30, 1994. Stockholders' Equity Stockholders' equity increased $5,051,000 from $101,261,000 at May 31, 1993 to $106,312,000 at February 28, 1994. ============================================================================== Part II OTHER INFORMATION ITEM 1 - PENDING LEGAL PROCEEDINGS __________________________________ See Note 3 to the Unaudited Condensed Consolidated Financial Statements. ITEM 4 - OTHER INFORMATION __________________________ The Company extended its $15,000,000 committed working capital line originally scheduled to expire on April 14, 1994. The line is now scheduled to expire on June 30, 1994. ============================================================================== 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, 15, 1994 BY: /s/ J.W. Braxton Jerry W. Braxton Chief Financial Officer