UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended February 28, 1998.
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-12392
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NATIONAL DATA CORPORATION
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 404-728-2000
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NONE
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(Former name, former address and former fiscal year, if
changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, Par Value $.125 33,835,360 shares
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Outstanding as of April 6, 1998
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1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
(In thousands, except per share data)
Three Months Ended February 28,
------------------------------------------
1998 1997
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Revenue $171,546 $136,783
- ---------------------------------------------------------------------------------------------------------
Operating Expenses:
Cost of service 83,986 67,447
Sales, general and administrative 59,659 51,024
Non-recurring charge 120,163 750
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263,808 119,221
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Operating income (loss) (92,262) 17,562
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Other income (expense):
Interest and other income 316 804
Interest and other expense (3,606) (2,803)
Minority interest (584) (348)
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(3,874) (2,347)
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Income (loss) before income taxes (96,136) 15,215
Provision for income taxes 176 5,490
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Net income (loss) $(96,312) $9,725
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Basic earnings (loss) per share $(2.89) $0.32
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Diluted earnings (loss) per share $(2.89) $0.30
===========================================
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
(In thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------
Nine Months Ended February 28,
------------------------------------------
1998 1997
------------------- -------------------
Revenue $463,775 $380,263
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Operating Expenses:
Cost of service 232,824 190,746
Sales, general and administrative 166,381 140,608
Non-recurring charge 120,163 9,503
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519,368 340,857
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Operating income (loss) (55,593) 39,406
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Other income (expense):
Interest and other income 1,256 2,258
Interest and other expense (9,675) (5,685)
Minority interest (1,892) (1,032)
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(10,311) (4,459)
-------------------------------------------
Income (loss) before income taxes (65,904) 34,947
Provision for income taxes 11,756 17,138
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $(77,660) $17,809
===========================================
Basic earnings (loss) per share $(2.45) $0.58
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Diluted earnings (loss) per share $(2.45) $0.55
===========================================
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION
(In thousands)
- --------------------------------------------------------------------------------
Nine Months Ended February 28,
------------------------------
1998 1997
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Cash flows from operating activities:
Net income (loss) $ (77,660) $ 17,809
Adjustments to reconcile net income to
cash provided by operating activities:
Non-recurring charges 110,340 6,754
Deferred income taxes (19,278) 909
Depreciation and amortization 17,450 18,677
Amortization of acquired intangibles and
goodwill 17,795 9,963
Minority interest in earnings 1,892 1,032
Provision for bad debts 4,074 (135)
Other, net 595 237
Changes in current assets and liabilities
which provided (used) cash, net of the
effects of acquisitions:
Accounts receivable, net (19,063) (11,825)
Merchant processing working capital (585) 4,930
Inventory 448 (3)
Prepaid expenses and other assets (5,686) (4,689)
Accounts payable and accrued liabilities (9,805) (230)
Income taxes payable 7,787 2,502
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Net cash provided by operating activities 28,304 45,931
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Cash flows from investing activities:
Capital expenditures (16,587) (14,554)
Business acquisitions, net of cash acquired (44,894) (159,550)
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Net cash used in investing activities (61,481) (174,104)
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Cash flows from financing activities:
Net borrowings (repayments) under lines of
credit 35,417 (6,361)
Net principal payments under capital lease
arrangements and other long-term debt (3,586) (13,507)
Net proceeds from the issuance of long-term
debt -- 139,682
Net proceeds from the issuance of stock from
stock plans 4,992 5,919
Purchases of outstanding common stock (1,111) --
Distributions to minority interests (4,325) (1,433)
Dividends paid (6,504) (7,120)
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Net cash provided by financing activities 24,883 117,180
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Decrease in cash and cash equivalents (8,294) (10,993)
Cash and cash equivalents, beginning of period 18,909 23,887
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Cash and cash equivalents, end of period $ 10,615 $ 12,894
========= =========
See Notes to Unaudited Condensed Financial Statements.
4
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION
(In thousands, except share data)
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February 28, May 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 10,615 $ 19,595
Accounts receivable 139,754 109,033
(less allowances of $8,461 and $4,903)
Deferred income taxes 9,884 2,553
Inventory 2,014 2,260
Prepaid expenses and other current assets 15,423 8,620
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Total current assets 177,690 142,061
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Property and equipment, net 68,411 58,960
Intangible assets, net 449,376 407,484
Deferred income taxes 19,663 7,715
Other 6,202 9,670
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Total Assets $721,342 $625,890
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 78,898 $ 67,843
Line of credit 68,000 34,298
Notes and earn-out payable 1,897 1,973
Income taxes payable 9,715 1,794
Obligations under capital leases 10,011 3,628
Deferred income 25,050 7,389
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Total current liabilities 193,571 116,925
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Long-term debt 157,577 155,962
Obligations under capital leases 12,435 4,963
Other long-term liabilities 4,701 3,653
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Total liabilities 368,284 281,503
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Minority interest in equity of subsidiaries 18,861 21,138
Commitments and contingencies
Shareholders' Equity:
Preferred stock, par value $1.00 per share,
1,000,000 shares authorized; none issued - -
Common stock, par value $.125 per share,
100,000,000 shares authorized;
33,750,989 and 30,802,452 shares issued 3,702 3,331
and outstanding, respectively.
Capital in excess of par value 338,648 241,436
Retained earnings (deficit) (4,886) 80,127
Cumulative translation adjustment (1,783) (727)
------------ --------
335,681 324,167
Less: Deferred compensation (1,484) (918)
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Total Shareholders' Equity 334,197 323,249
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Total Liabilities and Shareholders' Equity $721,342 $625,890
============ ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
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 1997 consolidated financial
statements to conform to the fiscal 1998 presentation.
All prior period amounts have been restated to reflect the December 1997 merger
with Physician Support Systems, Inc. ("PHSS") accounted for as a pooling-of-
interest. Prior periods have also been restated to reflect the adjustments
necessary to conform one of the Company's subsidiaries' revenue recognition
method for contingent billings related to certain revenue streams to the method
utilized by PHSS for certain of its similar clients, where revenue is recognized
upon collection of the clients' accounts receivable. The conformity adjustment
is reflected as a reduction of unbilled receivables and revenues previously
recognized.
It is suggested that these financial statements are read in conjunction with the
financial statements and notes thereto included in the Company's latest annual
report on Form 10-K for the fiscal year ended May 31, 1997.
In the opinion of management, the information furnished reflects all adjustments
necessary to present fairly the financial position, results of operations, and
cash flows for such interim periods.
NOTE 2 - EARNINGS PER SHARE:
Effective with the current quarter and retroactive for all prior periods, the
Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings per Share".
Basic earnings per share is computed by dividing reported earnings available to
common stockholders by weighted average shares outstanding during the period.
Diluted earnings per share is computed by dividing reported earnings available
to common stockholders by weighted average shares outstanding during the period
and the impact of securities that, if exercised, would have a dilutive effect on
earnings per share. All options with an exercise price less than the higher of
(1) the ending market share price for the period or (2) the average market share
price for the period generally are assumed to have a dilutive effect on earnings
per share. The convertible notes issued in fiscal 1997 have an antidilutive
effect on diluted earnings per share; accordingly, the notes are excluded from
earnings per share calculations.
6
The basic and diluted number of shares outstanding are as follows (In
thousands):
Three Months Ended February 28, Nine Months Ended February 28,
----------------------------------- ---------------------------------
1998 1997 1998 1997
------------------ --------------- ----------------- ------------
Basic 33,273 30,624 31,678 30,462
Stock Options -- 1,698 -- 1,773
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Diluted 33,273 32,322 31,678 32,235
=======================================================================
Net income available to common stockholders is the same for basic and diluted
earnings per share, as the dilutive nature of the stock options, if exercised,
do not have an impact on net income. Basic and diluted earnings per share for
the three and nine months ended February 28, 1998 are the same, as the effect of
any potentially dilutive securities is antidilutive due to the loss generated by
the non-recurring charges.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow disclosures, including non-cash investing and financing
activities, for the nine months ended February 28, 1998 and 1997 are as follows
(In thousands):
1998 1997
----------- ------------
Income taxes paid $23,156 $12,376
Interest paid 7,883 3,072
Promissory notes entered into on acquisition -- 6,000
Property and equipment capital leases 5,185 931
7
NOTE 4 -- NON-RECURRING CHARGES:
In connection with the December 1997 mergers with PHSS, Source Informatics Inc.
("Source") and a subsidiary of Pharmaceutical Marketing Services Inc. ("PMSI"),
the Company incurred a non-recurring, pre-tax charge of $120.2 million.
Included in this charge was $67.0 million for in-process research and
development, $32.4 million for asset impairment, and $20.8 million for merger
related expenses. The in-process research and development charge, asset
impairment and portions of the merger related expenses were considered non-cash
items, totaling $110.3 million. The remainder of the merger related expenses,
considered cash items, were either paid at the time of the merger or accrued at
the time the expenses were incurred.
As a result of the Source and PMSI acquisition, the Company obtained a third
party valuation of the research and development activities of the acquired
companies. The valuation determined that $67.0 million of the acquired
companies' projects represented in-process research and development that was not
capitalizable under generally accepted accounting principles.
As a result of the merger with PHSS, the Company performed an evaluation to
determine whether the merger impacted future undiscounted cash flows in certain
of the Company's Health Care Information Service businesses such that the future
undiscounted cash flows would be less than the aggregate carrying amount of the
related assets. The evaluation was performed in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to Be Disposed Of." Assets impaired included
intangible assets and capitalized software.
The merger related expenses consist of transaction costs of $7.0 million,
anticipated severance benefits and other related costs of $7.3 million arising
from the Company's plans to realign redundant operations and activities and
restructuring charges of $6.5 million. Merger transaction costs primarily
consist of investment banking and professional fees. Restructuring charges
include the write-off of PHSS prepaid expenses from which the Company will not
realize future economic value and a provision for additional PHSS integration
costs.
During the nine months ended February 28, 1997, PHSS incurred charges of $9.5
million, before the merger with the Company. These charges primarily relate to
transaction costs associated with three acquired entities and impairment losses
on certain identifiable intangible assets and goodwill associated with its
Spring Anesthesia Group, Inc. subsidiary.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table is a summary of the Company's third quarter fiscal 1998 and
1997 results of operations before and after the effects of the non-recurring
charges and the merger with Physician Support Systems, Inc. ("PHSS"), which was
accounted for as a pooling-of-interests (In millions, except per share data):
Third Quarter Fiscal 1998
-----------------------------------------------------------------
Consolidated Non-Recurring PHSS NDC Operations
- ------------------------------------------------------------------------------------------------
Revenue $ 171.5 $ -- $ 27.7 $143.8
Operating Income (Loss) (92.3) (120.2) 2.0 25.9
Net Income (Loss) (96.3) (111.2) 1.1 13.8
Basic EPS * $ (2.89) $ (3.34) $ (0.02) $ 0.47
Diluted EPS * $ (2.89) $ (3.32) $ (0.02) $ 0.45
Third Quarter Fiscal 1997
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Consolidated Non-Recurring PHSS NDC Operations
- ------------------------------------------------------------------------------------------------
Revenue $136.8 $ -- $ 25.4 $111.4
Operating Income (Loss) 17.6 (0.7) 1.3 17.0
Net Income (Loss) 9.7 (0.4) 0.4 9.7
Basic EPS $ 0.32 $ (0.01) $ (0.04) $ 0.37
Diluted EPS $ 0.30 $ (0.01) $ (0.04) $ 0.35
The following table is a summary of the Company's nine-month periods ended
February 28, 1998 and 1997 results of operations before and after the effects of
the non-recurring charges and the merger with PHSS, (In millions, except per
share data):
Nine Months Ended February 28, 1998
-----------------------------------------------------------------
Consolidated Non-Recurring PHSS NDC Operations
- ------------------------------------------------------------------------------------------------
Revenue $ 463.8 $ -- $ 80.8 $383.0
Operating Income (Loss) (55.6) (120.2) (0.9) 65.5
Net Income (Loss) (77.7) (111.2) (2.1) 35.6
Basic EPS * $ (2.45) $ (3.51) $ (0.24) $ 1.30
Diluted EPS * $ (2.45) $ (3.46) $ (0.22) $ 1.23
Nine Months Ended February 28, 1997
-----------------------------------------------------------------
Consolidated Non-Recurring PHSS NDC Operations
- ------------------------------------------------------------------------------------------------
Revenue $380.3 $ -- $ 66.3 $314.0
Operating Income (Loss) 39.4 (9.5) 3.5 45.4
Net Income (Loss) 17.8 (10.4) 1.5 26.7
Basic EPS $ 0.58 $ (0.34) $ (0.10) $ 1.02
Diluted EPS $ 0.55 $ (0.32) $ (0.08) $ 0.95
* - Consolidated Basic and Diluted Earnings (Loss) Per Share ("EPS") are the
same for the three and nine months ended February 28, 1998, as the effect of any
potentially dilutive securities is antidilutive due to the Non-Recurring
Charges. The Diluted EPS for NDC Operations and PHSS include the effect of an
incremental 1,476,000 shares due to stock options that would have a dilutive
effect, if exercised.
9
REVENUE
(In millions) Quarter Ending February 28,
---------------------------------
1998 1997 Increase
----------------- ----------------- --------
Revenue:
Health Information Services $100.0 58% $ 72.1 53% 39%
Integrated Payment Systems 39.7 23% 32.6 24% 22%
Global Payment Systems 38.6 23% 38.2 28% 1%
Intercompany Revenue (6.8) (4%) (6.1) (5%) 11%
----------------- ----------------- -----
Total Revenue $171.5 100% $136.8 100% 25%
================= ================= =====
Total revenue after the effects of the pooling transaction with PHSS, for
the third quarter of fiscal 1998 was $171.5 million, an increase of $34.7
million (25%) from the same period in fiscal 1997. The increase was the result
of increased revenue in Health Information Services, $27.9 million (39%),
Integrated Payment Systems, $7.1 million (22%) and Global Payment Systems, $0.4
million (1%).
(In millions) Nine Months Ending February 28,
------------------------------------
1998 1997 Increase
----------------- ----------------- ----------
Revenue:
Health Information Services $247.8 53% $191.4 50% 29%
Integrated Payment Systems 117.2 25% 96.2 25% 22%
Global Payment Systems 118.9 26% 110.0 29% 8%
Intercompany Revenue (20.1) (4%) (17.3) (4%) 16%
----------------- ----------------- ----------
Total Revenue $463.8 100% $380.3 100% 22%
Total revenue after the effects of the pooling transaction with PHSS, for
the nine month period ended February 28, 1998 was $463.8 million, an increase of
$83.5 million (22%) from the same period in fiscal 1997. The increase was the
result of increased revenue in Health Information Services, $56.4 million (29%);
Integrated Payment Systems, $21.0 million (22%); and Global Payment Systems,
$8.9 million (8%).
Health Information Services. Revenue growth resulted from internally
----------------------------
developed products and services and acquisitions. Third quarter revenue totaled
$100.0 million versus $72.1 million last year. The third quarter revenue growth
is impacted by the Company's acquisition of two related health care database
information management businesses based in Phoenix, Arizona. In this
transaction, the Company acquired the stock of Source Informatics Inc.
("Source") and the stock of a subsidiary of Pharmaceutical Marketing Services
Inc. ("PMSI").
Year-to-date revenue was $247.8 million compared to $191.4 million in the
same period for the prior year. For the nine month period ended February 28,
1998, the full year impact of the fiscal 1997 acquisitions of Equifax Healthcare
EDI Services, Inc. and Health Communications Services, Inc. are reflected in the
current year results.
10
Revenues during the third quarter excluding PHSS were $72.2 million versus
$46.7 million during the same quarter last year, a 55% increase. For the nine
month period ended February 28, 1998, the comparable revenue results were $167.0
million and $125.1 million, respectively, representing a 33% growth rate.
Integrated Payment Systems. Third quarter and year-to-date revenue reflect
---------------------------
the impact of growth of the industry, programs directed at new vertical industry
offerings and new distribution programs in addition to growth in the basic
market demand. Revenue totaled $39.7 million in the quarter versus $32.6
million last year, and $117.2 million for the nine month period ended February
28, 1998 versus $96.2 million in the comparable period last year.
Global Payment Systems. The period revenue includes historic network
-----------------------
services. New back office services are in the development and sales cycle and
did not have a material impact on currently reported results. Third quarter
revenue totaled $38.6 million versus $38.2 million last year. For the nine
month period ended February 28, 1998, revenue was $118.9 million versus $110.0
million for the prior period. The year-to-date increase reflects the impact of
the purchase of a portion of Electronic Data Systems Corporation's ("EDS") card
processing business and a joint marketing and service alliance with EDS closed
in the third quarter fiscal 1997.
COSTS AND EXPENSES
Total cost of service as a percentage of revenue remained constant at 49%
for both third quarter periods and at 50% for the nine month periods ended
February 28, 1998 and 1997. Cost of service increased $16.5 million (25%) in
the third quarter of fiscal 1998 and $42.1 million (22%) in the nine month
period ended February 28, 1998, when compared to the same periods last year.
These increases were primarily a result of increased operating costs associated
with the acquisitions and revenue growth.
Excluding the impact of the pooling with PHSS, cost of service as a
percentage of revenue was 47% for both third quarter periods and 48% for the
nine month periods ended February 28, 1998 and 1997.
As a percentage of revenue, sales, general and administrative ("SG&A")
expense decreased to 35% for the third quarter and 36% for the nine month period
ended February 28, 1998 from 37% for both periods in fiscal 1997. SG&A expenses
decreased as a percentage of revenue since revenues grew at a faster rate than
these expenses, including synergies realized from the integration of
acquisitions. SG&A expenses increased $8.6 million (17%) for the third quarter
of fiscal 1998 and $25.8 (18%) for the nine month period ended February 28, 1998
as compared to the same periods of fiscal 1997. These increases were primarily
due to expenses associated with investments made in product development and
distribution channel expansion for future revenue growth.
Excluding the impact of the pooling with PHSS, as a percentage of revenue,
SG&A expense decreased to 35% for the third quarter and for the nine month
period ended February 28, 1998 from 38% in the respective periods in fiscal
1997.
11
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding non-recurring charges, were $40.3 million for the third quarter of
fiscal 1998 and $28.9 million for the same quarter of fiscal 1997, a 39% gain.
As a percentage of revenue, EBITDA was 23% in the third quarter of fiscal 1998
versus 21% for the same period in fiscal 1997. EBITDA, excluding non-recurring
charges, was $100.8 million for the nine month period ended February 28, 1998
and $77.5 million for the same period of fiscal 1997, a 30% gain.
Excluding the impact of the pooling with PHSS and non-recurring charges,
EBITDA was $36.9 million for the third quarter of fiscal 1998 and $26.2 million
for the same quarter of fiscal 1997, a 41% gain. As a percentage of revenue,
excluding PHSS, EBITDA was 25% in the third quarter of fiscal 1998 versus 23%
for the same period in fiscal 1997. Excluding PHSS and non-recurring charges,
EBITDA was $96.9 million for the nine month period ended February 28, 1998 and
$69.9 million for the same period of fiscal 1997, a 39% gain.
The Company's EBITDA formula and results as a percentage of revenue may not
be comparable to similarly titled measures reported by other companies.
However, management believes this statistic is a relevant form of measurement
and provides a comparable operating income measure, excluding the impact of the
amortization of acquired intangibles, potential timing differences associated
with capital expenditures and the related depreciation charges and non-recurring
charges.
OPERATING INCOME
In the third quarter of fiscal 1998, an operating loss of $92.3 million was
realized versus operating income of $17.6 million in the prior year. In the
nine month period ended February 28, 1998, an operating loss of $55.6 million
was realized versus operating income of $39.4 million in the prior year
comparable period. The loss was driven by a non-recurring charge of $120.2
million incurred in the third quarter of fiscal 1998, discussed further below.
In the third quarter of fiscal 1998, operating income, excluding non-
recurring charges, increased 52%, from $18.3 million to $27.9 million. As a
percentage of revenue, operating income increased to 16.3% in the third quarter
of fiscal 1998 from 13.4% in the same quarter last year.
In the nine month period ended February 28, 1998, operating income,
excluding non-recurring charges, increased 32%, from $48.9 million to $64.6
million. As a percentage of revenue, operating income increased to 13.9% in the
year to date period of fiscal 1998 from 12.9% last year.
In the third quarter of fiscal 1998, excluding the impact of the pooling
with PHSS, operating income, excluding non-recurring charges, increased 52%,
from $17.0 million to $25.9 million. As a percentage of revenue, operating
income increased to 18.0% in the third quarter of fiscal 1998 from 15.3% in the
same quarter last year.
In the nine month period ended February 28, 1998, excluding PHSS, operating
income, excluding non-recurring charges, increased 44%, from $45.4 million to
$65.5 million. As a percentage of revenue, operating income increased to 17.1%
in the year to date period of fiscal 1998 from 14.5% in the same period last
year.
12
NON-RECURRING CHARGES
As explained further in Note 4 to the Unaudited Condensed Consolidated
Financial Statements, the Company incurred a pre-tax, non-recurring charge of
$120.2 million in the third quarter of fiscal 1998. Included in this charge was
$67.0 million for in-process research and development, $32.4 million for asset
impairment, and $20.8 million for merger related expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations provides the Company with a significant source of
liquidity to meet its needs. At February 28, 1998, the Company and its
subsidiaries had cash and cash equivalents totaling $10.6 million. Cash
provided by operations, before changes in working capital, was $55.2 million for
the nine month periods ended February 28, 1998 and 1997. Excluding the impact
of the non-recurring charges, cash provided by operations, before changes in
working capital, was $75.4 million versus $58.9 million for the same period in
the prior year. This difference is primarily driven by the increase in
depreciation and amortization resulting from acquisition activities and higher
net income for the nine month period ended February 28, 1998. Net cash provided
by operating activities decreased 38% to $28.3 million for the nine month period
ended February 28, 1998 from $45.9 million in the same period in fiscal 1997.
In the nine month period ended February 28, 1998 cash was required to fund
net changes in working capital of $26.9 million, compared to $9.3 million for
the same period of fiscal 1997. The change in working capital resulted
primarily from changes in net merchant processing funds, increase in accounts
receivable due to acquisitions, and the timing and payments on accounts payable
and accrued liabilities. The changes in net merchant processing working capital
reflect normal fluctuations in the timing of credit card sales processed. The
changes due to accounts payable and accrued liabilities primarily relate to the
timing of payroll and related liabilities, and an increase in deferred revenue
resulting from acquisitions.
For the nine month period ended February 28, 1998, cash used in investing
activities decreased to $61.5 million, compared to $174.1 million in the same
period of fiscal 1997. During the nine month period ended February 28, 1998,
capital expenditures increased 14% as the Company continues to invest in capital
programs related to growth in the business and acceleration of certain strategic
initiatives. Also during the nine month period ended February 28, 1998 the
Company completed the acquisitions of Source Informatics Inc., a subsidiary of
Pharmaceutical Marketing Services Inc. and two United Kingdom-based pharmacy
systems companies. These transactions were accounted for as purchase
acquisitions and were funded by $44.9 million in cash and the issuance of $93.0
million in common stock. In addition, common stock valued at the time of
closing of approximately $139.8 million was issued in exchange for the stock
outstanding at PHSS. The PHSS transaction was accounted for as a pooling-of-
interests. During the nine month period ended February 28, 1997, the Company
expended $159.6 million on acquisition activities, primarily for the
acquisitions of Equifax Healthcare EDI Services, Inc., Health Communication
Services, Inc. and a portion of Electronic Data System Corporation's credit card
processing business. The Company has financed its acquisition program through
cash flows from operations, equity, incurring debt, and the issuance of Company
common stock.
Net cash provided by financing activities was $24.9 million for the nine
month period ended February 28, 1998 and $117.2 million for the same period in
fiscal 1997. The Company borrowed $68.0 million to finance the third quarter
acquisitions, merger costs and to eliminate PHSS' outstanding line of credit
balance ($32.6 million) at the time of the merger. During fiscal 1997, the
Company repaid net balances on its line of credit and long-term debt, and
completed an issuance of long-term convertible public debt, providing net
proceeds of $139.7 million.
13
The Company has a committed, unsecured $125.0 million revolving line of
credit which expires in December 2002. As of February 28, 1998, there was $68.0
million outstanding under the facility. 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, equity or otherwise, as appropriate.
YEAR 2000 COMPLIANCE
The Company is continuing a review of its business systems, including its
computer systems, to attempt to identify ways in which these systems could be
affected by problems incorrectly processing date information on and after
January 1, 2000. The Company has identified certain modifications that will be
required to its currently installed computer systems, software products or other
business systems, or those of the Company's suppliers or customers, which will
allow those systems to correctly accept input of, store, manipulate and output
dates in the calendar year 2000 or thereafter without error or interruption. In
addition, the Company is requesting assurances from all software vendors from
which it has purchased or from which it may purchase software that the software
sold to the Company will correctly process all date information at all times and
the Company is querying its customers and suppliers as to their progress in
identifying and addressing problems that their computer systems will face in
correctly processing date information as the year 2000 approaches and is
reached. However, there can be no assurance that the Company will identify all
date-handling problems in its business systems or those of its customers and
suppliers in advance of their occurrence or that the Company will be able to
successfully remedy problems that are discovered. The Company, however,
continues to bear some risk related to the year 2000 issue and also could be
adversely affected if other entities (e.g., vendors or customers) not affiliated
with the Company do not appropriately address their own year 2000 compliance
issues.
FORWARD-LOOKING INFORMATION
When used in this report, press releases and elsewhere by management or the
Company from time to time, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify forward-looking statements
concerning the Company's operations, economic performance and financial
condition, including in particular, the likelihood of the Company's success in
developing and expanding its business. These statements are based on a number
of assumptions and estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. A
variety of factors could cause actual results to differ materially from those
anticipated in the Company's forward-looking statements, some of which include
competition in the market for the Company's services, continued expansion of the
Company's processing and payment systems markets, successfully completing and
integrating acquisitions in existing and new markets and other risk factors that
are discussed from time to time in the Company's Securities and Exchange
Commission ("SEC") reports and other filings. 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 obligations to publicly release the
results of any revisions to these 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.
14
PART II
ITEM 1 - PENDING LEGAL PROCEEDINGS
- ----------------------------------
The Company is party to a number of claims and lawsuits incidental to its
business. In the opinion of management, the ultimate outcome of such matters,
in the aggregate, will not have a material adverse impact on the Company's
financial position, liquidity or results of operations.
ITEM 2 - CHANGES IN SECURITITES
- --------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- --------------------------
The Company is incorporating within this filing, Quarterly Information
restated for the impact of the pooling-of-interests with Physician Support
Systems, Inc. ("PHSS") and the adjustments necessary to conform C.I.S.
Technology, Inc.'s revenue recognition for contingent billings, as discussed
further in Note 1 to the Unaudited Condensed Consolidated Financial Statements.
The following unaudited quarterly information is presented for information
purposes for fiscal year 1997 and nine month period ended February 28, 1998:
(1) Unaudited Condensed Consolidated Statements of Income (Exhibit 99.1)
(2) Unaudited Condensed Consolidated Statements of Income, Excluding Non-
Recurring Charges (Exhibit 99.2)
15
ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Unaudited Condensed Consolidated Statements of Income
Exhibit 99.2 - Unaudited Condensed Consolidated Statements of Income,
Excluding Non-Recurring Charges
(b) Reports Filed on Form 8-K:
National Data Corporation's Current Report on Form 8-K dated December 22,
1997, was filed on December 22, 1997, relating to the Company's Board of
Directors authorizing a plan to repurchase up to 200,000 shares of the
Company's Common Stock.
National Data Corporation's Current Report on Form 8-K dated December 15,
1997, was filed on December 30, 1997, relating to the Company's acquisition
of Source Informatics, Inc. and PMSI Database Holdings, Inc., the Over-The-
Counter Physician Survey business unit of Pharmaceutical Marketing
Services, Inc. ("PMSI"). The financial statements and pro forma financial
information were incorporated by reference to other documents filed with
the SEC.
National Data Corporation's Current Report on Form 8-K dated December 19,
1997, was filed on January 5, 1998, and amended on February 6, 1998,
relating to the Company's merger with Physician Support Systems, Inc.
(NASDAQ: PHSS), using the pooling-of-interests method of accounting. The
financial statements and pro forma financial information were incorporated
by reference to other documents filed with the SEC.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Data Corporation
-------------------------
(Registrant)
Date: April 14, 1998 By: /s/ Robert L. Walker
--------------------- ------------------------------
Robert L. Walker
Chief Financial Officer
(Principal Financial Officer)
Date: April 14, 1998 By: /s/ David H. Shenk
--------------------- ------------------------------
David H. Shenk
Corporate Controller
(Chief Accounting Officer)
17