-----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, BnIGgqio0Ih33U1aBzhXNFO18C8VBcOpfsOJ5fp2/Vnw6eC9Z05MuoUPooBPV7q4 79GoH4p+ApbKcAwCQi0/Dg== 0000931763-99-000086.txt : 19990115 0000931763-99-000086.hdr.sgml : 19990115 ACCESSION NUMBER: 0000931763-99-000086 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990114 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: 99506537 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 NATIONAL DATA CORPORATION 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 November 30, 1998. ------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 001-12392 --------- NATIONAL DATA CORPORATION ------------------------- (Exact name of registrant as specified in charter) DELAWARE 58-0977458 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) National Data Plaza, Atlanta, Georgia 30329-2010 -------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 404-728-2000 ------------ NONE ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Stock, Par Value $.125 33,670,616 shares ------------------------------------------------ Outstanding as of January 5, 1999 --------------------------------- UNAUDITED CONSOLIDATED STATEMENTS OF INCOME NATIONAL DATA CORPORATION (In thousands, except per share data) - ------------------------------------------------------------------------------ Three Months Ended November 30, ------------------------------- 1998 1997 -------------------------------- Revenue $191,522 $144,325 - ------------------------------------------------------------------------------ Operating Expenses: Cost of service 98,852 73,785 Sales, general and administrative 62,970 55,670 -------------------------------- 161,822 129,455 -------------------------------- Operating income 29,700 14,870 - ------------------------------------------------------------------------------ Other income (expense): Interest and other income 844 456 Interest and other expense (3,929) (3,040) Minority interest (817) (607) -------------------------------- (3,902) (3,191) -------------------------------- Income before income taxes 25,798 11,679 Provision for income taxes 10,061 4,617 - ------------------------------------------------------------------------------ Net income $ 15,737 $ 7,062 ================================ Basic earnings per share $ 0.47 $ 0.23 ================================ Diluted earnings per share $ 0.45 $ 0.22 ================================ See Notes to Unaudited Consolidated Financial Statements. 2 UNAUDITED CONSOLIDATED STATEMENTS OF INCOME NATIONAL DATA CORPORATION (In thousands, except per share data) - ------------------------------------------------------------------------- Six Months Ended November 30, ----------------------------- 1998 1997 ----------------------------- Revenue $ 383,204 $292,229 - ------------------------------------------------------------------------- Operating Expenses: Cost of service 199,227 148,838 Sales, general and administrative 123,371 106,722 ---------------------------- 322,598 255,560 ---------------------------- Operating income 60,606 36,669 - ------------------------------------------------------------------------- Other income (expense): Interest and other income 1,418 940 Interest and other expense (7,655) (6,069) Minority interest (1,812) (1,308) ---------------------------- (8,049) (6,437) ---------------------------- Income before income taxes 52,557 30,232 Provision for income taxes 20,497 11,580 - ------------------------------------------------------------------------- Net income $ 32,060 $ 18,652 ============================ Basic earnings per share $ 0.95 $ 0.61 ============================ Diluted earnings per share $ 0.92 $ 0.58 ============================ See Notes to Unaudited Consolidated Financial Statements. 3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL DATA CORPORATION (In thousands) - ------------------------------------------------------------------------------------------------------ Six Months Ended November 30, ----------------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 32,060 $ 18,652 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 13,869 13,383 Amortization of acquired intangibles and goodwill 13,275 9,469 Minority interest in earnings 1,812 1,308 Provision for bad debts 2,644 559 Other, net 1,191 534 Changes in current assets and liabilities which provided (used) cash, net of the effects of acquisitions: Accounts receivable, net (7,813) (6,102) Merchant processing working capital (5,904) 3,295 Inventory (1,143) 390 Prepaid expenses and other assets (2,630) 1,325 Accounts payable and accrued liabilities 5,922 (12,716) Income taxes payable and deferred income taxes (3,600) (4,354) ----------------------- Net cash provided by operating activities 49,683 25,743 ----------------------- Cash flows from investing activities: Capital expenditures (18,732) (11,687) Decrease in investments 1,126 - Business acquisitions, net of cash acquired - (8,424) ----------------------- Net cash used in investing activities (17,606) (20,111) ----------------------- Cash flows from financing activities: Net repayments under lines of credit (8,000) - Net (payments) borrowings on notes payable (1,424) 4,111 Net principal payments under capital lease arrangements (6,191) (1,869) Net proceeds from the issuance of stock from stock plans - 3,331 Net treasury stock purchased (5,757) - Distributions to minority interests (1,053) (3,134) Dividends paid (5,045) (3,982) ----------------------- Net cash used in financing activities (27,470) (1,543) ----------------------- Increase in cash and cash equivalents 4,607 4,089 Cash and cash equivalents, beginning of period 3,241 18,909 ----------------------- Cash and cash equivalents, end of period $ 7,848 $ 22,998 ======================= See Notes to Unaudited Consolidated Financial Statements.
4
CONSOLIDATED BALANCE SHEETS NATIONAL DATA CORPORATION (In thousands, except share and per share data) - ------------------------------------------------------------------------------------------------------------------ November 30, May 31, 1998 1998 ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 7,848 $ 3,241 Billed accounts receivable 143,047 135,223 Unbilled accounts receivable 19,355 18,835 Allowance for doubtful accounts (10,812) (7,394) ------------- ------------- Accounts receivable, net 151,590 146,664 Income tax receivable 144 635 Inventory 6,393 5,253 Deferred income taxes 1,281 - Prepaid expenses and other current assets 21,890 16,333 ------------- ------------- Total current assets 189,146 172,126 ------------- ------------- Property and equipment, net 92,385 74,234 Intangible assets, net 431,620 458,223 Deferred income taxes 36,601 20,145 Other 6,776 6,487 ------------- ------------- Total Assets $ 756,528 $ 731,215 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 67,000 $ 75,000 Current portion of long-term debt 6,239 1,621 Obligations under capital leases 12,729 11,053 Accounts payable and accrued liabilities 76,128 73,115 Deferred income taxes - 92 Deferred income 25,106 25,216 ------------- ------------- Total current liabilities 187,202 186,097 ------------- ------------- Long-term debt 149,497 155,477 Obligations under capital leases 18,034 12,390 Other long-term liabilities 13,131 10,313 ------------- ------------- Total liabilities 367,864 364,277 ------------- ------------- Minority interest in equity of subsidiaries 19,762 19,003 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, 33,888,849 and 33,791,534 shares issued, respectively. 4,236 4,224 Capital in excess of par value 342,265 344,019 Treasury stock, at cost, 271,581 and 159,200 shares, respectively (8,358) (5,980) Retained earnings 36,453 9,537 Cumulative translation adjustment (2,963) (2,011) Deferred compensation (2,731) (1,854) ------------- ------------- Total Shareholders' Equity 368,902 347,935 ------------- ------------- Total Liabilities and Shareholders' Equity $ 756,528 $ 731,215 ============= ============= See Notes to Unaudited Consolidated Financial Statements.
5 NOTES TO UNAUDITED CONSOLIDATED ------------------------------- FINANCIAL STATEMENTS --------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements are read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K for the fiscal year ended May 31, 1998. In the opinion of management, the information furnished reflects all adjustments necessary to present fairly the financial position, results of operations, and cash flows for such interim periods. NOTE 2 - EARNINGS PER SHARE: Basic earnings per share is computed by dividing reported earnings available to common shareholders by weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing reported earnings available to common shareholders by weighted average shares outstanding during the period and the impact of securities that, if exercised, would have a dilutive effect on earnings per share using the treasury stock method. 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 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. The basic and diluted number of shares outstanding are as follows (In thousands):
Three Months Ended Six Months Ended November 30, November 30, --------------------------------------------------------------- 1998 1997 1998 1997 -------------- -------------- -------------- --------------- Basic 33,681 30,937 33,702 30,894 Stock Options 1,127 1,506 1,221 1,585 --------------------------------------------------------------- Diluted 34,808 32,443 34,923 32,479 ===============================================================
6 NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash flow disclosures, including non-cash investing and financing activities, for the six months ended November 30, 1998 and 1997 are as follows (In thousands):
1998 1997 ----------- ---------- Income taxes paid, net of refunds $21,090 $14,760 Interest paid 7,217 5,489 Property and equipment capital leases 13,511 1,455
NOTE 4 - COMPREHENSIVE INCOME: The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of "comprehensive income" and its components. Comprehensive income for the Company consists of net income and foreign currency translation adjustments. Total comprehensive income (in thousands of dollars) was $15,769 and $7,094 for the three month periods ended November 30, 1998 and 1997, respectively. Total comprehensive income (in thousands of dollars) was $32,165 and $18,660 for the six month periods ended November 30, 1998 and 1997, respectively. NOTE 5 - SUBSEQUENT EVENTS: The Company acquired substantially all of the assets of John Richardson Computers ("JRC") on December 31, 1998 from its parent company Taylor Nelson Sofres plc. JRC, based in Preston, England, is a leading provider of systems for pharmacies throughout the United Kingdom. This acquisition strengthens the Company's presence in the United Kingdom Health Information Services market. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUE (In millions)
Second Quarter Ended November 30, ------------------------------------------------------------------------ 1998 1997 Increase ------------------------- ------------------------- ------------ Revenue: Health Information Services $112.4 59% $ 72.5 50% 55% Electronic Commerce: Integrated Payment Systems 46.1 24% 38.7 27% 19% Global Payment Systems 40.8 21% 39.8 28% 3% Intercompany Revenue (7.8) (4%) (6.7) (5%) 16% ------------------------------------------------------------------------- 79.1 41% 71.8 50% 10% ------------------------------------------------------------------------- Total Revenue $191.5 100% $144.3 100% 33% =========================================================================
Total revenue for the second quarter of fiscal 1999 was $191.5 million, an increase of $47.2 million (33%) from the same period in fiscal 1998. The increase resulted from increased revenue in Health Information Services, $39.9 million (55%); and in the Electronic Commerce business, specifically, Integrated Payment Systems, $7.4 million (19%), and Global Payment Systems, $1.0 million (3%). (In millions)
Six Months Ended November 30, ------------------------------------------------------------------------ 1998 1997 Increase ------------------------ ------------------------- ------------ Revenue: Health Information Services $221.8 58% $147.8 51% 50% Electronic Commerce: Integrated Payment Systems 94.5 25% 77.5 27% 22% Global Payment Systems 82.3 21% 80.2 27% 3% Intercompany Revenue (15.4) (4%) (13.3) (5%) 16% ------------------------------------------------------------------------- 161.4 42% 144.4 49% 12% ------------------------------------------------------------------------- Total Revenue $383.2 100% $292.2 100% 31% =========================================================================
Total revenue for the first half of fiscal 1999 was $383.2 million, an increase of $91.0 million (31%) from the same period in fiscal 1998. The increase resulted from increased revenue in Health Information Services, $74.0 million (50%); and in the Electronic Commerce business, specifically, Integrated Payment Systems, $17.0 million (22%), and Global Payment Systems, $2.1 million (3%). 8 Health Information Services. Health Information Services revenue growth in ---------------------------- the second quarter and first half of fiscal 1999 was a result of increases from internally developed products and services as well as the impact of two third quarter fiscal 1998 acquisitions, Source Informatics Inc. ("Source") and a subsidiary of Pharmaceutical Marketing Services Inc. ("PMSI"). Electronic Commerce. Electronic Commerce revenue growth in the second -------------------- quarter and first half of fiscal 1999 reflects the impact of growth of the industry, programs directed at new vertical industry offerings and new distribution channels, in addition to growth in basic market demand. This growth was reflected in an increase in the volume of merchant sales processed, due to a larger customer base and higher consumer credit card spending. In addition, the fourth quarter fiscal 1998 acquisition of CheckRite International, Inc. and Global Payment Systems' new back office services contributed to the revenue growth in the fiscal 1999 results. COSTS AND EXPENSES Cost of service increased $25.1 million (34%) in the second quarter and $50.4 million (34%) in the first half of fiscal 1999 from the same periods in fiscal 1998. The increase was primarily a result of increased operating costs associated with revenue growth and higher cost of service in companies acquired in fiscal 1998, primarily Physician Support Systems, Inc. ("PHSS") to support current and expected revenue growth in the physician management services area. Total cost of service, as a percentage of revenue, increased from 51%, for both the second quarter and first half of fiscal 1998, to 52% for the same periods of fiscal 1999. The Company continues to make investments to leverage its computer operations, telecommunications infrastructure, and investments in new market opportunities. Sales, general and administrative expenses ("SG&A") increased $7.3 million (13%) in the second quarter and $16.6 million (16%) in the first half of fiscal 1999 from the same periods in fiscal 1998. This increase was primarily due to expenses associated with continuing investments in product development, Year 2000 compliance initiatives, distribution channel expansion and development of the Health Information Services branding program for continued revenue growth. However, as a percentage of revenue, these expenses decreased to 33% from 39% for the second quarter of fiscal 1999 from the same period in fiscal 1998. As a percentage of revenue, these expenses decreased to 32% from 37% for the first half of fiscal 1999 from the same period in fiscal 1998. SG&A expenses continue to decrease as a percentage of revenue since revenues are growing at a faster rate than these expenses. The decrease as a percentage of revenue also reflects synergies realized from the integration of acquisitions. 9 OPERATING INCOME Operating income increased to $29.7 million from $14.9 million (100%) in the second quarter of fiscal 1999 from the same period in fiscal 1998. As a percentage of revenue, the Company's operating income margin increased 50% to 15.5% from 10.3% in the second quarter of fiscal 1999 from the same period in fiscal 1998. Operating income increased to $60.6 million from $36.7 million (65%) in the first half of fiscal 1999 from the same period in fiscal 1998. As a percentage of revenue, the Company's operating income margin increased 26% to 15.8% from 12.5% in the first half of fiscal 1999 from the same period in fiscal 1998. These improvements reflect improved margins in operations and profitability through execution of strategies to reposition the base business and investments in new market opportunities. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION Earnings before interest, taxes, depreciation and amortization ("EBITDA") was $43.8 million for the second quarter of fiscal 1999 and $26.1 million for the same period in fiscal 1998. As a percentage of revenue, EBITDA was 23% for the second quarter of fiscal 1999 and 18% for the same period in fiscal 1998. EBITDA was $87.8 million for the first half of fiscal 1999 and $59.5 million for the same period in fiscal 1998. As a percentage of revenue, EBITDA was 23% for the first half of fiscal 1999 and 20% for the same period in fiscal 1998. The Company's EBITDA formula and results as a percentage of revenue may not be comparable to similarly titled measures reported by other companies. However, management believes this statistic is a relevant measurement and provides a comparable operating income measure, excluding the impact of the amortization of acquired intangibles, potential timing differences associated with capital expenditures and the related depreciation charges. 10 LIQUIDITY AND CAPITAL RESOURCES Cash flow generated from operations provides the Company with a significant source of liquidity to meet its needs. Net cash provided by operating activities increased 93% to $49.7 million for the first half of fiscal 1999, from $25.7 million in the same period of fiscal 1998. Cash provided by operations before changes in working capital was $64.9 million for the first half of fiscal 1999, an increase of $21.0 million (48%) compared to the same period of the prior year. This difference is primarily driven by the $28.2 million increase in EBITDA. Cash required to fund net changes in working capital was $15.2 million in the first half of fiscal 1999 and $18.2 million for the same period in fiscal 1998. The changes in working capital resulted primarily from an increase in accounts receivable due to revenue growth, changes in net merchant processing funds, the timing and payments for prepaid expenses, other current assets, accounts payable and accrued liabilities. The changes in net merchant processing funds reflect normal fluctuations in the timing of credit card sales processed and vary from month to month. The changes due to accounts payable and accrued liabilities primarily relate to the timing of payroll and related liabilities. For the first half of fiscal 1999, cash used in investing activities decreased to $17.6 million, compared to $20.1 million in the same period of fiscal 1998. The decrease is primarily due to the first quarter fiscal 1998 investment in the acquisition of two pharmacy systems companies in the United Kingdom. The decrease is partially offset by an increase in capital expenditures during the first half of fiscal 1999. The Company continues to invest in capital expenditures related to growth in the business and acceleration of certain strategic initiatives. The Company has financed its investing activities through cash flows from operations, equity, borrowings on its line of credit and debt offerings. Net cash used in financing activities increased to $27.5 million for the first half of fiscal 1999 from $1.5 in the same period of fiscal 1998. During this period, the Company repaid $8.0 million on the $75.0 million borrowed in fiscal 1998 to finance portions of its acquisitions, merger costs and to eliminate PHSS' outstanding line of credit balance ($32.6 million). Principal payments under capital lease arrangements increased to $6.2 million for the first half of 1999 from $1.9 million in the same period of fiscal 1998 due to capital leases acquired through 1998 acquisitions and current year property and equipment acquired under capital leases. The Company purchased $7.5 million of its own common stock during the first half of fiscal 1999, offset by the reissuance of stock valued at $1.7 million under Company stock plans. Dividends of $5.0 million and $4.0 million were paid during the first six month periods of fiscal 1999 and 1998, respectively. The Company has a committed, unsecured $125.0 million revolving line of credit that expires in December 2002. At November 30, 1998, there was $67.0 million outstanding under the facility. The Company also has a $15.0 million uncommitted line of credit to fund working capital requirements, under which there were no amounts outstanding at November 30, 1998. 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. 11 YEAR 2000 COMPLIANCE INTRODUCTION The Year 2000 issue is the result of the potential for computer programs to improperly interpret dates in the year 2000 and beyond. Certain of the Company's computer systems used for product or internal use that have time/date-sensitive software and hardware may misinterpret dates resulting in a system failure or miscalculation. The Company presently believes that, with modification to existing computer systems as scheduled, the Year 2000 issue should not pose significant operational problems for the Company's products and internal systems, as so modified and converted. The Company has formed a corporate Program Office to define, evaluate and conduct audits of the Company and its progress toward Year 2000 compliance. The Company also has a Year 2000 Senior Advisory Board comprised of nine members of senior management and a Year 2000 Task Force comprised of representatives from various departments from each of the Company's operating subsidiaries. The Task Force is charged with evaluating the Company's Year 2000 efforts and regularly reporting results to the corporate Program Office. The corporate Program Office monitors the progress of the operating units in their implementation plans to resolve Year 2000 issues, tracks dependencies and provides reports to the Senior Advisory Board. The Senior Advisory Board is charged with evaluating the progress reported by the corporate Program Office and addressing any strategic issues as they arise. STATUS OF PROGRESS The corporate Program Office has established an implementation plan to address the Year 2000 issue. The implementation plan phases are stated and defined as follows: Phase I - Inventory/Assessment. List and classify all significant software, -------------------- hardware, networks, products, services, facilities, environment, third party relationships and any additional items that could be affected by the Year 2000 issue. For each item on the inventory, assess the likelihood of meeting the target dates to be corrected for Year 2000 data processing and ready for testing. This phase includes developing plans and strategies to manage each item on the inventory and assessment. Certain of the Company's products/services utilize third party software and/or hardware products in conjunction with proprietary software. In these cases, due diligence has been performed on the third party vendors and the Company has made or is in the process of making clients aware of upgrades/replacements that may be required if the third party products are not compliant. Phase II - Remediation. Determine and implement methodology for correcting Year ----------- 2000 issues via coding, upgrades, replacements, etc. and deliver to testing. Phase III - Internal Testing. Perform testing from developed plans as a result ---------------- of remediation, upgrades and/or testing of indicated Year 2000 compliant third party applications or services. At the completion of this phase, the Company's computer systems are deemed to be Year 2000 ready subject to implementation. The Company anticipates this phase will be substantially completed by June 1, 1999. Phase IV - External Testing. Perform end to end connection point testing with ---------------- third parties the Company relies upon for certain operating elements via interfaces and service providers. While this phase is scheduled to be completed by September 1999, the Company anticipates continuing tests with third parties past this date. 12 Phase V - Implementation and Proactive Management. Transition Year 2000 --------------------------------------- compliant computer systems into a production/live environment. For mission critical systems, the Company believes Phase I is completed. The diverse mission critical systems across the Company are at various stages of completion in Phase II. For the systems requiring remediation, a majority in the Health Information Services business have entered Phase III. The Electronic Commerce business has accomplished degrees of fulfillment through Phase IV, ahead of schedule. The Company believes its efforts will meet the scheduled target dates through Phase III. However, some of the remediation is ongoing due to the reliance upon suppliers, vendors and outsourcers for systems upgrades, evaluation and testing. COSTS TO ADDRESS As it relates to internal computer systems, the Company is incurring internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare its systems for the Year 2000. Given the nature of the Company's ongoing system development activities throughout its businesses, it is difficult to quantify, with specificity, all of the costs being incurred to address this issue. A significant portion of these costs is not likely to be incremental costs to the Company, but will represent the redeployment of existing information technology resources. The Company's employees have performed the majority of the work completed thus far on the implementation plans. The costs incurred to date range between $15-20 million. The estimated costs to complete comprise an additional $5-10 million in the current fiscal year and $5 million in the next fiscal year. These costs exclude capital expenditure estimates, as the Company is completing its assessment of all capital requirements. The total cost estimate for the implementation plan may be revised because the plan is constantly evaluated and revised as a result of many factors. These factors include, but are not limited to, the results of any phase of the implementation plan, customer requirements, or recommendations by contractors retained by the Company. The Company does not expect that the opportunity costs of executing the implementation plan will have a material effect on the financial condition of the Company or its results of operations. RISKS The Year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties upon which the Company relies. Accordingly, the Company is requesting assurances from certain software vendors from which it has acquired, or from which it may acquire software, that the software will correctly process all date information at all times. In addition, the Company is querying certain of its customers and suppliers as to their progress in identifying and addressing problems that their computer systems will face in correctly processing date information as the Year 2000 approaches and is reached. The Company is heavily reliant upon customers and other third parties in the health care, banking and credit card industries, in terms of electronic interfaces. Failure to appropriately address the Year 2000 issue by major customers or suppliers or a material percentage of the smaller customers could have a material adverse effect on the financial condition and results of operations of the Company. The Company does not expect any material research and development activities to be delayed due the Year 2000 compliance efforts, however if certain initiatives are delayed, the result could have an adverse effect to the Company. 13 In order for the testing phase of the Year 2000 plan to be completed, the Company is reliant upon its customers and other third party connection points to prepare their systems for testing. The Company could be affected if a significant number of customers delay testing until the end of 1999. In order to address this issue, the Company is evaluating the impact of those customers who have not yet coordinated with the Company for upgrades, certification/ verification, and testing. The customers with the greatest revenue impact have been identified and their testing/certification process is being analyzed. If possible, coordination for testing is targeted by June 1999. If coordination of a preset testing time is not possible, the revenue impact for the accommodation of last minute testing is being evaluated. The goal is to protect major revenues before October 1999, so that the Company's overall revenue is not impacted. The Company's business is also heavily reliant upon external suppliers to provide certain operating elements of its business. Some of these providers include telecommunication services, computer systems, banks and utility companies. Currently, due diligence is being performed on suppliers to the Company. Inquiries are made regarding each supplier's Year 2000 efforts and contingency plans are developed as necessary. However, the Company exerts no control over the efforts of these companies to become Year 2000 compliant. The services provided by these parties are critical to the operations of the Company and the Company is heavily reliant upon these parties to successfully address the Year 2000 issue. Therefore, if any of these parties fail to provide the Company with services, the Company's ability to conduct business could be materially impacted. The result of such impact may have a material adverse effect on the financial condition and results of operations of the Company. CONTINGENCY The Company's Year 2000 compliance activities are being regularly monitored and evaluated. Contingency plans are being established and implemented as the risks are identified. On-site audits are being performed to evaluate the progress of the operating units toward meeting their goals. The results of these audits are compared to the implementation plan and presented to the Senior Advisory Board and the Company's Board of Directors. Also, the dependencies between operating units have been documented. SUMMARY There are no assurances that the Company will identify all date-handling problems in its business systems or those of its customers and suppliers in advance of their occurrence or that the Company will be able to successfully remedy all Year 2000 compliance issues that are discovered. However, the Company, in good faith, is working to identify all issues. To the extent that the Company is unable to resolve its Year 2000 issues prior to January 1, 2000, operating results could be adversely affected. In addition, the Company could be adversely affected if other entities (i.e. vendors or customers) not affiliated with the Company do not appropriately address their own Year 2000 compliance issues in advance of their occurrence. 14 FORWARD-LOOKING INFORMATION When used in this Quarterly Report on Form 10-Q, in documents incorporated herein and elsewhere by management or National Data Corporation ("NDC" or the "Company") from time to time, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements concerning the Company's business operations, economic performance and financial condition, including in particular, the Company's business strategy and means to implement the strategy, the Company's objectives, the amount of future capital expenditures, the likelihood of the Company's success in developing and introducing new products and expanding its business, and the timing of the introduction of new and modified products or services. For those statements, the Company claims the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are based on a number of assumptions and estimates which are inherently subject to significant risks and uncertainties, many of which are beyond the control of the Company and reflect future business decisions which are subject to change. A variety of factors could cause actual results to differ materially from those anticipated in the Company's forward-looking statements, including the following factors: (a) those set forth in Exhibit 99.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended August 31, 1998 and, incorporated herein by reference, and elsewhere herein; and (b) those set forth from time to time in the Company's press releases and reports and other filings made with the Securities and Exchange Commission. The Company cautions that such factors are not exclusive. Consequently, all of the forward-looking statements made herein are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions of such forward-looking statements that may be made to reflect events or circumstances after the date hereof, or thereof, as the case may be, or to reflect the occurrence of unanticipated events. 15 PART II ITEM 1 - PENDING LEGAL PROCEEDINGS - ---------------------------------- The Company is party to a number of claims and lawsuits incidental to its business. In the opinion of management, the ultimate outcome of such matters, in the aggregate, will not have a material adverse impact on the Company's financial position, liquidity or results of operations. ITEM 2 - CHANGES IN SECURITITES - -------------------------------- None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ The Company's annual meeting of stockholders was held on October 22, 1998. At the annual meeting, the stockholders of the Company approved the following items: 1. Election of J. Veronica Biggins as the Class III director, to serve until the annual meeting of stockholders in 2001, or until her successor is duly elected and qualified; 2. Amendment of the 1984 Non-employee Director Stock Option Plan ("the Director Option Plan") to: (a) increase the number of shares that may be issued thereunder from 345,000 to 545,000 shares; (b) extend the termination date from September 6, 1999 until September 6, 2004; and (c) provide that any option granted under the Director Option Plan may be assigned or transferred by will, the laws of descent and distribution or pursuant to a qualified domestic relations order or to certain permitted transferees approved by the Board of Directors or a Committee of the Board of Directors administering the Director Option Plan. ITEM 5 - OTHER INFORMATION - -------------------------- None ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K - ----------------------------------------------- (a) Exhibits: Exhibit 27 - Financial Data Schedule (b) Reports Filed on Form 8-K: 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: January 14, 1999 By: /s/ Kevin C. Shea ---------------- ----------------------------- Kevin C. Shea Chief Financial Officer (Principal Financial Officer) Date: January 14, 1999 By: /s/ David H. Shenk ---------------- ----------------------------- David H. Shenk Corporate Controller (Chief Accounting Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS MAY-31-1999 JUN-01-1998 NOV-30-1998 7,848 0 162,402 10,812 6,393 189,146 202,810 110,425 756,528 187,202 149,497 0 0 4,236 364,666 756,528 0 383,204 0 199,227 123,371 2,644 7,655 52,557 20,497 32,060 0 0 0 32,060 0.95 0.92
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