-----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, Bq0oO03WfEGfsEnod+ADMSfZ/QSUTkvNngahJF5ZOtmaR1eIW1LHZVqxwsl5e+gr ih6pMGtkTX1rsuXHkV6EbQ== 0000931763-98-002655.txt : 19981016 0000931763-98-002655.hdr.sgml : 19981016 ACCESSION NUMBER: 0000931763-98-002655 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981015 SROS: NYSE 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: 98725919 BUSINESS ADDRESS: STREET 1: NATIONAL DATA COPRORATION STREET 2: NATIONAL DATA PLAZA CITY: ATLANTA STATE: GA ZIP: 30329 BUSINESS PHONE: 4047282000 MAIL ADDRESS: STREET 1: NATIONAL DATA PLZ CITY: ATLANTA STATE: GA ZIP: 30329-2010 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended August 31, 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--33,889,165 shares ------------------------------------------------ Outstanding as of October 9, 1998 --------------------------------- UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME NATIONAL DATA CORPORATION (In thousands, except per share data) - --------------------------------------------------------------------------- Three Months Ended August 31, ----------------------------- 1998 1997 ----------- ----------- Revenue $191,682 $147,904 - -------------------------------------------------------------------------- Operating Expenses: Cost of service 100,375 75,053 Sales, general and administrative 60,401 51,052 ---------------------------- 160,776 126,105 ---------------------------- Operating income 30,906 21,799 - -------------------------------------------------------------------------- Other income (expense): Interest and other income 574 484 Interest and other expense (3,726) (3,029) Minority interest (995) (701) ---------------------------- (4,147) (3,246) ---------------------------- Income before income taxes 26,759 18,553 Provision for income taxes 10,436 6,963 - -------------------------------------------------------------------------- Net income $ 16,323 $ 11,590 ============================ Basic earnings per share $ 0.48 $ 0.38 ============================ Diluted earnings per share $ 0.47 $ 0.36 ============================ See Notes to Unaudited Condensed Consolidated Financial Statements. 2 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL DATA CORPORATION (In thousands)
- ------------------------------------------------------------------------------------------------------------- Three Months Ended August 31, ------------------------------- 1998 1997 ------------- ------------ Cash flows from operating activities: Net income $ 16,323 $ 11,590 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 6,596 7,140 Amortization of acquired intangibles and goodwill 6,515 4,679 Minority interest in earnings 995 701 Provision for bad debts 1,197 167 Other, net 631 253 Changes in current assets and liabilities which provided (used) cash, net of the effects of acquisitions: Accounts receivable, net (10,459) (5,883) Merchant processing working capital 1,833 (2,843) Inventory (494) 144 Prepaid expenses and other assets (1,806) (350) Accounts payable and accrued liabilities 4,057 (3,339) Income taxes payable and deferred income taxes 7,241 2,283 ------------------------------- Net cash provided by operating activities 32,629 14,542 ------------------------------- Cash flows from investing activities: Capital expenditures (8,077) (5,039) Business acquisitions, net of cash acquired - (8,681) ------------------------------- Net cash used in investing activities (8,077) (13,720) ------------------------------- Cash flows from financing activities: Net repayments under lines of credit (10,000) - Net principal (payments) borrowings under capital lease arrangements and other long-term debt (3,095) 643 Net proceeds from the issuance of stock from stock plans 418 1,126 Treasury stock reissued 1,271 - Distributions to minority interests (1,053) (1,299) Dividends paid (2,520) (1,987) ------------------------------- Net cash used in financing activities (14,979) (1,517) ------------------------------- Increase (decrease) in cash and cash equivalents 9,573 (695) Cash and cash equivalents, beginning of period 3,241 18,909 ------------------------------- Cash and cash equivalents, end of period $ 12,814 $ 18,214 =============================== See Notes to Unaudited Condensed Consolidated Financial Statements. 3
CONSOLIDATED BALANCE SHEETS NATIONAL DATA CORPORATION (In thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------------------- August 31, May 31, 1998 1998 ---------- --------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 12,814 $ 3,241 Billed accounts receivable 145,178 135,223 Unbilled accounts receivable 18,986 18,835 Allowance for doubtful accounts (8,463) (7,394) --------- --------- Accounts receivable, net 155,701 146,664 Income tax receivable - 635 Inventory 5,741 5,253 Prepaid expenses and other current assets 17,130 16,333 --------- --------- Total current assets 191,386 172,126 --------- --------- Property and equipment, net 78,657 74,234 Intangible assets, net 437,696 458,223 Deferred income taxes 32,544 20,145 Other 7,032 6,487 --------- --------- Total Assets $ 747,315 $ 731,215 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 65,000 $ 75,000 Current portion of long-term debt 1,569 1,621 Obligations under capital leases 11,203 11,053 Accounts payable and accrued liabilities 76,981 73,115 Income tax payable 5,051 - Deferred income taxes 315 92 Deferred income 27,206 25,216 --------- --------- Total current liabilities 187,325 186,097 --------- --------- Long-term debt 155,532 155,477 Obligations under capital leases 12,344 12,390 Other long-term liabilities 10,502 10,313 --------- --------- Total liabilities 365,703 364,277 --------- --------- Minority interest in equity of subsidiaries 18,945 19,003 Commitments and contingencies Shareholders' equity: Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issue - - Common stock, par value $.125 per share; 100,000,000 shares authorized, 33,888,653 and 33,791,534 shares issued, respectively. 4,236 4,224 Capital in excess of par value 344,425 344,019 Treasury stock, at cost, 125,453 and 159,200 shares, respectively (4,709) (5,980) Retained earnings 23,303 9,537 Cumulative translation adjustment (2,985) (2,011) --------- --------- 364,270 349,789 Less: Deferred compensation (1,603) (1,854) --------- --------- Total Shareholders' Equity 362,667 347,935 --------- --------- Total Liabilities and Shareholders' Equity $ 747,315 $ 731,215 ========= ========= See Notes to Unaudited Condensed Consolidated Financial Statements. 4
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. 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 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. The basic and diluted number of shares outstanding are as follows (In thousands): Three Months Ended August 31, ----------------------------- 1998 1997 -------- ------- Basic 33,723 30,851 Stock Options 1,316 1,664 ---------------------------- Diluted 35,039 32,515 ============================ 5 NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash flow disclosures, including non-cash investing and financing activities, for the three months ended August 31, 1998 and 1997 are as follows (In thousands): 1998 1997 -------- -------- Income taxes paid, net of refunds $2,870 $3,983 Interest paid 1,649 953 Property and equipment capital leases 3,211 719 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUE (In millions)
First Quarter Ended August 31, ------------------------------------------------------- ------------ 1998 1997 Increase ------------------------- ------------------------- ------------ Revenue: Health Information Services $109.4 57% $ 75.3 51% 45% Electronic Commerce: Integrated Payment Systems 48.4 25% 38.8 26% 25% Global Payment Systems 41.5 22% 40.4 27% 3% Intercompany Revenue (7.6) (4%) (6.6) (4%) 15% -------------------------------------------------------------------- 82.3 43% 72.6 49% 13% -------------------------------------------------------------------- Total Revenue $191.7 100% $147.9 100% 30% ====================================================================
Total revenue for the first quarter fiscal 1999 was $191.7 million, an increase of $43.8 million (30%) from the same period in fiscal 1998. The increase resulted from increased revenue in Health Information Services, $34.1 million (45%); and in the Electronic Commerce business, specifically, Integrated Payment Systems, $9.6 million (25%), and Global Payment Systems, $1.1 million (3%). Health Information Services. Health Information Services revenue growth ---------------------------- (45%) in the first quarter fiscal 1999 was a result of increases from internally developed products and services. In addition, revenue growth resulted from the impact of a third quarter fiscal 1998 acquisition which had two related healthcare information management businesses, Source Informatics Inc. ("Source") and a subsidiary of Pharmaceutical Marketing Services Inc. ("PMSI"). Integrated Payment Systems. The Integrated Payment Systems revenue --------------------------- increase of $9.6 million (25%) 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. contributed to the first quarter fiscal 1999 revenue growth. Global Payment Systems. Global Payment Systems ("Global") revenue reflects ----------------------- an increase in the number of authorizations performed for the Company's customers under the historic network services business. New back office services are in the development and sales cycle and did not have a material impact on the first quarter fiscal 1999 reported results. Intercompany. A portion of Global's revenue is derived from intercompany ------------- sales of services, primarily for processing services provided for the Integrated Payment Systems product and services. 7 COSTS AND EXPENSES Cost of service increased $25.3 million (34%) in the first quarter fiscal 1999 from the same period in fiscal 1998. The increase was primarily a result of increased operating costs associated with revenue growth and higher cost of service in new acquisitions, primarily Physician Support Services, Inc. ("PHSS") to support expected revenue growth in the physician management services area. Total cost of service, as a percentage of revenue increased from 51% in the first quarter of fiscal 1998 to 52% for the same period of fiscal 1999. The Company continues to make investments to leverage its computer operations, telecommunication infrastructure, and investments in new market opportunities. Sales, general and administrative expenses ("SG&A") increased $9.3 million (18%) in the first quarter fiscal 1999 from the same period last year. This increase was primarily due to expenses associated with continuing investments in product development, distribution channel expansion and the development of the Health Information Services branding program for future revenue growth. However, as a percentage of revenue, these expenses decreased to 32% for the first quarter fiscal 1999 from 35% for 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 and the timing of discretionary program expenses. OPERATING INCOME Operating income increased from $21.8 million in the first quarter fiscal 1998 to $30.9 million (42%) in the same period of fiscal 1999. As a percentage of revenue, the Company's operating income margin increased 10% to 16.1% in the first quarter fiscal 1999 from 14.7% in the same period of 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 $43.1 million for the first quarter of fiscal 1999 and $33.5 million for the same period in fiscal 1998 and as a percentage of revenue was 23% for both periods. 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. OTHER EXPENSE Total other expense increased $0.9 million for the first quarter fiscal 1999 compared to the same period in fiscal 1998. This increase was primarily the result of increased interest expense due to borrowings on the Company's line of credit during fiscal 1998 to finance acquisition activities. 8 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 124% to $32.6 million for the first quarter fiscal 1999, from $14.5 million in the same period of fiscal 1998. Cash provided by operations before changes in working capital was $32.3 million for the first quarter fiscal 1999, an increase of $7.8 million (32%) compared to the same period of the prior year. This difference is primarily driven by the $9.6 million increase in EBITDA. Cash was provided in the first quarter fiscal 1999 from net changes in working capital of $0.3 million, compared to net cash required to fund net changes in working capital of $10.0 million for the same period in fiscal 1998. The changes in working capital resulted primarily from increases in accounts receivable due to acquisitions, changes in net merchant processing funds, and the timing and payments on accounts payable and accrued liabilities, including income taxes. 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, and an increase in deferred revenue resulting from acquisitions. For the first quarter fiscal 1999, cash used in investing activities decreased to $8.1 million, compared to $13.7 million in the same period of fiscal 1998. The decrease is primarily due to the first quarter fiscal 1998 acquisitions of two pharmacy systems companies in the United Kingdom. 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 acquisition program through cash flows from operations, equity, borrowings on its line of credit and debt offerings. Net cash used in financing activities increased to $15.0 million for the first quarter of fiscal 1999 from $1.5 in the same period of the prior year. During the first quarter, the Company repaid $10.0 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). Dividends of $2.5 million and $2.0 million were paid during the first quarter 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 August 31, 1998, there was $65.0 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 August 31, 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. 9 YEAR 2000 COMPLIANCE INTRODUCTION The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's hardware, software and embedded systems ("computer systems") that have time/ date-sensitive software and hardware may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculation. The Company presently believes that, with modification to existing computer systems, as scheduled, the Year 2000 issue will not pose significant operational problems for the Company's systems, as so modified and converted. The Company has a 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 effort and regularly reporting results to the Program Office. The Senior Advisory Board is charged with evaluating the progress reported by the Program Office and addressing any issues as they arise. STATUS OF PROGRESS Each of the Company's operating units has conducted an inventory and assessment of its technology to identify the computer systems that could be affected by the Year 2000 issue. The Year 2000 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 Task Force members guide the Year 2000 remediation and testing efforts at their respective locations. The majority of the efforts should meet their scheduled target dates. However, some of the remediation is ongoing due to the reliance upon suppliers, vendors and outsourcers for system upgrades, evaluation and testing. Testing, verification and/or certification with parties external to NDC is slated for 1999. COSTS TO ADDRESS As it relates to internal computer systems, the Company is incurring internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the Year 2000. Given the nature of the Company's ongoing system development activities throughout our businesses, it is difficult to quantify, with specificity, all of the costs being incurred to address this issue. A significant proportion 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 performed thus far on the implementation plans. The costs incurred to date range between $10-15 million, and the estimated costs to complete comprise an additional $10 million in each of the current and 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 of 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. 10 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 in the health care, banking and credit card industries. Failure to appropriately address the Year 2000 issue by a major customer or supplier 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 to the Year 2000 compliance efforts, however if certain initiatives are delayed, the result could have an adverse effect to the Company. 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. 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. Additional steps are being taken to further minimize the risks associated with the Year 2000 issue. For example, 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 strenuously 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. 11 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 this Quarterly Report on Form 10-Q 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. 12 PART II ITEM 1 - PENDING LEGAL PROCEEDINGS - ---------------------------------- The Company is party to a number of claims and lawsuits incidental to its business. In the opinion of management, the ultimate outcome of such matters, in the aggregate, will not have a material adverse impact on the Company's financial position, liquidity or results of operations. ITEM 2 - CHANGES IN SECURITIES - -------------------------------- None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None ITEM 5 - OTHER INFORMATION - -------------------------- The proxy to be solicited by management of the Company with respect to the 1999 Annual Meeting of Stockholders will confer discretionary authority to vote on any proposals of stockholders of the Company intended to be presented for consideration of such Annual Meeting that are submitted to the Company after July 17, 1999. Discretionary voting authority is the ability to vote proxies that stockholders have executed and returned to us, on matters not specifically reflected on the proxy card, and on which stockholders have not had an opportunity to vote by proxy. ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K - ----------------------------------------------- (a) Exhibits: (10) - Amendment to the National Data Corporation Employees Retirement Plan (27) - Financial Data Schedule (99.1) - Private Securities Litigation Reform Act Of 1995 Safe Harbor Compliance Statement For Forward-Looking Statements (b) Reports Filed on Form 8-K: 13 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: October 15, 1998 By: /s/ Kevin C. Shea --------------------- ------------------------ Kevin C. Shea Chief Financial Officer (Principal Financial Officer) Date: October 15, 1998 By: /s/ David H. Shenk --------------------- ------------------------ David H. Shenk Corporate Controller (Chief Accounting Officer) 14 EX-10 2 AMENDMENT TO THE NDC EMPLOYEE RETIREMENT PLAN AMENDMENT TO THE NATIONAL DATA CORPORATION EMPLOYEES RETIREMENT PLAN This Amendment to the National Data Corporation Employees Retirement Plan is adopted by National Data Corporation, effective as of July 31, 1998. W I T N E S S E T H: WHEREAS, National Data Corporation, (the "Corporation") currently maintains the National Data Corporation Employees Retirement Plan (the "Plan") for the benefit of its eligible employees; and WHEREAS, pursuant to Section 9.01 of the Plan, the Corporation may amend the Plan at any time; and WHEREAS, the Corporation desires to discontinue the accumulation of Benefit Service under the Plan and to freeze participation in the Plan, effective as of July 31, 1998 (the "Freeze Date"); and WHEREAS, the Corporation desires to allow employees who are participating in the Plan on the Freeze Date, as well as former participants who are rehired after the Freeze Date, to continue to accrue Annual Earnings for periods beginning after the Freeze Date, as well as to accrue Vesting Service for such periods. NOW, THEREFORE, effective as of July 31, 1998: 1. Section 2.05, the definition of Annual Earnings, shall be amended by adding --------------- the following sub-section (f) thereto, to read as follows: "(f) Notwithstanding Sections 2.10 and 3.01(d), as such Sections are amended effective July 31, 1998, Participants shall continue to be credited with Annual Earnings pursuant to this Section 2.05 for periods beginning after July 31, 1998." 2. The following shall be added at the end of Section 2.10, the definition of Benefit Service: - --------------- "Notwithstanding anything contained herein to the contrary, no Employee shall accrue Benefit Service for any period which begins after July 31, 1998." 3. The first paragraph of Section 2.34, Normal Retirement Age, shall be --------------------- amended and restated in its entirety to read as follows: "Normal Retirement Age, effective August 1, 1998, shall mean the --------------------- Participant's 65th birthday. A Participant who attains his Normal Retirement Age while an Employee shall become 100% vested in his entire Accrued Normal Retirement Income. Notwithstanding the foregoing, the Normal Retirement Age of a Participant whose Termination Date was before August 1, 1998, shall be determined under the terms of the Plan in effect as of his Termination Date. Prior to August 1, 1998, Normal Retirement Age meant the later of (i) the Participant's 65th birthday; or (ii) the date the Participant was credited with five (5) years of Vesting Service." 4. Section 2.54, Vesting Service, shall be amended by adding the following --------------- sub-section (j) thereto, to read as follows: "(j) Notwithstanding Sections 2.10 and 3.01(d), as such Sections are amended effective July 31, 1998, Participants shall continue to accrue Vesting Service pursuant to this Section 2.54 and Appendix B for periods beginning after July 31, 1998." 5. Section 3.01, Participation, shall be amended by adding the following sub- ------------- section (d) thereto, to read as follows: "(d) Effective as of July 31, 1998, and for all Plan Years and periods commencing thereafter, no Employee who is not a Participant in the Plan as of such date shall be or become eligible to participate in the Plan. Notwithstanding the foregoing, an Employee who is a Participant on July 31, 1998, or who was a Participant on any date prior to July 31, 1998 (even if such Employee is not a Participant on July 31, 1998) shall be eligible to participate in the Plan upon his rehire, pursuant to Section 3.02(b)." 6. Section 4.01, Normal Retirement Income, shall be amended and restated in ------------------------ its entirety to read as follows: "Each Participant who attains his Normal Retirement Date shall be eligible to receive Retirement Income commencing on his Normal Retirement Date payable in monthly installments. The amount of each monthly installment shall be 1/12th of the benefit -2- described in sub-section (a) or (b) below, whichever is applicable, calculated as a benefit payable for the life of the Participant and ceasing with the last payment due immediately before the Participant's death. (a) The benefit payable to a Participant who terminates employment on or before July 31, 1998, is equal to (i) minus (ii) where: (i) is 1.65% of the Participant's Final Average Earnings multiplied by the Participant's years of Benefit Service (up to a maximum of 35 years); and (ii) is .75% of the Participant's Final Average Earnings not in excess of his Integration Level, multiplied by the Participant's years of Benefit Service (up to a maximum of 35 years). However, if the Participant's Social Security Normal Retirement Age is greater than 65, then the product determined under this paragraph (ii) shall be reduced by 5/9ths of (1) one percent for each month preceding the Participant's Social Security Normal Retirement Age; provided however that (iii) In no event will the Retirement Income determined above be less than 50% of the amount determined under paragraph (i) above, but computed using only that portion of the Participant's Final Average Earnings which does not exceed the Participant's Integration Level. (b) The benefit payable to a Participant who terminates employment after July 31, 1998, is equal to: (i) the benefit calculated in (a) above, using the Participant's Final Average Earnings and Integration Level as of the earlier of the Termination Date or December 31, 1998; divided by (ii) the Participant's Final Average Earnings as of the earlier of the Termination Date or December 31, 1998; multiplied by (iii) the Participant's Final Average Earnings as of the Participant's Termination Date. (c) Under no circumstances shall the Retirement Income payable pursuant to paragraph (b) above be less than the Accrued Benefit on July 31, 1998. (d) Notwithstanding any contrary provision of this Plan, each Participant's right to his Retirement Income shall become non-forfeitable upon such Participant's attainment of Normal Retirement Age. (d) It is the intent of this Section 4.01 to comply with the amendments to Section 401(l) of the Code and the Treasury Regulations issued thereunder and this Section 4.01 shall be so interpreted. -3- 7. Sections 2.20, Earliest Retirement Age, 2.21, Early Retirement Date, and ----------------------- --------------------- 4.03, Early Retirement, shall be amended by replacing the phrase "Benefit ---------------- Service" with "Vesting Service" each time it appears in such sections, so as to make early retirement available to Participants who attain age 55 and complete 15 or more years of Vesting Service. 8. The first paragraph of Section 4.08, Disability, shall be amended and ---------- restated in its entirety, to read as follows: "A Participant whose Employment is terminated due to Disability after July 31, 1998, who has at least five (5) years of Vesting Service, whose attained age plus his years of Vesting Service total forty (40) (both determined as of the first anniversary of the date the Participant was first absent from service by reason of Disability), and whose Disability continues until the Participant's Normal Retirement Date, shall be entitled to receive Retirement Income at his Normal Retirement Date based on all years of Benefit Service the Participant would have had he continued Employment to his Normal Retirement Date (taking into account Section 2.10, as amended effective July 31, 1998, to halt the accrual of Benefit Service for all Participants), assuming Annual Earnings continued each year in the same amount as the Participant's Annual Earnings in his last calendar year preceding his date of Disability, or his Annual Earnings in the calendar year of Disability, if greater. A Participant whose Employment is terminated due to Disability before August 1, 1998, who has at leave five (5) years of Vesting Service, whose attained age plus his years of Benefit Service total forty (40) (both determined as of the first anniversary of the date the Participant was first absent from service by reason of Disability), and whose Disability continues until the Participant's Normal Retirement Date, shall be entitled to receive Retirement Income at his Normal Retirement Date based on all years of Benefit Service the Participant would have had he continued Employment to his Normal Retirement Date (taking into account Section 2.10, as amended effective July 31, 1998, to halt the accrual of Benefit Service for all Participants), assuming Annual Earnings continued each year in the same amount as the Participant's Annual Earnings in his last calendar year preceding his date of Disability, or his Annual Earnings in the calendar year of Disability, if greater." 9. Except as set forth herein, the Plan shall remain in full force and effect. -4- IN WITNESS WHEREOF, the undersigned has adopted this Amendment on behalf of the Corporation on the date shown below. NATIONAL DATA CORPORATION By: /s/ E.M. Ingram --------------------------------- Name E.M. Ingram --------------------------- Title: Secretary --------------------------- Date: July 15 , 1998 ------------------------------- -5- EX-27 3 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAY-31-1999 JUN-01-1998 AUG-31-1998 12,814 0 164,164 8,463 5,741 191,386 181,995 103,338 747,315 187,325 167,876 0 0 4,236 358,431 747,315 0 191,682 0 100,375 60,401 1,197 3,726 26,759 10,436 16,323 0 0 0 16,323 0.48 0.47
EX-99.1 4 SAFE HARBOR COMPLIANCE STATEMENT EXHIBIT 99.1 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. National Data Corporation ("NDC" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor Provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward- looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of NDC. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements (the "Safe Harbor Statement") to reflect future developments. In addition, NDC undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. NDC provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: COMPETITION AND CONSOLIDATION The markets for the applications systems and services offered by NDC are highly competitive. Competition in the health care transaction processing and payment systems markets affects NDC's ability to gain new customers and the prices it can charge. The key competitive factors for NDC are functionality of products, quality of service and price. Some of NDC's competitors have access to significant capital and management, marketing and technological resources that are equal to or greater than those of NDC, and there can be no assurance that NDC will continue to be able to compete successfully with them. In addition, NDC competes with businesses that internally perform data processing or other services offered by NDC. In addition, there has been and continues to be significant consolidation in the banking and health care provider industries. The Company markets its credit, charge and debit card transaction services through several marketing channels, including banks. As a result of consolidation, banks that market the Company's financial services may be acquired by banks that compete with the Company or by banks that have a relationship with one or more of the Company's competitors, thereby potentially depriving the Company of a distribution channel. The consolidation of health care providers reduces the number of potential customers for the Company's health care related services and the increased bargaining power of these larger consolidated organizations could lead to reductions in the amounts paid for such services. The overall impact of such consolidation in the banking and health care industries is difficult to predict and could have a material adverse effect on the Company's business, financial condition and results of operations. MARKETS AND APPLICATIONS NDC's future growth and profitability will depend, in part, upon the further expansion of the health care transaction processing and payment systems markets, the emergence of other markets for electronic transaction processing services and NDC's ability to penetrate such markets. Further expansion of these markets is dependent upon the continued growth in the number of transactions available to be processed and the continued automation of traditional paper- based processing systems. NDC's ability to penetrate such markets will depend, in turn, upon its ability to apply its existing technology, or to develop new technology, to meet the particular service needs of each new market. There can be no assurance that markets for NDC's services will continue to expand and develop or that NDC will be successful in its efforts, or have adequate financial, marketing and technological resources to penetrate new markets. HEALTH INFORMATION SERVICES Federal and state governments have recently focused significant attention on health care reform. It is not possible to predict which, if any, proposal that has been or will be considered will be adopted. There can be no assurance that the health care regulatory environment will not change so as to restrict the existing operations of, impose additional requirements on or limit the expansion of NDC. Costs of compliance with changes in government regulations may not be subject to recovery by NDC through price increases. Significant media and public attention has recently been focused on the health care industry due to ongoing federal and state investigations purportedly related to certain referral and billing practices. The Office of the Inspector General and the Department of Justice have initiated hospital laboratory billing review projects in certain states and are expected to extend such projects to additional states, including states in which NDC operates. These projects increase the likelihood of governmental investigations of hospitals, laboratories and other institutions for which NDC perform services. Although NDC currently monitors billing practices and arrangements to ensure compliance with prevailing industry practices under applicable laws, such laws are complex and constantly evolving and there can be no assurance that governmental investigators will not take positions that are inconsistent with industry practices, including NDC's practices. ELECTRONIC COMMERCE BUSINESS NDC's direct merchant customers have liability for charges disputed by cardholders. However, in the case of merchant fraud, or insolvency or bankruptcy of the merchant, NDC may be liable for any of such charges disputed by cardholders. NDC requires cash deposits and other types of collateral by certain merchants to minimize any such contingent liability. Based on its historical loss experience, NDC has established reserves, which management believes are adequate, for estimated losses on transactions processed. There can be no assurance, however, that such reserves for losses will be adequate. Any such losses in excess of reserves could have a material adverse effect on the financial condition and results of operations of NDC. ACQUISITION RISKS NDC completed six acquisitions in fiscal 1998 and intends to seek additional acquisition opportunities and alliance relationships with other businesses that will allow it to increase its market penetration, technological capabilities, product offerings and distribution capabilities. There can be no assurance that NDC will be able successfully to identify suitable acquisition candidates, complete acquisitions or expand into new markets. As a result of the acquisitions of each of Source Informatics Inc. ("Source"), PMSI Database Holdings Inc. ("PMSI Database") and Physician Support Systems, Inc. ("PHSS"), NDC is currently devoting significant management and other resources toward the assimilation of these businesses with NDC, particularly PHSS. There can be no assurance that NDC will be able to successfully integrate the operations of acquired businesses into NDC's operations. In addition, there can also be no assurance that future acquisitions will not have an adverse effect upon NDC's operating results, particularly in the fiscal quarters immediately following the completion of such acquisitions while the operations of the acquired business are being integrated into NDC's operations. Once integrated, acquired operations may not achieve levels of revenue growth, profitability or productivity comparable with those achieved by NDC's existing operations, or otherwise perform as expected. Specifically, with regard to the acquisition of Source, certain products currently under development may never reach technological feasibility, which could have a material adverse effect upon NDC's operating results. NDC may incur indebtedness in the future, including through borrowings under a credit facility, if a credit facility is available, to finance acquisitions. As a result, NDC expects to be subject to risks associated with debt financing, including the risk that interest rates may increase, the risk that NDC's cash flow will be insufficient to meet required payments on its debt and the risk that NDC may be unable to refinance or repay the debt as it comes due. In addition, NDC competes for acquisition and expansion opportunities with companies that have substantially greater resources. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW, CERTAIN CHARTER AND BY-LAW PROVISIONS AND STOCKHOLDER RIGHTS PLAN Certain provisions of NDC's Certificate of Incorporation and By-laws could delay, defer or prevent a takeover attempt that a stockholder might consider in its best interest. These provisions may adversely affect prevailing market prices for NDC Common Stock. These provisions, among other things, classify NDC's Board of Directors into three classes as nearly equal in number as the total number of directors permits, each of which serve for different three-year terms, and authorize the Board of Directors to issue preferred stock in one or more classes or series and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any action on the part of the stockholders. The rights of the holders of NDC Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of NDC. NDC has no current plans to issue shares of preferred stock. NDC also maintains a stockholder rights plan which entitles the stockholders of NDC, upon the happening of certain events, to purchase preferred stock of NDC. These NDC Rights (hereinafter defined) may have certain anti- takeover effects because the rights will cause substantial dilution to a person or group that attempts to acquire NDC on terms not approved by the Board of Directors of NDC unless the offer is conditioned on a substantial number of NDC Rights being acquired. In addition, Section 203 of the Delaware General Corporation Law (the "DGCL") prohibits certain persons from engaging in business combinations with NDC, which may also have the effect of delaying, deterring or preventing a change of control of NDC. NEW PRODUCT INTRODUCTIONS With NDC's acquisition of Source, PMSI Database and PHSS, NDC plans to introduce products and services different from those NDC has traditionally provided. The market for these products and services is characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing customer needs. There can be no assurance that NDC will be successful in developing and marketing these new products and services or that current or new products and services of Source and PHSS will adequately meet the quickly changing demands of their customers. In addition, in order to meet its customers' demands, Source and PHSS are continually involved in a number of development projects, including Source's efforts to update its core mainframe-based products. Because it is generally not possible to predict the time required and costs involved in reaching certain research, development and engineering objectives, estimated product development schedules could require extensions. NDC believes that the future success of its newly acquired businesses will depend in large part on its ability to maintain and enhance its current product and service offerings and to continually develop and introduce new products and services that will keep pace with technological advances and satisfy evolving customer requirements. Further, there can be no assurance that NDC will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products and services. If NDC is unable to develop and introduce new products and services in a timely manner, or if a new or updated product does not achieve market acceptance, NDC's financial condition and results of operations could be materially adversely affected. YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time/date-sensitive software and hardware may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculation. The Company presently believes that, with modification to existing software and hardware, the Year 2000 issue will pose no significant operational problems for the Company's systems, as so modified and converted. The Company has a 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 effort and regularly reporting results to the Program Office. The Senior Advisory Board is charged with evaluating the progress reported by the Program Office and addressing any issues as they arise. 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 software vendors from which it has acquired, or from which it may acquire software, that the software will correctly process all data information at all times. In addition, 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 data information as the Year 2000 approaches and is reached. The Company is heavily reliant upon customers in the health care, banking and credit card industries. Failure to appropriately address the Year 2000 issue by a major customer or supplier could have a material adverse effect on the financial condition and results of operations of the Company. Additionally, if certain Company research and development initiatives are delayed due to the Year 2000 compliance efforts, the result could be an adverse effect to the Company. The Company also relies upon external suppliers to provide certain operating elements of its business. Some of these providers include telecommunication services, computer systems, banks and utility companies. 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 be a material adverse effect on the financial condition and results of operations of the Company. -----END PRIVACY-ENHANCED MESSAGE-----