-----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, Ud2g+vMJrgA2TzKwiIvFwn2qhdCXtno+vJIo2plcCYwbp8wjRqq0xnSfH9GCdL4n zU+KW3JCjgRBDADd8pyKeA== 0000931763-99-002868.txt : 19991018 0000931763-99-002868.hdr.sgml : 19991018 ACCESSION NUMBER: 0000931763-99-002868 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991015 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: 99729224 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, 1999 --------------- 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 - 33,903,099 shares ----------------------------------------------------- Outstanding as of September 30, 1999 ------------------------------------ UNAUDITED CONSOLIDATED STATEMENTS OF INCOME NATIONAL DATA CORPORATION (In thousands, except per share data) - --------------------------------------------------------------------------------
Three Months Ended August 31, -------------------------------- 1999 1998 ---------- --------- Revenues $ 204,055 $ 191,682 - ------------------------------------------------------------------------------------------------------------------------- Operating expenses: Cost of service 101,833 100,375 Sales, general and administrative 68,942 60,401 -------------------------------- 170,775 160,776 -------------------------------- Operating income 33,280 30,906 - ------------------------------------------------------------------------------------------------------------------------- Other income (expense): Interest and other income 1,679 574 Interest and other expense (3,194) (3,726) Minority interest in earnings (1,071) (995) -------------------------------- (2,586) (4,147) -------------------------------- Income before income taxes 30,694 26,759 Provision for income taxes 11,817 10,436 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 18,877 $ 16,323 ================================ Basic earnings per share $ 0.56 $ 0.48 ================================ Diluted earnings per share $ 0.53 $ 0.47 ================================
See Notes to Unaudited Consolidated Financial Statements. 2 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL DATA CORPORATION (In thousands) - --------------------------------------------------------------------------------
Three Months Ended August 31, ------------------------------ 1999 1998 ---- ---- Cash flows from operating activities: Net income $ 18,877 $ 16,323 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 8,281 6,596 Amortization of acquired intangibles and goodwill 6,812 6,515 Deferred income taxes - 1,545 Minority interest in earnings 1,071 995 Provision for bad debts 1,944 1,197 Gain on sale of marketable securities (1,537) - Other, noncash items (1,989) 631 Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions: Accounts receivable, net (18,358) (10,459) Merchant processing working capital (7,205) 1,833 Inventory (726) (494) Prepaid expenses and other assets (5,411) (1,806) Accounts payable and accrued liabilities 1,568 2,003 Deferred income 5,434 2,054 Income taxes 15,696 5,696 ------------------------------ Net cash provided by operating activities 24,457 32,629 ------------------------------ Cash flows from investing activities: Capital expenditures (7,255) (8,077) Sale of marketable securities 2,912 - Purchase of investment (10,045) - ------------------------------ Net cash used in investing activities (14,388) (8,077) ------------------------------ Cash flows from financing activities: Net borrowings (repayments) under lines of credit 1,000 (10,000) Net principal payments under capital lease arrangements and other long-term debt (9,099) (3,095) Net proceeds of stock activities 1,141 1,689 Distributions to minority interests (1,194) (1,053) Dividends paid (2,543) (2,520) ------------------------------ Net cash used in financing activities (10,695) (14,979) ------------------------------ (Decrease) increase in cash and cash equivalents (626) 9,573 Cash and cash equivalents, beginning of period 4,295 3,241 ------------------------------ Cash and cash equivalents, end of period $ 3,669 $ 12,814 ==============================
See Notes to Unaudited Consolidated Financial Statements. 3 CONSOLIDATED BALANCE SHEETS NATIONAL DATA CORPORATION (In thousands, except share and per share data) - --------------------------------------------------------------------------------
August 31, May 31, 1999 1999 ----------- ---------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 3,669 $ 4,295 Billed accounts receivable 179,211 163,193 Unbilled accounts receivable 22,639 22,305 Allowance for doubtful accounts (10,752) (10,728) ----------- ---------- Accounts receivable, net 191,098 174,770 ----------- ---------- Income tax receivable - 8,348 Inventory 8,650 7,927 Net merchant processing receivable 5,411 - Deferred income taxes 1,191 1,191 Prepaid expenses and other current assets 20,483 16,297 ----------- ---------- Total current assets 230,502 212,828 ----------- ---------- Property and equipment, net 105,408 105,904 Intangible assets, net 417,699 424,324 Deferred income taxes 13,963 13,963 Investment 17,045 - Other 9,482 7,909 ----------- ---------- Total Assets $ 794,099 $ 764,928 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 36,000 $ 35,000 Current portion of long-term debt 204 6,245 Obligations under capital leases 13,322 13,113 Accounts payable and accrued liabilities 71,949 70,027 Net merchant processing payable - 1,794 Income tax payable 7,345 - Deferred income 37,441 30,258 ----------- ---------- Total current liabilities 166,261 156,437 ----------- ---------- Long-term debt 152,875 152,690 Obligations under capital leases 15,754 18,129 Other long-term liabilities 13,439 9,846 ----------- ---------- Total liabilities 348,329 337,102 ----------- ---------- Commitments and contingencies Minority interest in equity of subsidiaries 18,609 18,732 Shareholders' equity: Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issued - - Common stock, par value $.125 per share; 100,000,000 shares authorized, 33,953,023 and 33,953,031 shares issued, respectively. 4,244 4,244 Capital in excess of par value 345,371 345,639 Treasury stock, at cost, 42,296 and 175,442 shares, respectively (1,412) (5,857) Retained earnings 87,196 70,865 Deferred compensation (5,540) (3,215) Cumulative translation adjustment (2,698) (2,582) ----------- ---------- Total shareholders' equity 427,161 409,094 ----------- ---------- Total Liabilities and Shareholders' Equity $ 794,099 $ 764,928 =========== ==========
See Notes to Unaudited Consolidated Financial Statements. 4 NOTES TO UNAUDITED CONSOLIDATED ------------------------------- FINANCIAL STATEMENTS -------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements included herein have been prepared by National Data Corporation (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. In addition, certain reclassifications have been made to the fiscal 1999 consolidated financial statements to conform to the fiscal 2000 presentation. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K for the fiscal year ended May 31, 1999. In the opinion of management, the information furnished reflects all adjustments necessary to present fairly the financial position, results of operations, and cash flows for such interim periods. 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, and convertible debt, if converted, would have a dilutive effect on earnings per share. All options with an exercise price less than the average market share price for the period generally are assumed to have a dilutive effect on earnings per share. The following table sets forth the computation of basic and diluted earnings (In thousands):
Three Months Ended ------------------------------------------------------------------------------ August 31, 1999 August 31, 1998 ------------------------------------------------------------------------------ Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ ---------- Basic EPS: Net income $18,877 33,876 $0.56 $16,323 33,723 $0.48 -------- ---------- Effect of Dilutive Securities: Stock Options --- 1,389 --- 1,316 ------------------------ -------------------- 18,877 35,265 16,323 35,039 Convertible debt 1,195 2,752 --- --- Diluted EPS: ------------------------------------------------------------------------------ Income available to common stockholders plus assumed conversions $20,072 38,017 $0.53 $16,323 35,039 $0.47 ==============================================================================
5 For the three months ended August 31, 1998, convertible debt had no impact on the diluted earnings per share. Therefore, diluted earnings per share was not adjusted for convertible debt. NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash flow disclosures, including non cash investing and financing activities, for the three months ended August 31, 1999 and 1998 are as follows (In thousands):
1999 1998 ---- ---- Income taxes paid (received), net of refunds $(3,843) $2,870 Interest paid 1,573 1,649 Capital leases entered into in exchange for property and equipment 1,115 3,211 Non cash investment in Medscape 7,000 -
NOTE 4 - COMPREHENSIVE INCOME: The components of comprehensive income are as follows (In thousands):
Three months ended August 31, 1999 1998 ---- ---- Net income $18,877 $16,323 Foreign exchange effect (116) (974) ------- ------- Total comprehensive income $18,761 $15,349 ======= =======
NOTE 5 - SEGMENT INFORMATION: The segment information for the three month periods ended August 31, 1999 and August 31, 1998 is presented below. The Company classifies its businesses into two fundamental segments: Health Information Services and eCommerce. There has been no change in the composition of the reportable segments from the presentation of fiscal year 1999 segment information included in the most recent 10-K.
Health All Other Quarter Ended August 31, 1999 Information and (in thousands) Services eCommerce Corporate Totals - ------------------------------------------------------------------------------------------------ Revenues $114,226 $ 89,829 $ - $204,055 Depreciation and Amortization 9,149 5,346 598 15,093 EBITDA 23,359 27,007 (1,993) 48,373 Income (loss) before income tax 13,763 20,344 (3,413) 30,694 Segment assets 466,989 271,641 55,469 794,099
6
Health All Other Quarter Ended August 31, 1998 Information and (in thousands) Services eCommerce Corporate Totals - ------------------------------------------------------------------------------------------------------- Revenues $109,285 $ 82,397 $ - $191,682 Depreciation and Amortization 7,705 4,979 427 13,111 EBITDA 19,890 26,184 (2,057) 44,017 Income (loss) before income tax 11,991 19,826 (5,058) 26,759 Segment assets 422,042 258,687 66,586 747,315
NOTE 6 - SUBSEQUENT EVENTS: The Company announced on September 24, 1999 that its board of directors has authorized a plan to purchase up to an additional 2,000,000 shares of the company's common stock. This is in addition to the plan announced in October, 1998 when the company said that it would repurchase up to 500,000 shares. Subject to availability at prices the company deems appropriate, the repurchases may be made from time-to-time in the open market. The shares will be used to fund the company's internal requirements under various stock plans such as stock option, employee stock purchase, restricted stock and employee savings plans. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For an understanding of the significant factors that influenced the Company's results during the past two years, the following discussion should be read in conjunction with the consolidated financial statements of the Company and related notes appearing elsewhere in this report. Results of Operations
(In millions) 1999 1998 Change ----------------------- ------------------------ ----------- Revenue: NDC Health Information Services $114.2 56% $109.3 57% 4% NDC eCommerce 89.9 44% 82.4 43% 9% ------------------------------------------------------------------ Total Revenue $204.1 100% $191.7 100% 6% ================================================================== Depreciation and Amortization: NDC Health Information Services $ 9.2 61% $ 7.7 59% 19% NDC eCommerce 5.3 35% 5.0 38% 6% All Other and Corporate 0.6 4% 0.4 3% 50% ------------------------------------------------------------------ Total $ 15.1 100% $ 13.1 100% 15% ==================================================================
The Company's earnings before interest, taxes, depreciation and amortization (EBITDA) is defined as Operating Income plus depreciation and amortization. This statistic and its results as a percentage of revenue may not be comparable to similarly titled measures reported by other companies. However, management believes this statistic is a relevant measurement and provides a comparable cash earnings measure, excluding the impact of the amortization of acquired intangibles, potential timing differences associated with capital expenditures and the related depreciation charges and non-recurring charges.
1999 1998 Change --------------------- --------------------- ---------- EBITDA: NDC Health Information Services $23.4 48% $19.9 45% 18% NDC eCommerce 27.0 56% 26.2 60% 3% All Other and Corporate (2.0) (4%) (2.1) (5%) 5% -------------------------------------------------------------- Total EBITDA $48.4 100% $44.0 100% 10% ============================================================== Income before Income Taxes (IBIT): NDC Health Information Services $13.8 45% $12.0 45% 15% NDC eCommerce 20.3 66% 19.8 74% 3% All Other and Corporate (3.4) (11%) (5.0) (19%) 32% -------------------------------------------------------------- Total IBIT $30.7 100% $26.8 100% 15% ==============================================================
Consolidated Total revenue for the three months ended August 31, 1999 was $204.1 million, an increase of $12.4 million (6%) from the three months ended August 31, 1998 due to growth in customer base, transaction volumes and new services to our customers in both of our business segments. 8 Total cost of service, as a percentage of revenue, decreased from 52% in the three months ended August 31, 1998 to 50% in the three months ended August 31, 1999 due to improved efficiencies. Cost of service increased $1.5 million (1%) in the three months ended August 31, 1999 from the three months ended August 31, 1998. The increase was primarily a result of increased operating costs associated with the 6% revenue growth. Sales, general and administrative expenses increased $8.5 million (14%) from the same period last year. This increase was primarily due to expenses associated with investments in sales staffing and programs, customer service as well as Internet activities. As a percentage of revenue, these expenses increased to 34% for the three months ended August 31, 1999 from 32% for the three months ended August 31, 1998. Operating income increased 8% from $30.9 million in the three months ended August 31, 1998 to $33.3 million in the three months ended August 31, 1999. As a percentage of revenue, the Company's operating income margin increased to 16.3% in the three months ended August 31, 1999 from 16.1% in the three months ended August 31, 1998. These improvements reflect improved margins in operations gained through improved efficiencies. EBITDA for the three months ended August 31, 1999 increased by $4.4 million or 10% to $48.4 million due to the 6% revenue increase and productivity improvements. The EBITDA margin percentage was 23.7% in the three months ended August 31, 1999, compared to 23.0% in the three months ended August 31, 1998. IBIT for the three months ended August 31, 1999 improved to $30.7 million from $26.8 million in the three months ended August 31, 1998, a 15% increase. Total other expense decreased $1.6 million for the three months ended August 31, 1999 compared to the three months ended August 31, 1998. This decrease was primarily the result of the net gain of $1.5 million received on the sale of marketable securities. Earnings per share, diluted for exercisable securities, was $0.54 versus a comparable $0.47 last year. Potential additional dilution from the company's convertible debt due in November 2003 would adjust the $0.54 earnings per share to $0.53. NDC Health Information Services NDC Health Information Services revenue growth (4%) in the three months ended August 31, 1999 was a result of increases from internally developed products and services, primarily value added network transactions, physician practice management systems and Internet services. EBITDA for the three months ended August 31, 1999 was $23.4 million compared to $19.9 million in the three months ended August 31, 1998. This was an 18% growth in EBITDA that was due productivity improvements as measured by the EBITDA margin percentage that improved from 18.2% in the three months ended August 31, 1998 to 20.4% in the three months ended August 31, 1999 and the 4% increase in revenue. The Company improved EBITDA margins by offering higher margin value added services, by leveraging its fixed investments and through synergies realized from the integration of acquisitions. IBIT in the three months ended August 31, 1999 grew by 15% to $13.8 million from $12.0 million in the three months ended August 31, 1998. NDC eCommerce The NDC eCommerce revenue increase (9%) reflects the impact of growth of the industry, programs directed at new vertical industry offerings and new distribution channels (including the Internet) as reflected in revenues for authorization and draft capture transaction processing, fee services, customer support, various merchant fees and sale of equipment. This is offset by declines in the traditional cash management services. 9 EBITDA for the three months ended August 31, 1999 was $27.0 million compared to $26.2 million in the three months ended August 31, 1998. This 3% growth in EBITDA was due to the 9% increase in revenue and was partially offset by a reduction in the EBITDA margin percentage from 31.8% for the three months ended August 31, 1999 to 30.0% for the period ended August 31, 1999 due to increased investments in sales and new product development. IBIT in the three months ended August 31, 1999 grew 3% to $20.3 million from $19.8 million for the quarter ended August 31, 1998. All Other and Corporate All Other and Corporate is comprised primarily of corporate overhead functions and other corporate activities. This net expense declined by 32% from $5.0 million in the three months ended August 31, 1998 to $3.4 million in the three months ended August 31, 1999 primarily due to the sale of our marketable securities. Liquidity and Capital Resources Cash flow generated from operations provides the Company with a significant source of liquidity to meet its needs. Cash provided by operations before changes in assets and liabilities was $33.5 million for the three month period ended August 31, 1999, a decrease of $0.3 million (1%) compared to the same period of the prior year. Other, noncash items primarily includes amortization of debt issuance costs and restricted stock, loss on disposal of assets and recognition of Internet related license fees and promotional considerations. Cash required to fund net changes in assets and liabilities was $9.0 million and $1.2 million for the three month periods ended August 31, 1999 and 1998, respectively. The changes in assets and liabilities resulted primarily from an increase in accounts receivable, changes in net merchant processing funds, an increase in prepaid expenses and other assets, partially offset by cash provided by income tax refunds. The changes due to accounts receivable primarily relate to an increase in revenue and billing practices. The changes in net merchant processing funds reflect normal fluctuations in the timing of credit card settlements and funding of merchants and may vary from month to month. The increase in prepaid expenses and other assets primarily relates to timing of payments. Income taxes provided funds due to tax law changes (relating to the ability to utilize net operating loss carryforwards) enacted after May 31, 1999 but applicable to fiscal year 1999. Net cash provided by operating activities decreased 25.0% to $24.5 million from $32.6 million for the three month periods ended August 31, 1999 and 1998. Net cash used in investing activities was $14.4 million for the three month period ended August 31, 1999 compared to $8.1 for the three month period ended August 31, 1998. This increase is primarily due to the Medscape investment to support new Internet investments. Additionally, the Company continues to invest in capital expenditures related to growth in the business and acceleration of certain strategic initiatives. Net cash used in financing activities decreased to $10.7 million for the first three months ended August 31, 1999 from $15.0 in the same period of the prior year. The net effect of the payments and borrowings against the lines of credit is a $1.0 million borrowing for the three month period ended August 31, 1999 compared to a $10.0 million payment for the three month period ended August 31, 1998. The net borrowings for the three months ended August 31, 1999 primarily consisted of payments of approximately $9.0 million, offset by borrowings of $10.0 million related to the Medscape investment. Principal payments under capital lease arrangements and other long term debt increased to $9.1 million for the three month period ended August 31, 1999 from $3.1 million in the same period of the three 10 months ended August 31, 1998 due to the payoff of the $6.0 million Electronic Data Systems Corporation note payable. The Company reissued Treasury Stock valued at $1.1 million under Company stock plans. The Company announced on September 24, 1999 that its board of directors has authorized a plan to purchase up to an additional 2,000,000 shares of the company's common stock. This is in addition to the plan announced in October, 1998 when the company said that it would repurchase up to 500,000 shares. Dividends of $2.5 million were paid during the three month periods ended August 31, 1999 and 1998. The Company has a committed, unsecured $125.0 million revolving line of credit that expires in December 2002. At August 31, 1999, there was $32.0 million outstanding under the line of credit. The Company also has a $15.0 million uncommitted line of credit to fund working capital requirements, under which there was $4.0 million outstanding at August 31, 1999. 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 Readiness Introduction The Year 2000 issue is the result of the potential for computer programs to improperly interpret dates in the year 2000 and beyond. 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 a corporate Program Office to define, evaluate and conduct audits of the Company and its progress toward Year 2000 readiness. The Company also has a Year 2000 Senior Advisory Board comprised of members of senior management and a Year 2000 Task Force comprised of representatives from various departments from each of the Company's operating units. The Year 2000 Task Force is charged with evaluating the Company's Year 2000 efforts, managing implementation teams, 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 significant issues as they arise. State of Readiness The corporate Program Office has established an implementation plan to address the Year 2000 issue with respect to its information technology systems, hardware and software products and non-information technology products. The Company's year 2000 program is and has been implemented on a prioritized basis with systems most critical to the enterprise being addressed with the highest degree of priority. The implementation plan phases are stated and defined as follows: Phase I - Inventory/Assessment. The Company listed and classified 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, the Company assessed the likelihood of meeting the target dates to be corrected for Year 2000 data processing and ready for testing. This phase also included developing plans to manage each item on the inventory. 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 was performed on the third party products and the Company has made clients aware of upgrades/replacements that may be required if the third party products are not compliant. The Company has completed this phase for all systems. Phase II - Remediation. Determine and implement methodology for correcting Year ----------- 2000 issues via coding, upgrades, replacements, etc. and deliver to testing. These systems include communications and transaction processing, database management for healthcare applications, electronic commerce including credit, debit, and check, EDI services and NDC Health Information Services' pharmacy transaction submission, eligibility verification, data capture and editing. The Company has completed this phase for all systems. Phase III - Internal Testing. Perform testing based upon developed plans as a ---------------- result of the remediation phase, upgrades and/or testing of indicated Year 2000 ready 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's Phase III is substantially completed for its core operational networks. The Company's NDC Health Information Services' EDI systems are substantially complete. 12 Final testing efforts were originally planned to be completed by August 31, 1999. Substantial progress towards this goal was made; final testing efforts are planned for completion by October 31, 1999. Phase IV - External Testing. Perform end-to-end connection point testing with ---------------- third parties that the Company relies upon for certain operating elements via interfaces and also service providers as required. The Company targets this phase to be completed by October 31, 1999 for all key systems. The Company anticipates that continued testing with third parties may be required past the October date based on their availability. Testing is being performed as required and is dependent on third parties. The Company continues to actively pursue these dependencies to schedule required testing. Phase V - Implementation and Proactive Management. Transition Year 2000 ready --------------------------------------- computer systems into a production/live environment. The Company estimates completion of this phase by October 31, 1999. As testing is successfully completed, systems are implemented into a production/live environment. Management believes that its key systems will be Year 2000 ready by October 31, 1999. The following status chart indicates the approximate percentage of work completed for the mission-critical systems of the following material business units by phase as of October 11, 1999:
Phase I Phase II Phase III Phase IV Phase V PRODUCT LINE Target Date 2/28/99 6/30/99 8/31/99 9/30/99 10/31/99 - ----------- ------- ------- ------- ------- -------- Health Information Services Network Services 100% 100% 98% 93% 96% Information Management 100% 100% 100% 100% 100% eCommerce 100% 100% 100% 100% 100% Corporate Information Systems 100% 100% 100% 100% 100%
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 and capital expenditures 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. Based on experience derived from work performed to date, the costs incurred to date, excluding capital expenditures, are approximately $22 million. The funds were spent primarily to remediate via coding, upgrades, testing of third party software and implementation costs. The Company's costs to complete its Year 2000 compliance program are estimated to be approximately $3 million in fiscal year 2000. The capital expenditures incurred to date are approximately $12 million and estimated capital expenditures to complete the program are estimated to be an additional $1 million. These capital expenditures amounts include only those initiatives undertaken specifically to resolve Year 2000 issues. However, some Year 2000 issues were successfully corrected by other capital projects that addressed many of the Company's initiatives such as consolidation of information, productivity improvements and leveraging 13 fixed costs. 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. These cost estimates also do not include the cost of executing the contingency planning and proactive maintenance as the Year 2000 approaches. Currently, the Company is expecting this cost to be an additional $3-$5 million. 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, from customers' systems and from third parties' systems and networks upon which the Company relies. Risks also exist if customers fail to complete conversion activities. 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. Testing is being performed as required and is dependent on third parties. The Company continues to actively pursue these dependencies to schedule required testing. 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 or conversions until the end of 1999. The Company has been active in advising customers and business partners of their obligation and the Company continues to evaluate 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 has been analyzed. Testing has been completed and/or scheduled for substantially all key systems. 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 ensure that products with significant revenues are fully ready, tested and implemented before October 31, 1999, so that the Company's overall revenue is not materially 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, hardware, computer systems, banks and utility companies. Due diligence continues to be performed on suppliers to the Company as described in Phases III, IV and V. Inquiries are made regarding suppliers' Year 2000 efforts and contingency plans are developed as necessary. However, the Company does not exert 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 14 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 Plans The corporate Program Office is working with each business unit to develop contingency plans based on corporate Program Office guidelines. There are two types of plans. First, all of the Company's business units have hardware/software business continuity plans in case a supplier of hardware/software products or internally developed systems used in the business does not have a Year 2000 version in time for implementation and testing. A second type of contingency plan focuses on emergency recovery plans to support the date change event. Each business unit contingency plan calls for obtaining goods or services from alternative sources, utilizing alternative methods to perform functions, and establishing command centers and communication procedures to manage the actual rollover to the Year 2000. The Company's units have developed staffing support plans to ensure the appropriate on-site staff are in place to implement any emergency recovery plan and address any issues that may arise. It is expected that these plans will be updated throughout 1999, as the Company completes testing with third parties and gains a better understanding of external third party risks. The Company's Year 2000 readiness activities are being regularly monitored and evaluated. Contingency and proactive maintenance plans will address key third party dependencies, facilities, utilities and staffing. On-site audits and walkthroughs are being performed to evaluate the progress of the operating units toward meeting their goals. The results of these audits and walkthroughs are compared to the implementation plan and presented to the Senior Advisory Board. Summary The Company is working to ensure that its systems are Year 2000 ready this year through the steps taken and planned to be taken, as described above. 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. 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 readiness issues that are discovered. 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 issues. 15 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," "intends" and similar expressions are intended to identify forward-looking statements concerning the Company's business operations, economic performance and financial condition, including in particular, the Company's business strategy and means to implement the strategy, the Company's objectives, the amount of future capital expenditures, the likelihood of the Company's success in developing and introducing new products and expanding its business, and the timing of the introduction of new and modified products or services. For those statements, the Company claims the protection of the safe harbor for forward- looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond the control of the Company and reflect future business decisions that are subject to change. As a result of a variety of factors, actual results could differ materially from those anticipated in the Company's forward-looking statements, including the following factors: (a) those set forth in Exhibit 99.1 to the Registrant's Annual Report on Form 10-K for the period ended May 31, 1999 which are incorporated herein by this reference, and elsewhere herein; and (b) those set forth from time to time in the Company's press releases and reports and other filings made with the Securities and Exchange Commission. The Company 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. 16 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 1999 Annual Meeting of Stockholders of National Data Corporation will be held at the Company's offices in Atlanta, Georgia on October 28, 1999. The items to be addressed are: 1. To elect one director in Class I to serve until the annual meeting of stockholders in 2002, or until his successor is duly elected and qualified; and 2. To adopt the Company's 2000 Long-Term Incentive Plan; and 3. To vote on a proposal to amend the Certificate of Incorporation of the Company to increase the number of shares of Common Stock of the Company authorized for issuance from 100,000,000 to 200,000,000; and 4. To transact any other business that may properly come before the meeting. ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K - ----------------------------------------------- (a) Exhibits: (27) Financial Data Schedule (for SEC use only) (b) Reports Filed on Form 8-K: None 17 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 14, 1999 By: /s/ Kevin C. Shea ---------------- ------------------------------ Kevin C. Shea Chief Financial Officer (Principal Financial Officer) Date: October 14, 1999 By: /s/ David H. Shenk ------------------ ------------------------------ David H. Shenk Corporate Controller (Chief Accounting Officer) 18 EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAY-31-2000 JUN-01-1999 AUG-31-1999 3,669 0 201,850 10,752 8,650 230,502 230,084 124,676 794,099 166,261 149,698 0 0 4,244 422,917 794,099 0 204,055 0 101,833 68,942 1,944 3,194 30,694 11,817 18,877 0 0 0 18,877 0.56 0.53
-----END PRIVACY-ENHANCED MESSAGE-----