<PAGE>
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
---------------------------------
<PAGE>
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
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended August 31,
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
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
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION
(In thousands, except share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
August 31, May 31,
1998 1998
---------- ---------
<S> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
(In millions)
<TABLE>
<CAPTION>
First Quarter Ended August 31,
------------------------------------------------------- ------------
1998 1997 Increase
------------------------- ------------------------- ------------
<S> <C> <C> <C> <C> <C>
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%
====================================================================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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."
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 12,814
<SECURITIES> 0
<RECEIVABLES> 164,164
<ALLOWANCES> 8,463
<INVENTORY> 5,741
<CURRENT-ASSETS> 191,386
<PP&E> 181,995
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<TOTAL-ASSETS> 747,315
<CURRENT-LIABILITIES> 187,325
<BONDS> 167,876
0
0
<COMMON> 4,236
<OTHER-SE> 358,431
<TOTAL-LIABILITY-AND-EQUITY> 747,315
<SALES> 0
<TOTAL-REVENUES> 191,682
<CGS> 0
<TOTAL-COSTS> 100,375
<OTHER-EXPENSES> 60,401
<LOSS-PROVISION> 1,197
<INTEREST-EXPENSE> 3,726
<INCOME-PRETAX> 26,759
<INCOME-TAX> 10,436
<INCOME-CONTINUING> 16,323
<DISCONTINUED> 0
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
