<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 November 30, 1998.
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-12392
---------
NATIONAL DATA CORPORATION
-------------------------
(Exact name of registrant as specified in charter)
DELAWARE 58-0977458
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
National Data Plaza, Atlanta, Georgia 30329-2010
-------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 404-728-2000
------------
NONE
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, Par Value $.125 33,670,616 shares
------------------------------------------------
Outstanding as of January 5, 1999
---------------------------------
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
(In thousands, except per share data)
- ------------------------------------------------------------------------------
Three Months Ended November 30,
-------------------------------
1998 1997
--------------------------------
Revenue $191,522 $144,325
- ------------------------------------------------------------------------------
Operating Expenses:
Cost of service 98,852 73,785
Sales, general and administrative 62,970 55,670
--------------------------------
161,822 129,455
--------------------------------
Operating income 29,700 14,870
- ------------------------------------------------------------------------------
Other income (expense):
Interest and other income 844 456
Interest and other expense (3,929) (3,040)
Minority interest (817) (607)
--------------------------------
(3,902) (3,191)
--------------------------------
Income before income taxes 25,798 11,679
Provision for income taxes 10,061 4,617
- ------------------------------------------------------------------------------
Net income $ 15,737 $ 7,062
================================
Basic earnings per share $ 0.47 $ 0.23
================================
Diluted earnings per share $ 0.45 $ 0.22
================================
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
(In thousands, except per share data)
- -------------------------------------------------------------------------
Six Months Ended November 30,
-----------------------------
1998 1997
-----------------------------
Revenue $ 383,204 $292,229
- -------------------------------------------------------------------------
Operating Expenses:
Cost of service 199,227 148,838
Sales, general and administrative 123,371 106,722
----------------------------
322,598 255,560
----------------------------
Operating income 60,606 36,669
- -------------------------------------------------------------------------
Other income (expense):
Interest and other income 1,418 940
Interest and other expense (7,655) (6,069)
Minority interest (1,812) (1,308)
----------------------------
(8,049) (6,437)
----------------------------
Income before income taxes 52,557 30,232
Provision for income taxes 20,497 11,580
- -------------------------------------------------------------------------
Net income $ 32,060 $ 18,652
============================
Basic earnings per share $ 0.95 $ 0.61
============================
Diluted earnings per share $ 0.92 $ 0.58
============================
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION
(In thousands)
- ------------------------------------------------------------------------------------------------------
Six Months Ended November 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,060 $ 18,652
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 13,869 13,383
Amortization of acquired intangibles and goodwill 13,275 9,469
Minority interest in earnings 1,812 1,308
Provision for bad debts 2,644 559
Other, net 1,191 534
Changes in current assets and liabilities which provided (used) cash,
net of the effects of acquisitions:
Accounts receivable, net (7,813) (6,102)
Merchant processing working capital (5,904) 3,295
Inventory (1,143) 390
Prepaid expenses and other assets (2,630) 1,325
Accounts payable and accrued liabilities 5,922 (12,716)
Income taxes payable and deferred income taxes (3,600) (4,354)
-----------------------
Net cash provided by operating activities 49,683 25,743
-----------------------
Cash flows from investing activities:
Capital expenditures (18,732) (11,687)
Decrease in investments 1,126 -
Business acquisitions, net of cash acquired - (8,424)
-----------------------
Net cash used in investing activities (17,606) (20,111)
-----------------------
Cash flows from financing activities:
Net repayments under lines of credit (8,000) -
Net (payments) borrowings on notes payable (1,424) 4,111
Net principal payments under capital lease arrangements (6,191) (1,869)
Net proceeds from the issuance of stock from stock plans - 3,331
Net treasury stock purchased (5,757) -
Distributions to minority interests (1,053) (3,134)
Dividends paid (5,045) (3,982)
-----------------------
Net cash used in financing activities (27,470) (1,543)
-----------------------
Increase in cash and cash equivalents 4,607 4,089
Cash and cash equivalents, beginning of period 3,241 18,909
-----------------------
Cash and cash equivalents, end of period $ 7,848 $ 22,998
=======================
See Notes to Unaudited Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION
(In thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------
November 30, May 31,
1998 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,848 $ 3,241
Billed accounts receivable 143,047 135,223
Unbilled accounts receivable 19,355 18,835
Allowance for doubtful accounts (10,812) (7,394)
------------- -------------
Accounts receivable, net 151,590 146,664
Income tax receivable 144 635
Inventory 6,393 5,253
Deferred income taxes 1,281 -
Prepaid expenses and other current assets 21,890 16,333
------------- -------------
Total current assets 189,146 172,126
------------- -------------
Property and equipment, net 92,385 74,234
Intangible assets, net 431,620 458,223
Deferred income taxes 36,601 20,145
Other 6,776 6,487
------------- -------------
Total Assets $ 756,528 $ 731,215
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 67,000 $ 75,000
Current portion of long-term debt 6,239 1,621
Obligations under capital leases 12,729 11,053
Accounts payable and accrued liabilities 76,128 73,115
Deferred income taxes - 92
Deferred income 25,106 25,216
------------- -------------
Total current liabilities 187,202 186,097
------------- -------------
Long-term debt 149,497 155,477
Obligations under capital leases 18,034 12,390
Other long-term liabilities 13,131 10,313
------------- -------------
Total liabilities 367,864 364,277
------------- -------------
Minority interest in equity of subsidiaries 19,762 19,003
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issued - -
Common stock, par value $.125 per share; 100,000,000 shares authorized, 33,888,849
and 33,791,534 shares issued, respectively. 4,236 4,224
Capital in excess of par value 342,265 344,019
Treasury stock, at cost, 271,581 and 159,200 shares, respectively (8,358) (5,980)
Retained earnings 36,453 9,537
Cumulative translation adjustment (2,963) (2,011)
Deferred compensation (2,731) (1,854)
------------- -------------
Total Shareholders' Equity 368,902 347,935
------------- -------------
Total Liabilities and Shareholders' Equity $ 756,528 $ 731,215
============= =============
See Notes to Unaudited Consolidated Financial Statements.
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED
-------------------------------
FINANCIAL STATEMENTS
---------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading.
It is suggested that these financial statements are read in conjunction with the
financial statements and notes thereto included in the Company's latest annual
report on Form 10-K for the fiscal year ended May 31, 1998.
In the opinion of management, the information furnished reflects all adjustments
necessary to present fairly the financial position, results of operations, and
cash flows for such interim periods.
NOTE 2 - EARNINGS PER SHARE:
Basic earnings per share is computed by dividing reported earnings available to
common shareholders by weighted average shares outstanding during the period.
Diluted earnings per share is computed by dividing reported earnings available
to common shareholders by weighted average shares outstanding during the period
and the impact of securities that, if exercised, would have a dilutive effect on
earnings per share using the treasury stock method. All options with an
exercise price less than the average market share price for the period
generally are assumed to have a dilutive effect on earnings per share. The
convertible notes issued in fiscal 1997 have an antidilutive effect on diluted
earnings per share; accordingly, the notes are excluded from earnings per share
calculations.
The basic and diluted number of shares outstanding are as follows (In
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
---------------------------------------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Basic 33,681 30,937 33,702 30,894
Stock Options 1,127 1,506 1,221 1,585
---------------------------------------------------------------
Diluted 34,808 32,443 34,923 32,479
===============================================================
</TABLE>
6
<PAGE>
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow disclosures, including non-cash investing and financing
activities, for the six months ended November 30, 1998 and 1997 are as follows
(In thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Income taxes paid, net of refunds $21,090 $14,760
Interest paid 7,217 5,489
Property and equipment capital leases 13,511 1,455
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME:
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for the reporting and display of "comprehensive
income" and its components. Comprehensive income for the Company consists of
net income and foreign currency translation adjustments. Total comprehensive
income (in thousands of dollars) was $15,769 and $7,094 for the three month
periods ended November 30, 1998 and 1997, respectively. Total comprehensive
income (in thousands of dollars) was $32,165 and $18,660 for the six month
periods ended November 30, 1998 and 1997, respectively.
NOTE 5 - SUBSEQUENT EVENTS:
The Company acquired substantially all of the assets of John Richardson
Computers ("JRC") on December 31, 1998 from its parent company Taylor Nelson
Sofres plc. JRC, based in Preston, England, is a leading provider of systems
for pharmacies throughout the United Kingdom. This acquisition strengthens the
Company's presence in the United Kingdom Health Information Services market.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
(In millions)
<TABLE>
<CAPTION>
Second Quarter Ended November 30,
------------------------------------------------------------------------
1998 1997 Increase
------------------------- ------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Health Information Services $112.4 59% $ 72.5 50% 55%
Electronic Commerce:
Integrated Payment Systems 46.1 24% 38.7 27% 19%
Global Payment Systems 40.8 21% 39.8 28% 3%
Intercompany Revenue (7.8) (4%) (6.7) (5%) 16%
-------------------------------------------------------------------------
79.1 41% 71.8 50% 10%
-------------------------------------------------------------------------
Total Revenue $191.5 100% $144.3 100% 33%
=========================================================================
</TABLE>
Total revenue for the second quarter of fiscal 1999 was $191.5 million, an
increase of $47.2 million (33%) from the same period in fiscal 1998. The
increase resulted from increased revenue in Health Information Services, $39.9
million (55%); and in the Electronic Commerce business, specifically, Integrated
Payment Systems, $7.4 million (19%), and Global Payment Systems, $1.0 million
(3%).
(In millions)
<TABLE>
<CAPTION>
Six Months Ended November 30,
------------------------------------------------------------------------
1998 1997 Increase
------------------------ ------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Health Information Services $221.8 58% $147.8 51% 50%
Electronic Commerce:
Integrated Payment Systems 94.5 25% 77.5 27% 22%
Global Payment Systems 82.3 21% 80.2 27% 3%
Intercompany Revenue (15.4) (4%) (13.3) (5%) 16%
-------------------------------------------------------------------------
161.4 42% 144.4 49% 12%
-------------------------------------------------------------------------
Total Revenue $383.2 100% $292.2 100% 31%
=========================================================================
</TABLE>
Total revenue for the first half of fiscal 1999 was $383.2 million, an
increase of $91.0 million (31%) from the same period in fiscal 1998. The
increase resulted from increased revenue in Health Information Services, $74.0
million (50%); and in the Electronic Commerce business, specifically, Integrated
Payment Systems, $17.0 million (22%), and Global Payment Systems, $2.1 million
(3%).
8
<PAGE>
Health Information Services. Health Information Services revenue growth in
----------------------------
the second quarter and first half of fiscal 1999 was a result of increases from
internally developed products and services as well as the impact of two third
quarter fiscal 1998 acquisitions, Source Informatics Inc. ("Source") and a
subsidiary of Pharmaceutical Marketing Services Inc. ("PMSI").
Electronic Commerce. Electronic Commerce revenue growth in the second
--------------------
quarter and first half of fiscal 1999 reflects the impact of growth of the
industry, programs directed at new vertical industry offerings and new
distribution channels, in addition to growth in basic market demand. This growth
was reflected in an increase in the volume of merchant sales processed, due to a
larger customer base and higher consumer credit card spending. In addition, the
fourth quarter fiscal 1998 acquisition of CheckRite International, Inc. and
Global Payment Systems' new back office services contributed to the revenue
growth in the fiscal 1999 results.
COSTS AND EXPENSES
Cost of service increased $25.1 million (34%) in the second quarter and
$50.4 million (34%) in the first half of fiscal 1999 from the same periods in
fiscal 1998. The increase was primarily a result of increased operating costs
associated with revenue growth and higher cost of service in companies acquired
in fiscal 1998, primarily Physician Support Systems, Inc. ("PHSS") to support
current and expected revenue growth in the physician management services area.
Total cost of service, as a percentage of revenue, increased from 51%, for both
the second quarter and first half of fiscal 1998, to 52% for the same periods of
fiscal 1999. The Company continues to make investments to leverage its computer
operations, telecommunications infrastructure, and investments in new market
opportunities.
Sales, general and administrative expenses ("SG&A") increased $7.3 million
(13%) in the second quarter and $16.6 million (16%) in the first half of fiscal
1999 from the same periods in fiscal 1998. This increase was primarily due to
expenses associated with continuing investments in product development, Year
2000 compliance initiatives, distribution channel expansion and development of
the Health Information Services branding program for continued revenue growth.
However, as a percentage of revenue, these expenses decreased to 33% from 39%
for the second quarter of fiscal 1999 from the same period in fiscal 1998. As a
percentage of revenue, these expenses decreased to 32% from 37% for the first
half of fiscal 1999 from the same period in fiscal 1998. SG&A expenses continue
to decrease as a percentage of revenue since revenues are growing at a faster
rate than these expenses. The decrease as a percentage of revenue also reflects
synergies realized from the integration of acquisitions.
9
<PAGE>
OPERATING INCOME
Operating income increased to $29.7 million from $14.9 million (100%) in
the second quarter of fiscal 1999 from the same period in fiscal 1998. As a
percentage of revenue, the Company's operating income margin increased 50% to
15.5% from 10.3% in the second quarter of fiscal 1999 from the same period in
fiscal 1998.
Operating income increased to $60.6 million from $36.7 million (65%) in the
first half of fiscal 1999 from the same period in fiscal 1998. As a percentage
of revenue, the Company's operating income margin increased 26% to 15.8% from
12.5% in the first half of fiscal 1999 from the same period in fiscal 1998.
These improvements reflect improved margins in operations and profitability
through execution of strategies to reposition the base business and investments
in new market opportunities.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
was $43.8 million for the second quarter of fiscal 1999 and $26.1 million for
the same period in fiscal 1998. As a percentage of revenue, EBITDA was 23% for
the second quarter of fiscal 1999 and 18% for the same period in fiscal 1998.
EBITDA was $87.8 million for the first half of fiscal 1999 and $59.5
million for the same period in fiscal 1998. As a percentage of revenue, EBITDA
was 23% for the first half of fiscal 1999 and 20% for the same period in fiscal
1998.
The Company's EBITDA formula and results as a percentage of revenue may not
be comparable to similarly titled measures reported by other companies.
However, management believes this statistic is a relevant measurement and
provides a comparable operating income measure, excluding the impact of the
amortization of acquired intangibles, potential timing differences associated
with capital expenditures and the related depreciation charges.
10
<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 93% to $49.7 million for the first half of fiscal 1999,
from $25.7 million in the same period of fiscal 1998. Cash provided by
operations before changes in working capital was $64.9 million for the first
half of fiscal 1999, an increase of $21.0 million (48%) compared to the same
period of the prior year. This difference is primarily driven by the $28.2
million increase in EBITDA. Cash required to fund net changes in working
capital was $15.2 million in the first half of fiscal 1999 and $18.2 million for
the same period in fiscal 1998. The changes in working capital resulted
primarily from an increase in accounts receivable due to revenue growth, changes
in net merchant processing funds, the timing and payments for prepaid expenses,
other current assets, accounts payable and accrued liabilities. The changes in
net merchant processing funds reflect normal fluctuations in the timing of
credit card sales processed and vary from month to month. The changes due to
accounts payable and accrued liabilities primarily relate to the timing of
payroll and related liabilities.
For the first half of fiscal 1999, cash used in investing activities decreased
to $17.6 million, compared to $20.1 million in the same period of fiscal 1998.
The decrease is primarily due to the first quarter fiscal 1998 investment in the
acquisition of two pharmacy systems companies in the United Kingdom. The
decrease is partially offset by an increase in capital expenditures during the
first half of fiscal 1999. The Company continues to invest in capital
expenditures related to growth in the business and acceleration of certain
strategic initiatives. The Company has financed its investing activities through
cash flows from operations, equity, borrowings on its line of credit and debt
offerings.
Net cash used in financing activities increased to $27.5 million for the first
half of fiscal 1999 from $1.5 in the same period of fiscal 1998. During this
period, the Company repaid $8.0 million on the $75.0 million borrowed in fiscal
1998 to finance portions of its acquisitions, merger costs and to eliminate
PHSS' outstanding line of credit balance ($32.6 million). Principal payments
under capital lease arrangements increased to $6.2 million for the first half of
1999 from $1.9 million in the same period of fiscal 1998 due to capital leases
acquired through 1998 acquisitions and current year property and equipment
acquired under capital leases. The Company purchased $7.5 million of its own
common stock during the first half of fiscal 1999, offset by the reissuance of
stock valued at $1.7 million under Company stock plans. Dividends of $5.0
million and $4.0 million were paid during the first six month periods of fiscal
1999 and 1998, respectively.
The Company has a committed, unsecured $125.0 million revolving line of credit
that expires in December 2002. At November 30, 1998, there was $67.0 million
outstanding under the facility. The Company also has a $15.0 million
uncommitted line of credit to fund working capital requirements, under which
there were no amounts outstanding at November 30, 1998. Management believes
that its current level of cash and borrowing capacity, along with future cash
flows from operations are sufficient to meet the needs of its existing
operations and its planned requirements for the foreseeable future. The Company
regularly evaluates cash requirements for current operations, commitments,
development activities and strategic acquisitions. The Company may elect to
raise additional funds for these purposes, either through the issuance of
additional debt or equity or otherwise, as appropriate.
11
<PAGE>
YEAR 2000 COMPLIANCE
INTRODUCTION
The Year 2000 issue is the result of the potential for computer programs to
improperly interpret dates in the year 2000 and beyond. Certain of the Company's
computer systems used for product or internal use that have time/date-sensitive
software and hardware may misinterpret dates resulting in a system failure or
miscalculation. The Company presently believes that, with modification to
existing computer systems as scheduled, the Year 2000 issue should not pose
significant operational problems for the Company's products and internal
systems, as so modified and converted.
The Company has formed a corporate Program Office to define, evaluate and
conduct audits of the Company and its progress toward Year 2000 compliance. The
Company also has a Year 2000 Senior Advisory Board comprised of nine members of
senior management and a Year 2000 Task Force comprised of representatives from
various departments from each of the Company's operating subsidiaries. The Task
Force is charged with evaluating the Company's Year 2000 efforts and regularly
reporting results to the corporate Program Office. The corporate Program Office
monitors the progress of the operating units in their implementation plans to
resolve Year 2000 issues, tracks dependencies and provides reports to the Senior
Advisory Board. The Senior Advisory Board is charged with evaluating the
progress reported by the corporate Program Office and addressing any strategic
issues as they arise.
STATUS OF PROGRESS
The corporate Program Office has established an implementation plan to
address the Year 2000 issue. The implementation plan phases are stated and
defined as follows:
Phase I - Inventory/Assessment. List and classify all significant software,
--------------------
hardware, networks, products, services, facilities, environment, third party
relationships and any additional items that could be affected by the Year 2000
issue. For each item on the inventory, assess the likelihood of meeting the
target dates to be corrected for Year 2000 data processing and ready for
testing. This phase includes developing plans and strategies to manage each item
on the inventory and assessment. Certain of the Company's products/services
utilize third party software and/or hardware products in conjunction with
proprietary software. In these cases, due diligence has been performed on the
third party vendors and the Company has made or is in the process of making
clients aware of upgrades/replacements that may be required if the third party
products are not compliant.
Phase II - Remediation. Determine and implement methodology for correcting Year
-----------
2000 issues via coding, upgrades, replacements, etc. and deliver to testing.
Phase III - Internal Testing. Perform testing from developed plans as a result
----------------
of remediation, upgrades and/or testing of indicated Year 2000 compliant third
party applications or services. At the completion of this phase, the Company's
computer systems are deemed to be Year 2000 ready subject to implementation.
The Company anticipates this phase will be substantially completed by June 1,
1999.
Phase IV - External Testing. Perform end to end connection point testing with
----------------
third parties the Company relies upon for certain operating elements via
interfaces and service providers. While this phase is scheduled to be completed
by September 1999, the Company anticipates continuing tests with third parties
past this date.
12
<PAGE>
Phase V - Implementation and Proactive Management. Transition Year 2000
---------------------------------------
compliant computer systems into a production/live environment.
For mission critical systems, the Company believes Phase I is completed. The
diverse mission critical systems across the Company are at various stages of
completion in Phase II. For the systems requiring remediation, a majority in the
Health Information Services business have entered Phase III. The Electronic
Commerce business has accomplished degrees of fulfillment through Phase IV,
ahead of schedule. The Company believes its efforts will meet the scheduled
target dates through Phase III. However, some of the remediation is ongoing due
to the reliance upon suppliers, vendors and outsourcers for systems upgrades,
evaluation and testing.
COSTS TO ADDRESS
As it relates to internal computer systems, the Company is incurring
internal staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare its systems for
the Year 2000. Given the nature of the Company's ongoing system development
activities throughout its businesses, it is difficult to quantify, with
specificity, all of the costs being incurred to address this issue. A
significant portion of these costs is not likely to be incremental costs to the
Company, but will represent the redeployment of existing information technology
resources. The Company's employees have performed the majority of the work
completed thus far on the implementation plans. The costs incurred to date range
between $15-20 million. The estimated costs to complete comprise an additional
$5-10 million in the current fiscal year and $5 million in the next fiscal year.
These costs exclude capital expenditure estimates, as the Company is completing
its assessment of all capital requirements. The total cost estimate for the
implementation plan may be revised because the plan is constantly evaluated and
revised as a result of many factors. These factors include, but are not limited
to, the results of any phase of the implementation plan, customer requirements,
or recommendations by contractors retained by the Company. The Company does not
expect that the opportunity costs of executing the implementation plan will have
a material effect on the financial condition of the Company or its results of
operations.
RISKS
The Year 2000 issue creates risk for the Company from unforeseen problems
in its own computer systems and from third parties upon which the Company
relies. Accordingly, the Company is requesting assurances from certain software
vendors from which it has acquired, or from which it may acquire software, that
the software will correctly process all date information at all times. In
addition, the Company is querying certain of its customers and suppliers as to
their progress in identifying and addressing problems that their computer
systems will face in correctly processing date information as the Year 2000
approaches and is reached. The Company is heavily reliant upon customers and
other third parties in the health care, banking and credit card industries, in
terms of electronic interfaces. Failure to appropriately address the Year 2000
issue by major customers or suppliers or a material percentage of the smaller
customers could have a material adverse effect on the financial condition and
results of operations of the Company. The Company does not expect any material
research and development activities to be delayed due the Year 2000 compliance
efforts, however if certain initiatives are delayed, the result could have an
adverse effect to the Company.
13
<PAGE>
In order for the testing phase of the Year 2000 plan to be completed, the
Company is reliant upon its customers and other third party connection points to
prepare their systems for testing. The Company could be affected if a
significant number of customers delay testing until the end of 1999. In order to
address this issue, the Company is evaluating the impact of those customers who
have not yet coordinated with the Company for upgrades, certification/
verification, and testing. The customers with the greatest revenue impact have
been identified and their testing/certification process is being analyzed. If
possible, coordination for testing is targeted by June 1999. If coordination of
a preset testing time is not possible, the revenue impact for the accommodation
of last minute testing is being evaluated. The goal is to protect major revenues
before October 1999, so that the Company's overall revenue is not impacted.
The Company's business is also heavily reliant upon external suppliers to
provide certain operating elements of its business. Some of these providers
include telecommunication services, computer systems, banks and utility
companies. Currently, due diligence is being performed on suppliers to the
Company. Inquiries are made regarding each supplier's Year 2000 efforts and
contingency plans are developed as necessary. However, the Company exerts no
control over the efforts of these companies to become Year 2000 compliant. The
services provided by these parties are critical to the operations of the Company
and the Company is heavily reliant upon these parties to successfully address
the Year 2000 issue. Therefore, if any of these parties fail to provide the
Company with services, the Company's ability to conduct business could be
materially impacted. The result of such impact may have a material adverse
effect on the financial condition and results of operations of the Company.
CONTINGENCY
The Company's Year 2000 compliance activities are being regularly monitored
and evaluated. Contingency plans are being established and implemented as the
risks are identified. On-site audits are being performed to evaluate the
progress of the operating units toward meeting their goals. The results of these
audits are compared to the implementation plan and presented to the Senior
Advisory Board and the Company's Board of Directors. Also, the dependencies
between operating units have been documented.
SUMMARY
There are no assurances that the Company will identify all date-handling
problems in its business systems or those of its customers and suppliers in
advance of their occurrence or that the Company will be able to successfully
remedy all Year 2000 compliance issues that are discovered. However, the
Company, in good faith, is working to identify all issues. To the extent that
the Company is unable to resolve its Year 2000 issues prior to January 1, 2000,
operating results could be adversely affected. In addition, the Company could
be adversely affected if other entities (i.e. vendors or customers) not
affiliated with the Company do not appropriately address their own Year 2000
compliance issues in advance of their occurrence.
14
<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 the
Registrant's Quarterly Report on Form 10-Q for the period ended August 31, 1998
and, incorporated herein by reference, and elsewhere herein; and (b) those set
forth from time to time in the Company's press releases and reports and other
filings made with the Securities and Exchange Commission. The Company cautions
that such factors are not exclusive. Consequently, all of the forward-looking
statements made herein are qualified by these cautionary statements and readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions of such forward-looking statements
that may be made to reflect events or circumstances after the date hereof, or
thereof, as the case may be, or to reflect the occurrence of unanticipated
events.
15
<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 SECURITITES
- --------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company's annual meeting of stockholders was held on October 22, 1998. At
the annual meeting, the stockholders of the Company approved the following
items:
1. Election of J. Veronica Biggins as the Class III director, to serve until
the annual meeting of stockholders in 2001, or until her successor is duly
elected and qualified;
2. Amendment of the 1984 Non-employee Director Stock Option Plan ("the Director
Option Plan") to:
(a) increase the number of shares that may be issued thereunder from
345,000 to 545,000 shares;
(b) extend the termination date from September 6, 1999 until September 6,
2004; and
(c) provide that any option granted under the Director Option Plan may be
assigned or transferred by will, the laws of descent and distribution
or pursuant to a qualified domestic relations order or to certain
permitted transferees approved by the Board of Directors or a Committee
of the Board of Directors administering the Director Option Plan.
ITEM 5 - OTHER INFORMATION
- --------------------------
None
ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K
- -----------------------------------------------
(a) Exhibits: Exhibit 27 - Financial Data Schedule
(b) Reports Filed on Form 8-K:
16
<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: January 14, 1999 By: /s/ Kevin C. Shea
---------------- -----------------------------
Kevin C. Shea
Chief Financial Officer
(Principal Financial Officer)
Date: January 14, 1999 By: /s/ David H. Shenk
---------------- -----------------------------
David H. Shenk
Corporate Controller
(Chief Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 7,848
<SECURITIES> 0
<RECEIVABLES> 162,402
<ALLOWANCES> 10,812
<INVENTORY> 6,393
<CURRENT-ASSETS> 189,146
<PP&E> 202,810
<DEPRECIATION> 110,425
<TOTAL-ASSETS> 756,528
<CURRENT-LIABILITIES> 187,202
<BONDS> 149,497
0
0
<COMMON> 4,236
<OTHER-SE> 364,666
<TOTAL-LIABILITY-AND-EQUITY> 756,528
<SALES> 0
<TOTAL-REVENUES> 383,204
<CGS> 0
<TOTAL-COSTS> 199,227
<OTHER-EXPENSES> 123,371
<LOSS-PROVISION> 2,644
<INTEREST-EXPENSE> 7,655
<INCOME-PRETAX> 52,557
<INCOME-TAX> 20,497
<INCOME-CONTINUING> 32,060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,060
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.92
</TABLE>
