UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended August 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-12392
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NATIONAL DATA CORPORATION
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(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
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NONE
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(Former name, former address and former fiscal year, if
changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, Par Value $.125 - 33,903,099 shares
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Outstanding as of September 30, 1999
------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NATIONAL DATA CORPORATION
(In thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended August 31,
--------------------------------
1999 1998
---------- ---------
Revenues $ 204,055 $ 191,682
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 101,833 100,375
Sales, general and administrative 68,942 60,401
--------------------------------
170,775 160,776
--------------------------------
Operating income 33,280 30,906
- -------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 1,679 574
Interest and other expense (3,194) (3,726)
Minority interest in earnings (1,071) (995)
--------------------------------
(2,586) (4,147)
--------------------------------
Income before income taxes 30,694 26,759
Provision for income taxes 11,817 10,436
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 18,877 $ 16,323
================================
Basic earnings per share $ 0.56 $ 0.48
================================
Diluted earnings per share $ 0.53 $ 0.47
================================
See Notes to Unaudited Consolidated Financial Statements.
2
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION
(In thousands)
- --------------------------------------------------------------------------------
Three Months Ended August 31,
------------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 18,877 $ 16,323
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 8,281 6,596
Amortization of acquired intangibles and goodwill 6,812 6,515
Deferred income taxes - 1,545
Minority interest in earnings 1,071 995
Provision for bad debts 1,944 1,197
Gain on sale of marketable securities (1,537) -
Other, noncash items (1,989) 631
Changes in assets and liabilities which provided (used) cash, net of
the effects of acquisitions:
Accounts receivable, net (18,358) (10,459)
Merchant processing working capital (7,205) 1,833
Inventory (726) (494)
Prepaid expenses and other assets (5,411) (1,806)
Accounts payable and accrued liabilities 1,568 2,003
Deferred income 5,434 2,054
Income taxes 15,696 5,696
------------------------------
Net cash provided by operating activities 24,457 32,629
------------------------------
Cash flows from investing activities:
Capital expenditures (7,255) (8,077)
Sale of marketable securities 2,912 -
Purchase of investment (10,045) -
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Net cash used in investing activities (14,388) (8,077)
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Cash flows from financing activities:
Net borrowings (repayments) under lines of credit 1,000 (10,000)
Net principal payments under capital lease arrangements
and other long-term debt (9,099) (3,095)
Net proceeds of stock activities 1,141 1,689
Distributions to minority interests (1,194) (1,053)
Dividends paid (2,543) (2,520)
------------------------------
Net cash used in financing activities (10,695) (14,979)
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(Decrease) increase in cash and cash equivalents (626) 9,573
Cash and cash equivalents, beginning of period 4,295 3,241
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Cash and cash equivalents, end of period $ 3,669 $ 12,814
==============================
See Notes to Unaudited Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
August 31, May 31,
1999 1999
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ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,669 $ 4,295
Billed accounts receivable 179,211 163,193
Unbilled accounts receivable 22,639 22,305
Allowance for doubtful accounts (10,752) (10,728)
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Accounts receivable, net 191,098 174,770
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Income tax receivable - 8,348
Inventory 8,650 7,927
Net merchant processing receivable 5,411 -
Deferred income taxes 1,191 1,191
Prepaid expenses and other current assets 20,483 16,297
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Total current assets 230,502 212,828
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Property and equipment, net 105,408 105,904
Intangible assets, net 417,699 424,324
Deferred income taxes 13,963 13,963
Investment 17,045 -
Other 9,482 7,909
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Total Assets $ 794,099 $ 764,928
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 36,000 $ 35,000
Current portion of long-term debt 204 6,245
Obligations under capital leases 13,322 13,113
Accounts payable and accrued liabilities 71,949 70,027
Net merchant processing payable - 1,794
Income tax payable 7,345 -
Deferred income 37,441 30,258
----------- ----------
Total current liabilities 166,261 156,437
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Long-term debt 152,875 152,690
Obligations under capital leases 15,754 18,129
Other long-term liabilities 13,439 9,846
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Total liabilities 348,329 337,102
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Commitments and contingencies
Minority interest in equity of subsidiaries 18,609 18,732
Shareholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issued - -
Common stock, par value $.125 per share; 100,000,000 shares authorized, 33,953,023
and 33,953,031 shares issued, respectively. 4,244 4,244
Capital in excess of par value 345,371 345,639
Treasury stock, at cost, 42,296 and 175,442 shares, respectively (1,412) (5,857)
Retained earnings 87,196 70,865
Deferred compensation (5,540) (3,215)
Cumulative translation adjustment (2,698) (2,582)
----------- ----------
Total shareholders' equity 427,161 409,094
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Total Liabilities and Shareholders' Equity $ 794,099 $ 764,928
=========== ==========
See Notes to Unaudited Consolidated Financial Statements.
4
NOTES TO UNAUDITED CONSOLIDATED
-------------------------------
FINANCIAL STATEMENTS
--------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements included herein have been prepared by National Data
Corporation (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
the disclosures are adequate to make the information presented not misleading.
In addition, certain reclassifications have been made to the fiscal 1999
consolidated financial statements to conform to the fiscal 2000 presentation.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's latest annual
report on Form 10-K for the fiscal year ended May 31, 1999.
In the opinion of management, the information furnished reflects all adjustments
necessary to present fairly the financial position, results of operations, and
cash flows for such interim periods.
NOTE 2 - EARNINGS PER SHARE:
Basic earnings per share is computed by dividing reported earnings available to
common shareholders by weighted average shares outstanding during the period.
Diluted earnings per share is computed by dividing reported earnings available
to common shareholders by weighted average shares outstanding during the period
and the impact of securities that, if exercised, and convertible debt, if
converted, would have a dilutive effect on earnings per share. All options with
an exercise price less than the average market share price for the period
generally are assumed to have a dilutive effect on earnings per share.
The following table sets forth the computation of basic and diluted earnings (In
thousands):
Three Months Ended
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August 31, 1999 August 31, 1998
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Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ----------
Basic EPS:
Net income $18,877 33,876 $0.56 $16,323 33,723 $0.48
-------- ----------
Effect of Dilutive
Securities:
Stock Options --- 1,389 --- 1,316
------------------------ --------------------
18,877 35,265 16,323 35,039
Convertible debt 1,195 2,752 --- ---
Diluted EPS:
------------------------------------------------------------------------------
Income available to common
stockholders plus assumed
conversions $20,072 38,017 $0.53 $16,323 35,039 $0.47
==============================================================================
5
For the three months ended August 31, 1998, convertible debt had no impact on
the diluted earnings per share. Therefore, diluted earnings per share was not
adjusted for convertible debt.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow disclosures, including non cash investing and financing
activities, for the three months ended August 31, 1999 and 1998 are as follows
(In thousands):
1999 1998
---- ----
Income taxes paid (received), net of refunds $(3,843) $2,870
Interest paid 1,573 1,649
Capital leases entered into in exchange
for property and equipment 1,115 3,211
Non cash investment in Medscape 7,000 -
NOTE 4 - COMPREHENSIVE INCOME:
The components of comprehensive income are as follows (In thousands):
Three months ended August 31,
1999 1998
---- ----
Net income $18,877 $16,323
Foreign exchange effect (116) (974)
------- -------
Total comprehensive income $18,761 $15,349
======= =======
NOTE 5 - SEGMENT INFORMATION:
The segment information for the three month periods ended August 31, 1999 and
August 31, 1998 is presented below. The Company classifies its businesses into
two fundamental segments: Health Information Services and eCommerce. There has
been no change in the composition of the reportable segments from the
presentation of fiscal year 1999 segment information included in the most recent
10-K.
Health All Other
Quarter Ended August 31, 1999 Information and
(in thousands) Services eCommerce Corporate Totals
- ------------------------------------------------------------------------------------------------
Revenues $114,226 $ 89,829 $ - $204,055
Depreciation and Amortization 9,149 5,346 598 15,093
EBITDA 23,359 27,007 (1,993) 48,373
Income (loss) before income tax 13,763 20,344 (3,413) 30,694
Segment assets 466,989 271,641 55,469 794,099
6
Health All Other
Quarter Ended August 31, 1998 Information and
(in thousands) Services eCommerce Corporate Totals
- -------------------------------------------------------------------------------------------------------
Revenues $109,285 $ 82,397 $ - $191,682
Depreciation and Amortization 7,705 4,979 427 13,111
EBITDA 19,890 26,184 (2,057) 44,017
Income (loss) before income tax 11,991 19,826 (5,058) 26,759
Segment assets 422,042 258,687 66,586 747,315
NOTE 6 - SUBSEQUENT EVENTS:
The Company announced on September 24, 1999 that its board of directors has
authorized a plan to purchase up to an additional 2,000,000 shares of the
company's common stock. This is in addition to the plan announced in October,
1998 when the company said that it would repurchase up to 500,000 shares.
Subject to availability at prices the company deems appropriate, the repurchases
may be made from time-to-time in the open market. The shares will be used to
fund the company's internal requirements under various stock plans such as stock
option, employee stock purchase, restricted stock and employee savings plans.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the Company's
results during the past two years, the following discussion should be read in
conjunction with the consolidated financial statements of the Company and
related notes appearing elsewhere in this report.
Results of Operations
(In millions) 1999 1998 Change
----------------------- ------------------------ -----------
Revenue:
NDC Health Information Services $114.2 56% $109.3 57% 4%
NDC eCommerce 89.9 44% 82.4 43% 9%
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Total Revenue $204.1 100% $191.7 100% 6%
==================================================================
Depreciation and Amortization:
NDC Health Information Services $ 9.2 61% $ 7.7 59% 19%
NDC eCommerce 5.3 35% 5.0 38% 6%
All Other and Corporate 0.6 4% 0.4 3% 50%
------------------------------------------------------------------
Total $ 15.1 100% $ 13.1 100% 15%
==================================================================
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating Income plus depreciation and amortization. This
statistic and its results as a percentage of revenue may not be comparable to
similarly titled measures reported by other companies. However, management
believes this statistic is a relevant measurement and provides a comparable cash
earnings measure, excluding the impact of the amortization of acquired
intangibles, potential timing differences associated with capital expenditures
and the related depreciation charges and non-recurring charges.
1999 1998 Change
--------------------- --------------------- ----------
EBITDA:
NDC Health Information Services $23.4 48% $19.9 45% 18%
NDC eCommerce 27.0 56% 26.2 60% 3%
All Other and Corporate (2.0) (4%) (2.1) (5%) 5%
--------------------------------------------------------------
Total EBITDA $48.4 100% $44.0 100% 10%
==============================================================
Income before Income Taxes (IBIT):
NDC Health Information Services $13.8 45% $12.0 45% 15%
NDC eCommerce 20.3 66% 19.8 74% 3%
All Other and Corporate (3.4) (11%) (5.0) (19%) 32%
--------------------------------------------------------------
Total IBIT $30.7 100% $26.8 100% 15%
==============================================================
Consolidated
Total revenue for the three months ended August 31, 1999 was $204.1
million, an increase of $12.4 million (6%) from the three months ended August
31, 1998 due to growth in customer base, transaction volumes and new services to
our customers in both of our business segments.
8
Total cost of service, as a percentage of revenue, decreased from 52% in
the three months ended August 31, 1998 to 50% in the three months ended August
31, 1999 due to improved efficiencies. Cost of service increased $1.5 million
(1%) in the three months ended August 31, 1999 from the three months ended
August 31, 1998. The increase was primarily a result of increased operating
costs associated with the 6% revenue growth.
Sales, general and administrative expenses increased $8.5 million (14%)
from the same period last year. This increase was primarily due to expenses
associated with investments in sales staffing and programs, customer service as
well as Internet activities. As a percentage of revenue, these expenses
increased to 34% for the three months ended August 31, 1999 from 32% for the
three months ended August 31, 1998.
Operating income increased 8% from $30.9 million in the three months ended
August 31, 1998 to $33.3 million in the three months ended August 31, 1999. As a
percentage of revenue, the Company's operating income margin increased to 16.3%
in the three months ended August 31, 1999 from 16.1% in the three months ended
August 31, 1998. These improvements reflect improved margins in operations
gained through improved efficiencies.
EBITDA for the three months ended August 31, 1999 increased by $4.4 million
or 10% to $48.4 million due to the 6% revenue increase and productivity
improvements. The EBITDA margin percentage was 23.7% in the three months ended
August 31, 1999, compared to 23.0% in the three months ended August 31, 1998.
IBIT for the three months ended August 31, 1999 improved to $30.7 million from
$26.8 million in the three months ended August 31, 1998, a 15% increase.
Total other expense decreased $1.6 million for the three months ended
August 31, 1999 compared to the three months ended August 31, 1998. This
decrease was primarily the result of the net gain of $1.5 million received on
the sale of marketable securities.
Earnings per share, diluted for exercisable securities, was $0.54 versus a
comparable $0.47 last year. Potential additional dilution from the company's
convertible debt due in November 2003 would adjust the $0.54 earnings per share
to $0.53.
NDC Health Information Services
NDC Health Information Services revenue growth (4%) in the three months
ended August 31, 1999 was a result of increases from internally developed
products and services, primarily value added network transactions, physician
practice management systems and Internet services.
EBITDA for the three months ended August 31, 1999 was $23.4 million
compared to $19.9 million in the three months ended August 31, 1998. This was an
18% growth in EBITDA that was due productivity improvements as measured by the
EBITDA margin percentage that improved from 18.2% in the three months ended
August 31, 1998 to 20.4% in the three months ended August 31, 1999 and the 4%
increase in revenue. The Company improved EBITDA margins by offering higher
margin value added services, by leveraging its fixed investments and through
synergies realized from the integration of acquisitions. IBIT in the three
months ended August 31, 1999 grew by 15% to $13.8 million from $12.0 million in
the three months ended August 31, 1998.
NDC eCommerce
The NDC eCommerce revenue increase (9%) reflects the impact of growth of
the industry, programs directed at new vertical industry offerings and new
distribution channels (including the Internet) as reflected in revenues for
authorization and draft capture transaction processing, fee services, customer
support, various merchant fees and sale of equipment. This is offset by declines
in the traditional cash management services.
9
EBITDA for the three months ended August 31, 1999 was $27.0 million
compared to $26.2 million in the three months ended August 31, 1998. This 3%
growth in EBITDA was due to the 9% increase in revenue and was partially offset
by a reduction in the EBITDA margin percentage from 31.8% for the three months
ended August 31, 1999 to 30.0% for the period ended August 31, 1999 due to
increased investments in sales and new product development. IBIT in the three
months ended August 31, 1999 grew 3% to $20.3 million from $19.8 million for the
quarter ended August 31, 1998.
All Other and Corporate
All Other and Corporate is comprised primarily of corporate overhead
functions and other corporate activities. This net expense declined by 32% from
$5.0 million in the three months ended August 31, 1998 to $3.4 million in the
three months ended August 31, 1999 primarily due to the sale of our marketable
securities.
Liquidity and Capital Resources
Cash flow generated from operations provides the Company with a significant
source of liquidity to meet its needs. Cash provided by operations before
changes in assets and liabilities was $33.5 million for the three month period
ended August 31, 1999, a decrease of $0.3 million (1%) compared to the same
period of the prior year. Other, noncash items primarily includes amortization
of debt issuance costs and restricted stock, loss on disposal of assets and
recognition of Internet related license fees and promotional considerations.
Cash required to fund net changes in assets and liabilities was $9.0 million and
$1.2 million for the three month periods ended August 31, 1999 and 1998,
respectively. The changes in assets and liabilities resulted primarily from an
increase in accounts receivable, changes in net merchant processing funds, an
increase in prepaid expenses and other assets, partially offset by cash provided
by income tax refunds. The changes due to accounts receivable primarily relate
to an increase in revenue and billing practices. The changes in net merchant
processing funds reflect normal fluctuations in the timing of credit card
settlements and funding of merchants and may vary from month to month. The
increase in prepaid expenses and other assets primarily relates to timing of
payments. Income taxes provided funds due to tax law changes (relating to the
ability to utilize net operating loss carryforwards) enacted after May 31, 1999
but applicable to fiscal year 1999. Net cash provided by operating activities
decreased 25.0% to $24.5 million from $32.6 million for the three month periods
ended August 31, 1999 and 1998.
Net cash used in investing activities was $14.4 million for the three month
period ended August 31, 1999 compared to $8.1 for the three month period ended
August 31, 1998. This increase is primarily due to the Medscape investment to
support new Internet investments. Additionally, the Company continues to invest
in capital expenditures related to growth in the business and acceleration of
certain strategic initiatives.
Net cash used in financing activities decreased to $10.7 million for the
first three months ended August 31, 1999 from $15.0 in the same period of the
prior year. The net effect of the payments and borrowings against the lines of
credit is a $1.0 million borrowing for the three month period ended August 31,
1999 compared to a $10.0 million payment for the three month period ended August
31, 1998. The net borrowings for the three months ended August 31, 1999
primarily consisted of payments of approximately $9.0 million, offset by
borrowings of $10.0 million related to the Medscape investment. Principal
payments under capital lease arrangements and other long term debt increased to
$9.1 million for the three month period ended August 31, 1999 from $3.1 million
in the same period of the three
10
months ended August 31, 1998 due to the payoff of the $6.0 million Electronic
Data Systems Corporation note payable. The Company reissued Treasury Stock
valued at $1.1 million under Company stock plans. The Company announced on
September 24, 1999 that its board of directors has authorized a plan to purchase
up to an additional 2,000,000 shares of the company's common stock. This is in
addition to the plan announced in October, 1998 when the company said that it
would repurchase up to 500,000 shares. Dividends of $2.5 million were paid
during the three month periods ended August 31, 1999 and 1998.
The Company has a committed, unsecured $125.0 million revolving line of
credit that expires in December 2002. At August 31, 1999, there was $32.0
million outstanding under the line of credit. The Company also has a $15.0
million uncommitted line of credit to fund working capital requirements, under
which there was $4.0 million outstanding at August 31, 1999. Management believes
that its current level of cash and borrowing capacity, along with future cash
flows from operations, are sufficient to meet the needs of its existing
operations and its planned requirements for the foreseeable future. The Company
regularly evaluates cash requirements for current operations, commitments,
development activities and strategic acquisitions. The Company may elect to
raise additional funds for these purposes, either through the issuance of
additional debt or equity or otherwise, as appropriate.
11
Year 2000 Readiness
Introduction
The Year 2000 issue is the result of the potential for computer programs to
improperly interpret dates in the year 2000 and beyond. Certain of the Company's
computer systems used for product or internal use that have time/date-sensitive
software and hardware may misinterpret dates resulting in a system failure or
miscalculation. The Company presently believes that, with modification to
existing computer systems as scheduled, the Year 2000 issue should not pose
significant operational problems for the Company's products and internal
systems, as so modified and converted.
The Company has a corporate Program Office to define, evaluate and conduct
audits of the Company and its progress toward Year 2000 readiness. The Company
also has a Year 2000 Senior Advisory Board comprised of members of senior
management and a Year 2000 Task Force comprised of representatives from various
departments from each of the Company's operating units. The Year 2000 Task Force
is charged with evaluating the Company's Year 2000 efforts, managing
implementation teams, and regularly reporting results to the corporate Program
Office. The corporate Program Office monitors the progress of the operating
units in their implementation plans to resolve Year 2000 issues, tracks
dependencies and provides reports to the Senior Advisory Board. The Senior
Advisory Board is charged with evaluating the progress reported by the corporate
Program Office and addressing any significant issues as they arise.
State of Readiness
The corporate Program Office has established an implementation plan to
address the Year 2000 issue with respect to its information technology systems,
hardware and software products and non-information technology products. The
Company's year 2000 program is and has been implemented on a prioritized basis
with systems most critical to the enterprise being addressed with the highest
degree of priority. The implementation plan phases are stated and defined as
follows:
Phase I - Inventory/Assessment. The Company listed and classified software,
--------------------
hardware, networks, products, services, facilities, environment, third party
relationships and any additional items that could be affected by the Year 2000
issue. For each item on the inventory, the Company assessed the likelihood of
meeting the target dates to be corrected for Year 2000 data processing and ready
for testing. This phase also included developing plans to manage each item on
the inventory. Certain of the Company's products/services utilize third party
software and/or hardware products in conjunction with proprietary software. In
these cases, due diligence was performed on the third party products and the
Company has made clients aware of upgrades/replacements that may be required if
the third party products are not compliant. The Company has completed this phase
for all systems.
Phase II - Remediation. Determine and implement methodology for correcting Year
-----------
2000 issues via coding, upgrades, replacements, etc. and deliver to testing.
These systems include communications and transaction processing, database
management for healthcare applications, electronic commerce including credit,
debit, and check, EDI services and NDC Health Information Services' pharmacy
transaction submission, eligibility verification, data capture and editing. The
Company has completed this phase for all systems.
Phase III - Internal Testing. Perform testing based upon developed plans as a
----------------
result of the remediation phase, upgrades and/or testing of indicated Year 2000
ready third party applications or services. At the completion of this phase, the
Company's computer systems are deemed to be Year 2000 ready subject to
implementation. The Company's Phase III is substantially completed for its core
operational networks. The Company's NDC Health Information Services' EDI systems
are substantially complete.
12
Final testing efforts were originally planned to be completed by August 31,
1999. Substantial progress towards this goal was made; final testing efforts are
planned for completion by October 31, 1999.
Phase IV - External Testing. Perform end-to-end connection point testing with
----------------
third parties that the Company relies upon for certain operating elements via
interfaces and also service providers as required. The Company targets this
phase to be completed by October 31, 1999 for all key systems. The Company
anticipates that continued testing with third parties may be required past the
October date based on their availability.
Testing is being performed as required and is dependent on third parties. The
Company continues to actively pursue these dependencies to schedule required
testing.
Phase V - Implementation and Proactive Management. Transition Year 2000 ready
---------------------------------------
computer systems into a production/live environment. The Company estimates
completion of this phase by October 31, 1999. As testing is successfully
completed, systems are implemented into a production/live environment.
Management believes that its key systems will be Year 2000 ready by October 31,
1999.
The following status chart indicates the approximate percentage of work
completed for the mission-critical systems of the following material business
units by phase as of October 11, 1999:
Phase I Phase II Phase III Phase IV Phase V
PRODUCT LINE
Target Date 2/28/99 6/30/99 8/31/99 9/30/99 10/31/99
- ----------- ------- ------- ------- ------- --------
Health Information Services
Network Services 100% 100% 98% 93% 96%
Information Management 100% 100% 100% 100% 100%
eCommerce 100% 100% 100% 100% 100%
Corporate Information
Systems 100% 100% 100% 100% 100%
Costs to Address
As it relates to internal computer systems, the Company is incurring
internal staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare its systems for
the Year 2000. Given the nature of the Company's ongoing system development
activities throughout its businesses, it is difficult to quantify, with
specificity, all of the costs and capital expenditures being incurred to address
this issue. A significant portion of these costs is not likely to be incremental
costs to the Company, but will represent the redeployment of existing
information technology resources. The Company's employees have performed the
majority of the work completed thus far on the implementation plans. Based on
experience derived from work performed to date, the costs incurred to date,
excluding capital expenditures, are approximately $22 million. The funds were
spent primarily to remediate via coding, upgrades, testing of third party
software and implementation costs. The Company's costs to complete its Year 2000
compliance program are estimated to be approximately $3 million in fiscal year
2000. The capital expenditures incurred to date are approximately $12 million
and estimated capital expenditures to complete the program are estimated to be
an additional $1 million. These capital expenditures amounts include only those
initiatives undertaken specifically to resolve Year 2000 issues. However, some
Year 2000 issues were successfully corrected by other capital projects that
addressed many of the Company's initiatives such as consolidation of
information, productivity improvements and leveraging
13
fixed costs. The total cost estimate for the implementation plan may be revised
because the plan is constantly evaluated and revised as a result of many
factors. These factors include, but are not limited to, the results of any phase
of the implementation plan, customer requirements, or recommendations by
contractors retained by the Company. These cost estimates also do not include
the cost of executing the contingency planning and proactive maintenance as the
Year 2000 approaches. Currently, the Company is expecting this cost to be an
additional $3-$5 million. The Company does not expect that the opportunity costs
of executing the implementation plan will have a material effect on the
financial condition of the Company or its results of operations.
Risks
The Year 2000 issue creates risk for the Company from unforeseen problems
in its own computer systems, from customers' systems and from third parties'
systems and networks upon which the Company relies. Risks also exist if
customers fail to complete conversion activities. Accordingly, the Company is
requesting assurances from certain software vendors from which it has acquired,
or from which it may acquire software, that the software will correctly process
all date information at all times. In addition, the Company is querying certain
of its customers and suppliers as to their progress in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the Year 2000 approaches and is reached. The
Company is heavily reliant upon customers and other third parties in the health
care, banking and credit card industries, in terms of electronic interfaces.
Failure to appropriately address the Year 2000 issue by major customers or
suppliers or a material percentage of the smaller customers could have a
material adverse effect on the financial condition and results of operations of
the Company. Testing is being performed as required and is dependent on third
parties. The Company continues to actively pursue these dependencies to schedule
required testing.
In order for the testing phase of the Year 2000 plan to be completed, the
Company is reliant upon its customers and other third party connection points to
prepare their systems for testing. The Company could be affected if a
significant number of customers delay testing or conversions until the end of
1999. The Company has been active in advising customers and business partners of
their obligation and the Company continues to evaluate the impact of those
customers who have not yet coordinated with the Company for upgrades,
certification/verification and testing.
The customers with the greatest revenue impact have been identified and
their testing/certification process has been analyzed. Testing has been
completed and/or scheduled for substantially all key systems. If coordination of
a preset testing time is not possible, the revenue impact for the accommodation
of last minute testing is being evaluated. The goal is to ensure that products
with significant revenues are fully ready, tested and implemented before October
31, 1999, so that the Company's overall revenue is not materially impacted.
The Company's business is also heavily reliant upon external suppliers to
provide certain operating elements of its business. Some of these providers
include telecommunication services, hardware, computer systems, banks and
utility companies. Due diligence continues to be performed on suppliers to the
Company as described in Phases III, IV and V. Inquiries are made regarding
suppliers' Year 2000 efforts and contingency plans are developed as necessary.
However, the Company does not exert control over the efforts of these companies
to become Year 2000 compliant. The services provided by these parties are
critical to the operations of the Company and the Company is heavily reliant
upon these parties to successfully address the Year 2000 issue. Therefore, if
any of these parties fail to provide the Company with services, the Company's
ability to conduct business could be
14
materially impacted. The result of such impact may have a material adverse
effect on the financial condition and results of operations of the Company.
Contingency Plans
The corporate Program Office is working with each business unit to develop
contingency plans based on corporate Program Office guidelines. There are two
types of plans.
First, all of the Company's business units have hardware/software business
continuity plans in case a supplier of hardware/software products or internally
developed systems used in the business does not have a Year 2000 version in time
for implementation and testing.
A second type of contingency plan focuses on emergency recovery plans to
support the date change event. Each business unit contingency plan calls for
obtaining goods or services from alternative sources, utilizing alternative
methods to perform functions, and establishing command centers and communication
procedures to manage the actual rollover to the Year 2000. The Company's units
have developed staffing support plans to ensure the appropriate on-site staff
are in place to implement any emergency recovery plan and address any issues
that may arise. It is expected that these plans will be updated throughout 1999,
as the Company completes testing with third parties and gains a better
understanding of external third party risks.
The Company's Year 2000 readiness activities are being regularly monitored
and evaluated. Contingency and proactive maintenance plans will address key
third party dependencies, facilities, utilities and staffing. On-site audits and
walkthroughs are being performed to evaluate the progress of the operating units
toward meeting their goals. The results of these audits and walkthroughs are
compared to the implementation plan and presented to the Senior Advisory Board.
Summary
The Company is working to ensure that its systems are Year 2000 ready this
year through the steps taken and planned to be taken, as described above. The
Company presently believes that, with modification to existing computer systems
as scheduled, the Year 2000 issue should not pose significant operational
problems for the Company's products and internal systems, as so modified and
converted. There are no assurances that the Company will identify all
date-handling problems in its business systems or those of its customers and
suppliers in advance of their occurrence or that the Company will be able to
successfully remedy all Year 2000 readiness issues that are discovered. To the
extent that the Company is unable to resolve its Year 2000 issues prior to
January 1, 2000, operating results could be adversely affected. In addition, the
Company could be adversely affected if other entities (i.e. vendors or
customers) not affiliated with the Company do not appropriately address their
own Year 2000 issues.
15
Forward-Looking Information
When used in this Quarterly Report on Form 10-Q, in documents incorporated
herein and elsewhere by management or National Data Corporation ("NDC" or the
"Company") from time to time, the words "believes," "anticipates," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements concerning the Company's business operations, economic performance
and financial condition, including in particular, the Company's business
strategy and means to implement the strategy, the Company's objectives, the
amount of future capital expenditures, the likelihood of the Company's success
in developing and introducing new products and expanding its business, and the
timing of the introduction of new and modified products or services. For those
statements, the Company claims the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation Reform Act of
1995. These statements are based on a number of assumptions and estimates that
are inherently subject to significant risks and uncertainties, many of which are
beyond the control of the Company and reflect future business decisions that are
subject to change. As a result of a variety of factors, actual results could
differ materially from those anticipated in the Company's forward-looking
statements, including the following factors: (a) those set forth in Exhibit 99.1
to the Registrant's Annual Report on Form 10-K for the period ended May 31, 1999
which are incorporated herein by this reference, and elsewhere herein; and (b)
those set forth from time to time in the Company's press releases and reports
and other filings made with the Securities and Exchange Commission. The Company
cautions that such factors are not exclusive. Consequently, all of the forward-
looking statements made herein are qualified by these cautionary statements and
readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions of such forward-
looking statements that may be made to reflect events or circumstances after the
date hereof, or thereof, as the case may be, or to reflect the occurrence of
unanticipated events.
16
Part II
ITEM 1 - PENDING LEGAL PROCEEDINGS
- ----------------------------------
The Company is party to a number of claims and lawsuits incidental to its
business. In the opinion of management, the ultimate outcome of such matters, in
the aggregate, will not have a material adverse impact on the Company's
financial position, liquidity or results of operations.
ITEM 2 - CHANGES IN SECURITIES
- ------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- --------------------------
The 1999 Annual Meeting of Stockholders of National Data Corporation will be
held at the Company's offices in Atlanta, Georgia on October 28, 1999. The items
to be addressed are:
1. To elect one director in Class I to serve until the annual meeting of
stockholders in 2002, or until his successor is duly elected and qualified;
and
2. To adopt the Company's 2000 Long-Term Incentive Plan; and
3. To vote on a proposal to amend the Certificate of Incorporation of the
Company to increase the number of shares of Common Stock of the Company
authorized for issuance from 100,000,000 to 200,000,000; and
4. To transact any other business that may properly come before the meeting.
ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
(27) Financial Data Schedule (for SEC use only)
(b) Reports Filed on Form 8-K:
None
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Data Corporation
-------------------------
(Registrant)
Date: October 14, 1999 By: /s/ Kevin C. Shea
---------------- ------------------------------
Kevin C. Shea
Chief Financial Officer
(Principal Financial Officer)
Date: October 14, 1999 By: /s/ David H. Shenk
------------------ ------------------------------
David H. Shenk
Corporate Controller
(Chief Accounting Officer)
18