- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 001-12392
---------------
NATIONAL DATA CORPORATION
(Exact name of registrant as specified in its 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, Par Value $.125 Per Share New York Stock Exchange
Junior Preferred Stock Purchase Rights New York Stock Exchange
5% Convertible Subordinated Notes due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Form 10-K Cover Page - Continued
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 [_]
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $970,140,282 based upon the last reported sale price on The New
York Stock Exchange on August 18, 2000 using beneficial ownership of stock
rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to
exclude voting stock owned by all directors and officers of the registrant,
some of whom may not be held to be affiliates upon judicial determination.
The number of shares of the registrant's common stock, par value $.125,
outstanding as of August 18, 2000 was 32,791,061 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K
-------- ---------
Portions of the Company's Definitive Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be held on October 26,
2000 Part III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NATIONAL DATA CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
-----------------
PART I.
- -------
Item 1. BUSINESS.................................................... 3
Item 2. PROPERTIES.................................................. 21
Item 3. LEGAL PROCEEDINGS........................................... 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 21
EXECUTIVE OFFICERS OF THE REGISTRANT.................................. 22
PART II
- -------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................... 24
Item 6. SELECTED FINANCIAL DATA..................................... 24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.......................................... 24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 24
Part III
- --------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................ 25
Item 11. EXECUTIVE COMPENSATION...................................... 25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 25
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 25
PART IV
- -------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...................................... 26
SIGNATURES............................................................ 33
APPENDIX A............................................................ 35
SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD LOOKING STATEMENTS
When used in this Annual Report on Form 10-K, in documents incorporated
herein and elsewhere by management of 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, cannot be foreseen, and reflect future
business decisions that are subject to change. Actual revenues, revenue growth
and margins will be dependent upon all such factors and their results subject to
risks related to the implementation of changes by the Company, the failure to
implement changes, customer acceptance of such changes or lack of 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 this Annual Report on
Form 10-K which are incorporated herein by this reference, and those set forth
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. Subsequent to year-end, the Company has announced that it
has entered into definitive agreements for the sale of its Health Information
Services businesses that were acquired through the acquisition of PHSS in
December 1997 and other related businesses. Additionally, subsequent to year-
end, the Company announced plans to merge its Pharmacy Systems business activity
with another company. Both of these transactions closed in the first quarter of
fiscal 2001. There can be no assurance that this divestiture and other plans to
curtail non-core products and services in the business will have the effects
anticipated by the Company. The Company has announced its intent to spin-off the
NDC eCommerce business segment into a separate publicly traded company with its
own management and Board of Directors. Although it is expected to be completed
in the first half of fiscal 2001, this spin-off has not yet been completed and
there can be no assurance that it will be completed. 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.
2
PART I
------
Item 1. BUSINESS
- -----------------
General
-------
National Data Corporation (together with its subsidiaries, herein referred
to as the "Company" or "NDC") is a Delaware corporation that was incorporated in
1967. The Company is a leading provider of high volume information services and
systems to the health care and electronic commerce markets through its Health
Information Services and eCommerce business segments. NDC Health Information
Services serves a diverse customer base comprised of approximately 150,000
physicians, ninety percent of the pharmacies in North America, twenty percent of
the nation's hospitals, and 1,000 health care payers representing over 4,000
payer plans. NDC eCommerce has 1,000,000 points of service in more than 775,000
merchant locations, provides services to thousands of corporations and more than
700 financial institutions, as well as numerous federal and state government
agencies. The Company is one of the world's largest independent providers of
health care information and electronic commerce services.
As a result of regular strategy reviews, during fiscal 2000, the decision
was made to restructure into two separate businesses. Accordingly, the Company
has announced its intent to spin-off the NDC eCommerce business segment into a
separate publicly traded company with its own management and Board of Directors.
This spin-off is expected to be successfully completed during the first half of
fiscal year 2001.
This decision was based on the need to increase focus on the unique
opportunities and requirements of the two markets that the Company addresses by
providing more singular management focus on the planning, programs and resource
demands of each segment.
In line with that decision, it was decided to concentrate on those products
and services within each segment that are judged to be core to the long-term
strategies of the respective segments. Accordingly, the Company decided to
pursue the divestiture of its Physician and Hospital Support Services ("PHSS")
business and, subsequently, to place this business into a discontinued
operations category in accordance with Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations". As a result of this action, the
information presented herein reflects only the continuing operations of the
Company. On July 20, 2000, the Company announced that it has entered into
definitive agreements for the sale of its Health Information Services businesses
that were acquired through the acquisition of PHSS in December 1997 and other
related businesses. In addition, the Company has sold or is phasing out certain
other non-core products and services. The Company also announced plans to merge
its Pharmacy Systems business activity with another company so as to leverage
the combined product development and distribution of our systems to the pharmacy
market. The Company successfully closed both of these transactions in the first
quarter of fiscal 2001.
3
NDC Health Information Services
NDC's Health Information Services line of business offers a broad scope of
products and services that serve a diverse range of health care markets. The
primary products and services include electronic eligibility, claims processing,
adjudication and remittance services, practice management systems and
information management based services. The primary markets include pharmacists,
physicians, hospitals, health maintenance organizations, payers, managed care
organizations, pharmaceutical manufacturers and distributors. Typically, these
services utilize the Internet and other forms of transport and processing
capability. NDC Health Information Services provides a greater range of
electronic information products and services to more segments of the healthcare
industry than any other company. For fiscal year 2000, approximately 50% of the
Company's continuing revenue was derived from the Company's Health Information
Services segment.
NDC Health Information Services operates principally in three integrated
business areas: point of service systems, value added network and information
management. The point of service systems are designed to provide customers with
application solutions that improve the efficiency of operations, address cost
containment concerns and enhance overall quality of patient care. Through its
value added network, NDC Health Information Services provides electronic data
interchange ("EDI") and transaction processing services to participants in the
healthcare market. Information management provides proprietary health care
information and related information consulting services primarily to the
pharmaceutical and retail pharmacy markets. The Company's extensive capabilities
in the collection, management and dissemination of both administrative and
decision support information leverage our value-added network.
These services assist the Company's customers to increase efficiency,
enhance the quality of patient care, strengthen their management of revenue and
cash flow, reduce overhead costs, react quickly to changing market conditions,
improve business operations, and streamline administrative processes.
NDC eCommerce
NDC eCommerce is an integrated provider of high volume electronic
transaction processing and value-added end-to-end information services and
systems on a direct and indirect basis to merchants, multinational corporations,
financial institutions, and government agencies. These services are marketed to
customers within the direct and indirect merchant acquiring businesses and the
funds transfer business through various sales channels. The Company's eCommerce
line of business represented approximately 50% of the Company's continuing
revenue for fiscal year 2000.
Direct merchant acquiring provides its customers with a full range of end-
to-end electronic commerce services, including credit and debit card
authorization and
4
transaction data capture, settlement and funding, charge back processing,
customer support services, portfolio risk management, business-to-business
purchasing card services, check guarantee, check recovery, merchant statement
accounting, and terminal management services.
NDC eCommerce provides indirect merchant acquiring services to financial
institutions and independent sales organizations that re-market these services
directly to their customers. The indirect merchant acquiring business includes
the products offered by direct merchant acquiring as well as card issuing
services. Included within indirect merchant acquiring is Global Payment Systems,
LLC ("Global"), a partnership with MasterCard International Incorporated.
The electronic funds transfer business provides cash management and funds
transfer services, management information and deposit reporting, financial
electronic data interchange, and Internet-based tax payment processing to
domestic and international banks, corporations, and government agencies. These
services are provided in the United States, Canada and Europe.
Significant Recent Events
-------------------------
NDC Health Information Services
Rationalization Efforts
During its annual Health Information Services strategy update process,
the Company evaluated current product and service offerings in light of changing
market and technological environments. The decision was made to focus attention
on the strategic point of service systems, value-added network, information
management solutions and related Internet initiatives. This resulted in the
identification of obsolete and/or non-strategic product offerings. The company
executed the first step in this plan via the sale of the majority of its dental
systems product line during the second quarter.
Actions were initiated on non-core products and services which included
acceleration of clearinghouse integration, consolidation of locations,
associated staff and expense reductions, and elimination of obsolete and
redundant product and service offerings. Total charges related to the
restructuring and asset impairment were $34.4 million in fiscal 2000.
Additionally, as a result of business events and information arising during the
second quarter, the Company evaluated certain significant business risks and
exposures that included bankrupt accounts and customer disputes. This resulted
in the Company recording $13.3 million of unusual expenses in the second quarter
of fiscal year 2000.
Based on the decision to divest PHSS and move it to discontinued operations
during the third quarter, approximately $2.2 million of these unusual sales,
general and administrative
5
expenses which were related to the PHSS operation are reflected in the results
of the discontinued operations. Accordingly, the results of the year ended May
31, 2000 include approximately $45.5 million of charges related to restructuring
and asset impairment ($34.4 million) and other unusual expenses ($11.1 million).
Further, the Company completed the evaluation of strategic alternatives
relating to the Management Services business. These include the units that were
acquired through the PHSS acquisition in December 1997. The Company concluded
that these operations no longer logically integrate with the Company's core
Health Information Services business. Therefore, the decision was made to divest
the PHSS business and the Company actively pursued this course of action. On
July 20, 2000, the Company announced that it has entered into definitive
agreements for the sale of its Health Information Services businesses that were
acquired through the acquisition of PHSS in December 1997 and other related
businesses.
The Company also announced, in the first quarter of fiscal 2001, plans to
merge its Pharmacy Systems business activity with another company so as to
leverage the combined product development and distribution of our systems to the
pharmacy market. Both of these transactions closed in the first quarter of
fiscal 2001.
Strategic Acquisitions
To support its business strategy, NDC Health Information Services has
pursued strategic acquisition opportunities and alliances with other companies
to complement internal developments. These have permitted the Company to
increase its market penetration, technological capabilities, product offerings
and/or distribution capabilities. In fiscal year 2000, one acquisition was
completed which expanded the Company's Health Information Services' physician
practice management applications and distribution capability. In fiscal year
1999, the Company completed one acquisition to expand its presence in the Health
Information Services operation in the United Kingdom. In 1999 and 2000, NDC
Health Information Services announced several key alliances and joint product
offerings.
6
NDC eCommerce
Emerging Markets and Technologies
NDC eCommerce's strategy includes formation of business alliances with
emerging payment technology companies to leverage its existing customer
relationships and infrastructure and to accelerate product time-to-market.
Additionally, NDC eCommerce will continue to evaluate direct and indirect (via
joint product development programs) equity investments in emerging technology
companies that offer a viable alternative form of payment or that have strong
growth potential.
During its fiscal year 2000, NDC eCommerce made a direct investment in
eCharge Corporation, which offers Internet users secure and convenient ways to
make purchases over the Internet. NDC eCommerce also entered into alliances with
emerging payment technology companies and innovative product and service
providers.
The Company believes that these alliances and direct investments are
consistent with its business strategy and are supported by trends in the
electronic commerce market.
Distribution Channel Expansion
Expansion of the reach and distribution channel effectiveness for the
Company's products and services remains a high priority. During the year, new
relationships were formed with a number of independent sales organizations and
companies with complementary services to resell the Company's offerings.
7
Industry Background
-------------------
Advances in computer software, hardware and telecommunications technology
have aided the development of on-line, real-time information processing systems
that electronically capture and transmit high volumes of information. At the
same time, the demand has grown to collect, process and convert data into value
added information to support management decision-making. These advances allow
information processors to offer greater convenience to purchasers and providers
of goods and services and reduce processing costs, settlement delays and losses
from fraudulent transactions.
Health Care Market
The health care sector of the market for information services and systems
is growing due to the need of providers, employers, payers, manufacturers and
distributors to have information to control costs and to improve quality of
care. A high percentage of health care transactions are still processed using
manual, paper-based methods. Third party payers, managed care organizations and
health care providers continue to seek methods to automate processing and obtain
information in order to reduce costs and improve the quality of health care
services. The Company believes the health care industry is one of the largest
untapped markets for electronic information processing services, including point
of service systems, the electronic transmission and capture of data for on-line
eligibility verification and reimbursement for services, as well as for
information management services.
The use of the Internet for the capture and transmission of data,
information gathering and dissemination is expected to improve market expansion.
This will result in greater opportunities for growth for the Company. This
technology is being adapted to the processing of other health care data,
including a variety of transactions for physicians and hospitals. The Internet
is now expanding the market to new users and providing new distribution
channels.
The Company believes that the ability to offer total end-to-end solutions
is an important competitive advantage as automated transaction processing and
the demand for information in the health care market continues to grow. As
electronic processing of health care claims accelerates, the Company believes it
will be important for companies to be able to offer integrated, value-added
services and systems to industry participants who continue to automate. Included
in the market's requirements are practice management systems, contract
management, referrals, eligibility verification, remittance advice, as well as
new information management services. The market includes, among others,
providers, hospitals, managed care organizations, payers and pharmaceutical
manufacturers.
Management believes that its healthcare value-added network is the world's
most advanced. This network streamlines work flow, improves cash flow and gives
health providers new, improved methods to manage data to assure a higher quality
of care at a lower cost. NDC Health Information Services provides a greater
range of end-to-end products and services to more segments of the health care
community than any other
8
company. These services include: claims submission and editing; formulary
management; eligibility verification and referral authorization; claims
processing, remittance advice and enrollment; Web-enabled practice analysis; and
sales force management and billing. Large-scale data warehousing and data mining
capability complement the Company's value-added network.
The Internet is providing new tools and expanding distribution channels in
helping the Company's customers complete their business processes and obtain the
information to run their operations more effectively. The Company has been
active in Web-enabling its existing products and introducing new ones to deliver
better information solutions with others under development.
Electronic Commerce Market
The Company believes that there are significant opportunities for continued
growth in the application of transaction processing services to the electronic
commerce market. Both the consumer-to-business and business-to-business aspects
of electronic commerce demand a growing array of processing and support
services. A large percentage of retail transactions still utilize cash and
checks. Merchants continue to encourage electronically authorized and settled
transactions using credit and debit cards. The rapid growth of retail credit
card transactions, as well as the increased utilization of debit cards, has
directly correlated to the Company's historic growth. In addition, the Company
believes that the proliferation of "loyalty" or co-branded cards that provide
consumers with added benefits should contribute to increased use of credit and
debit cards in the future. Both of these market trends should increase demand
for the Company's services.
Business-to-business electronic data interchange using purchasing card
technology and its associated systems software is providing businesses with
increased efficiency and is providing the Company with strong growth in
industries that have not traditionally utilized credit cards. Purchasing cards
and the related business-to-business electronic data interchange replace
costly, time-consuming paper ordering and invoicing with inexpensive, real-time
electronic payment processing transactions.
The Company believes that the number of electronic transactions will
continue to grow in the future and that an increasing percentage of these
transactions will be processed via the Internet. The Internet will be a major
factor in accelerating the continued conversion of paper to electronic pulse,
which will result in greater growth opportunities for the Company. The Internet
is an important component in the Company's strategy for expansion of services to
new customers. The Company's management believes that "brick and mortar"
retailers will be successful virtual retailers as they leverage their brand
awareness, along with emerging "e-tailers" that are creating broader
transactions markets. The Company's Internet-related services include secure
credit and debit card processing and tax payment services.
9
Payment processing service providers such as the Company provide high
volume electronic transaction processing and support services directly to
financial institutions and other new entrants into the business. The shift in
the industry from traditional financial institution providers to independent
providers is due in large part to more efficient distribution channels, as well
as increased technological capabilities required for the rapid and efficient
creation, processing, handling, storage and retrieval of information. These
capabilities have become increasingly complex, requiring significant capital
commitments to develop, maintain, and update the systems necessary to provide
these advanced services at a competitive price.
As a result, several large merchant processors, including the Company, have
expanded their operations through the creation of alliances or joint ventures
with banks and have acquired new merchant portfolios from banks that previously
serviced these merchant accounts.
Business Strategy
-----------------
The Company's business strategy centers on providing end-to-end value-added
information processing services in the markets it serves. The Company believes
that this strategy provides the greatest opportunity for leveraging its existing
infrastructure and maintaining a consistent base of recurring revenues. NDC
believes that both the health care and electronic commerce markets present
attractive opportunities for continued growth. In pursuing its business
strategy, the Company seeks both to increase its penetration of existing
information processing and application systems markets and to continue to
identify and create new markets through the:
. development of value-added applications, enhancement of existing
products and development of new systems and services;
. expansion of distribution channels (including the Internet); and
. acquisition of, investments in or alliance with, companies that have
compatible products, services, development capabilities and/or
distribution capabilities.
Products and Services
---------------------
The Company operates in two principal business segments, Health Information
Services and eCommerce. The Company has offices in the United States, Canada and
the United Kingdom. The following discussion highlights products and services in
each segment. For more financial information, see the Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 12 to the
Consolidated Financial Statements on page A-38.
10
NDC Health Information Services
NDC Health Information Services provides a large variety of electronic
information products, systems and services to numerous segments of the
Healthcare industry. The Company has led the health information industry in
creating a strong franchise. The Company's management believes that its presence
in the pharmacy, pharmaceutical manufacturer, distributor, managed care
organization, physician, hospital, and payer markets for its services is broader
than any other company. Additionally, in an Internet enabled economy, the
Company's network information model is squarely in the mainstream of
opportunities now and in the future. This network has proven breadth, scale and
reliability to increase its leadership position.
NDC Health Information Services is focused on three integrated areas: point
of service systems, value added network and information management. The
Company's products include electronic claims processing, claims adjudication and
payment systems, funding capabilities, practice management systems and clinical
database information and consulting services. The Company provides these
products and services to pharmacies, pharmaceutical manufacturers, physicians,
hospitals, integrated delivery systems, managed care organizations, payers,
government health care agencies, distributors, clinics, nursing homes and
Internet portals.
The Company's extensive capabilities in the collection, management and
dissemination of both administrative and decision support information leverage
our value-added network. The Internet is providing alternatives to handle
administrative transactions as well as accelerate demand for new sources of
clinical and decision support information. The Company is aggressively building
on its systems, network and data management capabilities to take advantage of
the Internet.
Revenue for the Company's Health Information Services consists of recurring
transaction processing fees, monthly maintenance and support fees, information
management contract fees, software license revenue and proceeds from the sale of
practice management systems, as well as upgrade charges for additional
applications. Fees for electronic claims processing services are based on a per
transaction rate, with the rate varying depending upon the volume and scope of
services provided.
Point of Service Systems
The Company's point of service systems are designed to provide the health
care market with application solutions at the point of delivery of care to
patients that improve the efficiency of operations, address cost containment
concerns and enhance overall quality of patient care. These practice management
systems are offered with the Company's transaction processing services, and
other associated functions.
11
The Company's physician practice management systems are designed to
significantly improve the efficiency of office management and provide the
following value-added services:
. patient scheduling and recall,
. patient record accounting,
. eligibility verification,
. coordination of multiple payers and payment plans,
. insurance transaction information and
. electronic processing.
The Company's pharmacy practice management systems enable pharmacists to
manage and perform patient registration, drug record-keeping, private and third-
party billing, inventory control and ordering, price updates, management
reporting and drug database updates to detect potential clinical dispensing and
prescribing problems. The Company also provides products which allow customers
to order refill prescriptions via telephone and enable physicians to
electronically transmit prescriptions directly to pharmacies utilizing NDC's
pharmacy management systems. During the first quarter of fiscal year 2001, the
Company reached an agreement to merge its pharmacy practice management
development and customer support with another company. In return, the Company
retained rights to continued marketing of these systems, as well as an equity
position with the new company.
Value Added Network
NDC Health Information Services provides various network-based transaction
processing services to participants in the healthcare market. The Company
provides the network connectivity and transaction services payers need to
communicate electronically with their provider networks. Through its transaction
network, the Company provides an electronic link, directly or indirectly through
other clearinghouses or vendors, or through the Internet, to managed care
organizations, pharmacies, physicians, hospitals, HMO's and preferred provider
organizations. These services include transaction submission, eligibility
verification, patient-specific benefit coverage verification, transaction data
capture and editing, claim adjudication, remittance processing and retrospective
and prospective drug utilization review. These services allow customers to
exchange patient treatment and payment data electronically, receive
reimbursement quickly, process claims electronically, and streamline internal
processes.
12
Information Management
The Company is a leading provider of privacy-protected proprietary health
care decision support information and consulting services, primarily to the
pharmaceutical and retail pharmacy markets. This product offering gathers data
from pharmacies, pharmacy chains and health care providers. The customized
information management services enable customers to better understand individual
prescriber, payer, consumer, pharmacy benefit manager and retail pharmacy
behavior in order to compete more effectively and efficiently in the market.
This information is maintained in a proprietary database and decision
support system, which is one of the industry's largest banks of prescription,
prescriber, pharmacy and managed care data. This automated information warehouse
is the core upon which many of the Company's information management products and
services are based. Using this database and other tools, the Company is able to
provide critical competitive information for its customers. The Internet is
serving as a complementary, highly efficient means of gathering business
information and delivering business information more quickly, accurately and
cost-effectively.
The Company provides its services through a broad array of information
offerings, including data mining and integrated marketing decision-making tools.
It draws from a comprehensive cross-section of data, ranging from regional and
demographic characteristics to individual prescription analysis, to build
service programs tailored to individual customers and specific applications. The
Company typically provides integrated decision support services to executives in
the sales, marketing, market research and information technology areas.
Alliances
NDC Health Information Services' strategy includes broadening its value
added network-based information solutions through key alliances. These alliances
allow the Company and its partners to improve efficiencies by leveraging core
competencies to benefit the health care industry. Combining NDC's connectivity
to physicians, pharmacies and payers with alliance partners' products and
services provides customers with greater accuracy and efficiency in claims and
practice management.
During 1999 and 2000, the Company announced several key alliances and joint
product offerings including:
. physician services (including integrated claims service offered via an
Application Services Provider (ASP) delivery model, credentialing
application tools, and others);
. pharmacy services (prescription authorization service); and
. joint product development and marketing services.
13
Internet Products and Services
During fiscal years 1999 and 2000, the Company accelerated its investment
in development and announced a new range of Internet enabled products and
services and alliances. This includes Web-enabling many of our existing products
and services and also developing totally new Internet products for a broader set
of customers and distribution channels. These Internet offerings include:
. pharmacy services (real-time claims information availability);
. physician services (including data warehousing, practice analysis,
resource utilization and others);
. joint marketing services (including joint development and marketing of
internet based information offerings for consumers, providers, payers
and suppliers, performance management, resource allocation and
others);
. sales and marketing effectiveness evaluation services (performance
management, resource allocation and others);
. research services (including pharmaceutical prescriber-level
prescription data, outcome studies, pricing analysis and an analytic
service that links drugs to diagnoses); and
. patient services.
14
NDC eCommerce
NDC eCommerce is one of the largest independent electronic transaction
processing service providers in the world. NDC eCommerce provides a wide range
of value-added, end-to-end electronic commerce solutions to retail merchants,
corporations, financial institutions and government agencies. NDC eCommerce
markets its products and services through a variety of distinct sales channels
including a direct sales force, independent sales organizations, independent
sales representatives, an internal telesales group, alliance bank relationships
and financial institutions.
NDC eCommerce operates three principal business categories of products and
services: direct merchant acquiring, indirect merchant acquiring and electronic
funds transfer. These categories offer customers a broad range of end-to-end
electronic commerce services, including credit and debit card authorization and
transaction data capture, settlement and funding, charge back processing,
customer support services, portfolio risk management, business-to-business
purchasing card services, check guarantee, check recovery, check validation,
merchant statement accounting, terminal management services, card issuing
services, cash management and funds transfer services, management information
and deposit reporting, financial electronic data interchange and Internet-based
tax payment processing.
A summary description of each of NDC eCommerce's types of products and
services follows.
Direct Merchant Acquiring
Direct merchant acquiring services are marketed directly to merchant
acquirers and include card processing, check guarantee, and check recovery
services.
Card processing services consist of credit and debit card authorization and
the capture of related transaction data (such as card identification number,
transaction date, and dollar value of the goods or services purchased). NDC
eCommerce's extensive authorization network system and related-software enables
an entire data stream to be electronically captured and transmitted providing
expedited clearing through the banking system. Revenue for these services is
primarily based on a percentage of transaction value, as well as various
processing fees charged to merchants. NDC eCommerce also provides efficient and
secure settlement and funding services, sales draft retrieval and charge back
resolution services, customer support services, and portfolio risk management.
Portfolio risk management services allow financial institutions to monitor
credit risk, thereby enhancing the profitability of their portfolios. Risk
management services include credit underwriting, credit scoring, fraud control,
account processing and collections. Card processing services offer the
convenience of its business-to-business purchasing card services, which allow
for timely and accurate flow of goods and services among its corporate
customers. NDC eCommerce believes that these products and service offerings
will enable the Company to realize significant growth in this market area.
15
Check guarantee services include comprehensive check verification and
guarantee services designed for a retail merchant's specific needs and risk
adversity. Since this offering guarantees all checks that are electronically
verified (primarily using point-of-sale check readers) through its extensive
database, merchants may safely expand their revenue base by accepting checks
from potentially high-risk customers. If a verified check is dishonored, check
guarantee provides the merchant with reimbursement of the check's face value,
and then collects the check through its internal recovery services. To protect
against this risk, verification databases are used that contain information on
historical delinquent check writing activity and up-to-date consumer bank
account status. Revenue for these services is primarily derived from a
percentage of the face value of each guaranteed check.
Check recovery services are similar to those provided in the check
guarantee service (verification primarily through point-of-sale check readers),
except that the check recovery product does not guarantee its verified checks.
This service provides a low-cost, loss-prevention solution for merchants wishing
to quickly measure a customer's check presentment worthiness at the point of
sale, while not having to incur the additional expense of check guarantee
services. Revenue for these services is primarily derived from the service fees
collected from delinquent check writers, fees charged to merchants based on a
transaction rate per verified check and fees charged to merchants for
specialized services, such as electronic re-deposits of dishonored checks.
Indirect Merchant Acquiring
Indirect merchant acquiring services are marketed through other
distribution channels and include network, merchant, terminal management and
card issuing services.
Network services includes credit and debit electronic payment authorization
and draft capture processing capabilities to financial institutions and
independent sales organizations that re-market these services directly to their
retail merchant and corporate customers. Revenues are generated on a per
transaction basis.
The merchant accounting services allow merchants to monitor portfolio
performance, control expenses, disseminate information, and track profitability
through the production and distribution of detailed statements summarizing
electronic transaction payment processing activity. These services are provided
to financial institutions and independent sales organizations that re-market
these services directly to their retail merchant and corporate customers.
Customers are charged according to transaction volume levels or in service fees.
The terminal management product and service offering provides a variety of
services relating to electronic transaction payment processing equipment, such
as terminal programming and deployment, set-up and telephone training,
maintenance and equipment replacement, warehousing and inventory control,
customer service and technical support, customized
16
reporting and conversions. These services are provided to financial institutions
and independent sales organizations which re-market these services directly to
their retail merchant and corporate customers, as well as directly to merchants
by the Company. Revenues are derived from equipment sales and rentals,
programming and deployment fees and other fees.
The card issuing product serves as an outsource solution to small and mid-
sized credit unions and financial institutions wishing to issue credit, debit
and corporate purchasing cards. Revenue is generated by providing a variety of
card issuing services, including set-up and maintenance of product and system
parameters, card application processing, card activation and authorization,
system training and documentation, system and compliance enhancements, billing
and reporting services, system security and fraud detection services,
settlement, charge back and sales draft retrieval processing.
Funds Transfer
The electronic funds transfer set of offerings includes a wide variety of
services such as cash management and account balance reporting, management
information and deposit reporting and financial electronic data interchange.
These services include the capability for use by a range of corporation sizes
including large, multi-national corporations in a multi-currency, multi-bank
environment. These products and services provide financial, management and
operational data to corporate and government agencies worldwide and allow these
organizations to exchange such information with financial institutions and other
service providers. NDC eCommerce also provides an Internet tax filing and
payment service that allows financial institutions and government agencies to
offer corporate taxpayers a secure and convenient method of paying taxes
electronically. Security on the system is handled through both encryption and
multi-level password access and operates through a web site that serves as the
portal for securely receiving tax information and delivering the transaction for
payment. This service allows businesses to easily comply with state and federal
tax regulations, while maintaining control of the timing for tax payments.
Alliances and Direct Investments
NDC eCommerce's strategy includes direct investment in or formation of
business alliances with banks and other distributors as well as emerging payment
technology companies to leverage its existing customer relationships and
infrastructure and to accelerate product time-to-market. During fiscal year
2000, NDC eCommerce made a direct investment in a company that offers Internet
users secure and convenient ways to make purchases over the Internet.
Additionally, NDC eCommerce announced several alliances with emerging payment
technology companies.
17
Sales and Marketing
-------------------
The Company's products and services are offered to the health care markets
directly through Company personnel and through alliances with other
organizations and through Internet sites.
The Company markets its products and services to the eCommerce markets
through a variety of distinct sales channels including a direct sales force,
independent sales organizations, independent sales representatives, an internal
telesales group, alliance bank relationships and financial institutions.
Additionally, the Company markets directly to customers primarily through
print advertising and direct mail efforts. The Company participates in the
industries' major tradeshows and publicity events and actively employs various
public relations campaigns. This strategy is intended to utilize the lowest
delivery cost system available to successfully acquire and convert target
customers onto the Company's products and services.
Operations and Systems
----------------------
The Company operates multiple data and customer support facilities. The
primary facilities are in Atlanta, Georgia; Phoenix, Arizona; Tulsa, Oklahoma;
Hanover, Maryland; Dallas, Texas; Los Angeles, California; Winston Salem, North
Carolina; Cleveland, Ohio; and St. Louis, Missouri with others in Virginia,
Illinois, Utah, Toronto, Ontario; and the United Kingdom.
Because of the large number and variety of NDC's products and services, the
Company does not rely on a single technology to satisfy its sophisticated
computer systems needs but instead employs technology that is suitable for
each particular processing requirement. Given this approach, NDC utilizes (i)
fault-tolerant computers for high volume, fast response transaction processing;
(ii) client-server technology for end-user data base applications; (iii) the
latest central systems for large scale transaction and batch data base
processing; and (iv) HP, DEC, SUN, Sequent, UNIX, NT and Windows based systems
for specialized communication and data base applications systems. The larger
systems are linked via high speed, fiber optic-based networked backbones for
file exchange and inter-system communication purposes; others use high speed LAN
connections. The bulk of these system connections utilize the Internet TCP/IP
architecture. NDC also maintains storage systems connected to the backbones,
including robotic tape libraries and optical storage for archival purposes. An
experienced systems support, operations and production control staff, with an
advanced network control center, supports the Company's systems.
The Company's communications network is made up of numerous discrete
networks; each designed for a different purpose. NDC maintains three primary
networks in addition to its support of the public Internet: a dial-up, short
transaction network; a private
18
line nationwide high bandwidth network; and a dial-up voice/data network for
interactive and voice traffic. The Company also maintains a number of support
services offering satellite, wireless, Internet and ISDN connectivity. The
network environment supports a diverse set of telecommunication protocols to
respond to its diverse customer requirements.
Competition
-----------
The most significant competitive factors related to the Company's services
are value-added features, functionality, price and reliability of service, as
well as breadth of and effectiveness of distribution channels.
Health Care Market
Potential competition in the healthcare value added network and transaction
processing market arises from companies that are similarly specialized in each
product or service category that the Company offers, and also from companies
involved in other, more highly developed sectors of the value added network
transaction processing market. Such companies could focus more attention on the
healthcare value added network transaction processing market as it develops. The
emergence of the Internet may provide new types of offerings and create a
competitive shift in the marketplace. When compared to the Company's information
management products and services, certain of these competitors have larger
processing volumes, offer services in certain specialized markets and control a
higher market share. The Company does not believe it has a dominant market
share and, as the healthcare industry continues to consolidate, the Company may
experience revenue declines and operating margin compression.
Factors influencing competition in the healthcare market include (i)
compatibility with the provider's software and inclusion in practice management
software products, (ii) in the case of the pharmacy market, relationships with
major pharmacy chains, and (iii) relationships with third-party payors and
managed care organizations. The Company believes that the breadth of
functionality, price and reliability of its services are the most significant
factors in developing and maintaining relationships with its customers.
Electronic Commerce Market
NDC eCommerce faces significant competition from other companies offering
products and functionality similar to the Company's. These other companies are
also utilizing many of the same distribution techniques that NDC eCommerce does.
In addition to new distribution alternatives, a new threat is emerging in the
payment processing market in the form of alternative payment solutions. These
alternative payment forms, if successfully implemented, could have an adverse
financial impact on current industry participants that do not embrace the
change. Further, although the Internet does not currently reflect a significant
form of payment processing when compared to traditional forms, it is a rapidly
emerging medium that will likely have a long-term impact on the industry.
19
NDC eCommerce's principal competitors include other independent processors,
major national banks, regional banks, financial institutions, and independent
sales organizations. When compared to the Company, certain of these competitors
have larger processing volumes, offer services in certain specialized markets
and control a higher market share. The Company does not believe that it has a
dominant market share and, as the payment processor industry continues to
consolidate, the Company may experience revenue declines and operating margin
compression.
NDC creates a differentiated competitive position in its product areas by
offering a variety of value-added solutions to its customers. These enhanced
services involve vertical market unique features and sophisticated reporting
features that add value to information obtained from the Company's electronic
commerce transaction processing databases. The Company believes that its
knowledge of its specific markets and its ability to offer specific, integrated
solutions to its customers, including hardware, software, processing, and
network facilities and its flexibility in packaging these products are positive
factors pertaining to the competitive position of the Company.
Research and Development
------------------------
During fiscal 2000, 1999, and 1998, the Company expended approximately
$15.3 million, $14.0 million, and $15.6 million (plus a non-recurring charge of
$67.0 million described below), respectively, on activities relating to the
development and improvement of new and existing products, services and
techniques. Of these amounts, approximately $10.5 million, $10.1 million, and
$5.0 million were capitalized in fiscal 2000, 1999, and 1998, resulting in net
expenses of approximately $4.8 million, $3.9 million, and $10.6 million,
respectively. These amounts exclude expenditures for product improvements,
customer requested enhancements, maintenance and Year 2000 remediation. Research
and development costs for fiscal 1998 include $67.0 million determined by an
independent third party valuation representing in-process research and
development activities acquired through the Source Informatics Inc. acquisition.
These costs were not capitalizable and were appropriately charged to expense
under generally accepted accounting principles (see Note 5 to the Consolidated
Financial Statements on Page A- 27 of this report).
Employees
---------
As of May 31, 2000 the Company and its subsidiaries continuing operations
had approximately 3,800 employees. Many of the Company's employees are highly
skilled in technical areas specific to the healthcare and electronic payments
industries, and the Company believes that its current and future operations
depend substantially on retaining such employees. The Company's employees are
not represented by any labor union and the Company believes its employee
relations to be excellent.
On July 20, 2000, the Company announced its plans to merge its pharmacy
systems business with another company. After the completion of this action, the
Company and its subsidiaries will have approximately 3,300 employees.
20
Item 2. PROPERTIES
- -------------------
The Company's corporate headquarters are located in Atlanta, Georgia. The
Company occupies a six-story, 120,000 square foot building at Two National Data
Plaza in Atlanta, Georgia. There is no outstanding debt on the facility.
Additionally, in May 1999, the Company purchased a previously leased (by the
Company) fully occupied five-story, 80,000 square foot corporate headquarters
building at One National Data Plaza in Atlanta. There is an existing $3.2
million mortgage on this facility which the Company assumed.
In addition to the above facilities, the Company leases or rents a total of
71 other facilities. Of these 71, 19 are regional support centers and 52 are
sales offices. Included in these totals are 7 foreign locations. The Company
owns or leases a variety of computers and other computer equipment for its
operational needs. The Company continues to upgrade and expand its computers and
related equipment in order to increase efficiency, enhance reliability, and
provide the necessary base for business expansion.
The Company believes that its facilities and equipment are suitable and
adequate for the business of the Company as presently conducted.
Information about leased properties is incorporated by reference from Note
15 of the Notes to the Consolidated Financial Statements on page A- 44 of this
Report.
Item 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
21
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, titles, ages, and business experience of all present executive
officers of the Company are listed below. All officers hold office at the
pleasure of the Board of Directors, unless they earlier retire or resign.
Name Business Experience Age
---- ------------------- ---
Robert A. Yellowlees Chairman of the Board of the Company since 61
June 1992; President,Chief Executive Officer
and Chief Operating Officer of the Company
since May 1992; director of Protective Life
Corporation. Mr. Yellowlees has been a
director of the Company since April 1985.
Paul R. Garcia Chief Executive Officer, NDC eCommerce since 47
July 1999; President and Chief Executive
Officer of Productivity Point International
from March 1997 to September 1998; Group
President of First Data Card Services from
1995 to 1997.
Walter M. Hoff Chief Executive Officer, Health Information 47
Services since August 1998; Executive Vice
President of First Data Corporation from 1992
to 1998. Director of Metris Corporation.
Thomas M. Dunn Chief Operating Officer, NDC eCommerce since 43
March 1999; General Manager, Integrated Payment
Systems from June 1996 to March 1999; Group Vice
President from August 1992 to June 1996; and
Division Vice President from August 1988 to
August 1992.
22
William H. McCahan Chief Marketing Officer, Health Information 63
Services from July 1997; Chief Marketing Officer
for the 1996 Centennial Olympic Games in Atlanta,
1992 to 1996
David H. Shenk Interim Chief Financial Officer since January 2000. 52
Chief Accounting Officer of the Company since
January 1998; Corporate Controller, Rollins, Inc.,
1992 - 1997
Suellyn P. Tornay Interim General Counsel and Secretary since April 39
1999; various staff positions in the Company's
legal department since January 1987.
23
PART II
-------
Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
- ----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
Market Price and Dividend Information appears on Page A-2 of this report.
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
Selected Financial Data appears on Page A-1 of this report. Additional
discussion of Business Acquisitions appears in from Note 2 of the Notes to the
Consolidated Financial Statements on page A- 22 of this Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages A-3 to A-14 of this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
This disclosure is included in the Management's Discussion and Analysis of
Financial Condition and Results of Operations which appears on pages A-3 to A-14
of this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Financial statements and supplementary information appears on pages A-15 to A-48
of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
24
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The Company hereby incorporates by reference the information contained
under the heading "Election of Directors - Certain Information Concerning
Nominee and Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" from its definitive Proxy Statement to be delivered to the
stockholders of the Company in connection with the 2000 Annual Meeting of
Stockholders to be held on October 26, 2000. Certain information relating to
executive officers of the Company appears at pages 22 to 23 of this Annual
Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
- --------------------------------
The Company hereby incorporates by reference the information contained
under the heading "Election of Directors - Compensation and Other Benefits" from
its definitive proxy statement to be delivered to the stockholders of the
Company in connection with the 2000 Annual Meeting of Stockholders to be held on
October 26, 2000. In no event shall the information contained in the proxy
statement under the sections entitled "Stockholder Return Analysis" and "Report
of the Compensation Committee" be included herein by this reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The Company hereby incorporates by reference the information contained
under the headings "Election of Directors - Common Stock Ownership of
Management" and " - Common Stock Ownership by Certain Other Persons" from its
definitive Proxy Statement to be delivered to the stockholders of the Company in
connection with the 2000 Annual Meeting of Stockholders to be held on October
26, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Neil Williams, a Director of the Company, was, until September 30, 1999, a
partner of Alston & Bird LLP (attorneys and counsel for the Company). The
Company paid Alston & Bird LLP approximately $852,000, $726,000, and $830,000 in
fiscal 2000, 1999 and 1998, respectively for legal services rendered in
connection with numerous matters.
25
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Listing of Financial Statements
The following consolidated financial statements for the Registrant and
its subsidiaries appear in Appendix A to this report and are filed as a part
hereof:
Consolidated Statements of Income / (loss) for each of the three fiscal years
ended May 31, 2000.
Consolidated Balance Sheets at May 31, 2000 and 1999.
Consolidated Statements of Cash Flows for each of the three fiscal years ended
May 31, 2000.
Consolidated Statements of Changes in Shareholders' Equity for each of the three
fiscal years ended May 31, 2000.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants
(a)(2) Listing of Financial Statement Schedules
Other than as described below, Financial Statement Schedules are not
filed with this Report because the Schedules are either inapplicable or the
required information is presented in the Financial Statements or Notes thereto.
The following Schedule is filed in Appendix A as a part hereof:
Consolidated Schedule II - Valuation and Qualifying Accounts.
Report of Independent Public Accountants as to Schedule
(a)(3) Exhibits
2(i) Stock Purchase Agreement dated September 3, 1996, as amended, September
24, 1996 between the Registrant and Equifax Healthcare Information Services,
Inc. (filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated
October 1, 1996, File No. 001-12392, and incorporated herein by reference.)
(ii) Stock Purchase Agreement dated December 5, 1996 among the Registrant,
Blue Cross and Blue Shield of Virginia and Consolidated Healthcare, Inc. (filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K dated December 31,
1996, File No. 001-12392, and incorporated herein by reference.)
26
(iii) Stock Purchase Agreement dated as of August 20, 1997, by and among
Registrant, PMSI Database Holdings, Inc. and Pharmaceutical Marketing Services,
Inc. (included as Exhibit 2.1 to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-35991), as amended, previously filed and incorporated
by reference herein).
(iv) Agreement and Plan of Merger dated as of August 20, 1997 by and among the
Registrant, Source Informatics Inc., and a wholly owned Subsidiary of the
Registrant (included as Exhibit 2.1 to the Registrant's Registration Statement
on Form S-4 (Registration No. 333-35995), as amended, previously filed with the
Commission and incorporated by reference herein).
(v) Agreement and Plan of Merger dated as of October 14, 1997 by and among
the Registrant, a Subsidiary of the Registrant and Physician Support Systems,
Inc.(filed as Annex A to the Proxy Statement/Prospectus previously filed as part
of the Registrant's Registration Statement on Form S-4 (Registration No. 333-
40153) and incorporated by reference herein).
(3)(i) Certificate of Incorporation of the Registrant, as amended (filed as
Exhibit 4(a) to the Registrant's Registration Statement on Form S-8
(Registration No. 333-05427) and incorporated herein by reference).
(ii) Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated October 28, 1996 (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated October 29, 1996, file No. 001-12392, and
incorporated herein by reference.)
(iii) Amended Certificate of Designations of the Registrant, dated October 28,
1996 (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated
October 29, 1996, file No. 001-12392, and incorporated herein by reference.)
(iv) Certificates of Amendment to Certificate of Incorporation of the
Registrant, dated March 22, 1999; May 26, 1999; June 21, 1999 and June 30, 2000.
(v) Bylaws of the Registrant, as amended (filed as Exhibit 3(ii) to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1991, File
No. 001-12392, and incorporated herein by reference.)
(vi) Amendment to Bylaws of the Registrant, as previously amended (filed as
Exhibit 3(iii) to the Registrant's Annual Report on Form 10-K for the year ended
May 31, 1995, File No. 001-12392, and incorporated herein by reference.)
27
(4)(i) Rights Agreement, dated as of January 18, 1991, between the Registrant
and the Rights Agent, as amended (incorporated by reference from Exhibit 2 to
the Registrant's Registration Statement on Form 8-A, File No. 001-12392, as
filed on October 5, 1993.)
(ii) Form of Indenture between the Registrant and The First National Bank of
Chicago, as Trustee, relating to Registrant's 5% Convertible Subordinated Notes
due 2003 (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K dated
October 29, 1996, File No. 001-12392, and incorporated herein by reference.)
(iii) Form of the Registrant's 5% Convertible Subordinated Note due 2003
(filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K dated October
29, 1996, File No. 001-12392, and incorporated herein by reference.)
(10)(i) Operating Agreement of Global Payment Systems LLC dated March 31, 1996
between MasterCard International Incorporated, GPS Holding Limited Partnership,
National Data Corporation of Canada, Ltd., National Data Corporation, NDC
International, Ltd. and National Data Payment Systems, Inc. (filed as Exhibit
10(i) to the Registrant's Annual Report on Form 10-K for the year ended May 31,
1996, File No. 001-12392, and incorporated herein by reference).
(ii) Registration Rights Agreement dated April 1, 1996 between Global Payment
Systems LLC and MasterCard International Incorporated (filed as Exhibit 10(ii)
to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1996,
File No. 001-12392, and incorporated herein by reference).
(iii) Credit Agreement dated as of December 19, 1997, among the Registrant,
The First National Bank of Chicago, as Administrative Agent, Wachovia Bank,
N.A., as Documentation Agent, and the Lenders named therein. (filed as Exhibit
10.7 to the Registrant's Annual Report on Form 10-K for the year ended May 31,
1998, File No. 001-12392, and incorporated herein by reference).
(iv) First Amendment dated April 10, 1998 to the Credit Agreement dated as of
December 19, 1997, among the Registrant, The First National Bank of Chicago, as
Administrative Agent, Wachovia Bank, N.A., as Documentation Agent, and the
Lenders named therein. (filed as Exhibit 10.8 to the Registrant's Annual Report
on Form 10-K for the year ended May 31, 1998, File No. 001-12392, and
incorporated herein by reference).
(v) Second Amendment dated October 14, 1998 to the Credit Agreement dated as
of December 19, 1997, among the Registrant, The First National Bank of Chicago,
as Administrative Agent, Wachovia Bank, N.A., as Documentation Agent, and the
Lenders named therein. (filed as Exhibit 10 (v) to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1999, File No. 001-12392, and
incorporated herein by reference).
28
(vi) Third Amendment dated February 26, 1999 to the Credit Agreement dated as
of December 19, 1997, among the Registrant, The First National Bank of Chicago,
as Administrative Agent, Wachovia Bank, N.A., as Documentation Agent, and the
Lenders named therein. (filed as Exhibit 10 (vi) to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1999, File No. 001-12392, and
incorporated herein by reference).
(vii) Fourth Amendment dated July 7, 1999 to the Credit Agreement dated as of
December 19, 1997, among the Registrant, The First National Bank of Chicago, as
Administrative Agent, Wachovia Bank, N.A., as Documentation Agent, and the
Lenders named therein. (filed as Exhibit 10 (vii) to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1999, File No. 001-12392, and
incorporated herein by reference).
(viii) Fifth Amendment dated September 29, 1999 to the Credit Agreement dated
as of December 19, 1997, among the Registrant, Bank One, NA (formerly The First
National Bank of Chicago), as Administrative Agent, Wachovia Bank, N.A., as
Documentation Agent, and the Lenders named therein.
(ix) Sixth Amendment dated April 13, 2000 to the Credit Agreement dated as of
December 19, 1997, among the Registrant, Bank One, NA (formerly The First
National Bank of Chicago), as Administrative Agent, Wachovia Bank, N.A., as
Documentation Agent, and the Lenders named therein.
Executive Compensation Plans and Arrangements
(x) Form of Executive Severance Compensation Agreement with certain
executive officers (filed as Exhibit 10(ii) to the Registrant's Annual Report on
Form 10-K for the year ended May 31, 1986, File No. 001-12392, and incorporated
herein by reference.)
(xi) Non-Employee Directors Stock Option Plan (filed as Exhibit 10(iv) to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1987, File
No. 001-12392, and incorporated herein by reference.)
(xii) 1995 Non-Employee Director Compensation Plan (filed as Exhibit 10(vii)
to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1996,
File No. 001-12392, and incorporated herein by reference).
(xiii) Amended and Restated Retirement Plan for Non-Employee Directors, dated
as of April 20, 1994 (filed as Exhibit 10(xii) to the Registrant's Annual Report
on Form 10-K for the year ended May 31, 1994, File No. 001-12392, and
incorporated herein by reference.)
29
(xiv) Amendment to Amended and Restated Retirement Plan for Non-Employee
Directors (filed as Exhibit 4(xi) to the Registrant's Annual Report on Form 10-K
for the year ended May 31, 1995, File No. 001-12392, and incorporated herein by
reference).
(xv) 1983 Restricted Stock Plan, as amended (incorporated by reference from
Exhibit 10 to the Registrant's Registration Statement on Form S-8, No. 333-
05451).
(xvi) 1987 Stock Option Plan, as amended (incorporated by reference from
Exhibit 10 to the Registrant's Registration Statement on Form S-8, No. 333-
05449).
(xvii) Amended and Restated C.I.S. Technologies, Inc. Stock Option Plan
(incorporated by reference from Exhibit 10(a) to the Registrant's Registration
Statement on Form S-8, No. 333-05427).
(xviii) Amended and Restated C.I.S. Technologies, Inc. Employee Stock Option
Plan (incorporated by reference from Exhibit 10(b) to the Registrant's
Registration Statement on Form S-8, No. 333-05427).
(xix) C.I.S. Technologies, Inc. HCC Management Stock Option Plan (incorporated
by reference from Exhibit 10(c) to the Registrant's Registration Statement on
Form S-8, No. 333-05427).
(xx) C.I.S. Technologies, Inc. 1995 Directors' Stock Option Plan
(incorporated by reference from Exhibit 10(d) to the Registrant's Registration
Statement on Form S-8, No. 333-05427).
(xxi) C.I.S. Technologies, Inc. 1995 Stock Incentive Plan (incorporated by
reference from Exhibit 10(e) to the Registrant's Registration Statement on Form
S-8, No. 333-05427).
(xxii) Supplemental Executive Retirement Plan effective June 1, 1997
(incorporated by reference from Exhibit 10(xx) to the Registrant's Annual Report
on Form 10-K for the year ended May 31, 1997, File No. 001-12392).
(xxiii) Amendment to Registrant's 1987 Stock Option Plan effective September
28, 1996 (incorporated by reference from Exhibit 10(xxi) to the Registrant's
Annual Report on Form 10-K for the year ended May 31, 1997, File No. 001-12392).
(xxiv) Amendment to Registrant's 1983 Restricted Stock Plan effective December
17, 1996 (incorporated by reference from Exhibit 10(xxii) to the Registrant's
Annual Report on Form 10-K for the year ended May 31, 1997, File No. 001-12392).
(xxv) Employment Agreement effective June 1, 1997 between Robert A. Yellowlees
and the Registrant (incorporated by reference from Exhibit 10(xxiv) to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1997, File
No. 001-12392).
30
(xxvi) Synergistic Systems, Inc. 1996 Stock Option Plan (incorporated herein
by reference from Exhibit 4(a) to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-44823).
(xxvii) Physician Support Systems, Inc. 1996 Stock Option Plan (incorporated
herein by reference from Exhibit 4(b) to the Registrant's Registration Statement
on Form S-8 (Reg. No. 333-44823).
(xxviii) Employment Agreement dated December 10, 1997 between Robert Brown and
Source Informatics Inc. (incorporated by reference from Exhibit 10(xxvi) to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1999, File
No. 001-12392).
(xxix) Amendment dated May 31, 1999 to the Employment Agreement effective
June 1, 1997 between Robert A. Yellowlees and the Registrant. (incorporated by
reference from Exhibit 10(xxvii) to the Registrant's Annual Report on Form 10-K
for the year ended May 31, 1999, File No. 001-12392).
(xxx) Amendment to the National Data Corporation Employees Retirement Plan
effective July 31, 1998 (incorporated by reference from Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter end August 31, 1998,
File No. 001-12392).
(xxxi) Amendment to the 1984 Non-Employee Director Stock Option Plan
effective October 22, 1998. (filed as Exhibit 10 (xxix) to the Registrant's
Annual Report on Form 10-K for the year ended May 31, 1999, File No. 001-12392,
and incorporated herein by reference).
(xxxii) 2000 Long-term Incentive Plan (filed as Exhibit A to the Registrant's
Definitive Proxy Statement on Form 14A for the year ended May 31, 1999 and
incorporated herein by reference).
(21) Subsidiaries of the Registrant
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule (for SEC use only).
(99.1) Safe Harbor Compliance Statement For Forward-Looking Statements.
(b) One report on Form 8-K was filed during the last quarter of the most
recent fiscal year. The report, which was filed on March 31, 2000, contained a
press release announcing third quarter earnings and the decision to divest the
PHSS business. The press release was accompanied by unaudited consolidated
statements of income,
31
proforma statements of income, consolidated balance sheets, a report on the
Company's segment information and a report on discontinued operations.
(c) The Exhibits to this Report are listed under Item 14(a)(3) above.
(d) The Financial Statement Schedule to this Report is listed under Item
14(a)(2) above.
32
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, National Data Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL DATA CORPORATION
By: /s/ Robert A. Yellowlees
----------------------------
Robert A. Yellowlees, Chairman of the
Board, President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ David H. Shenk
--------------------------
David H. Shenk
Interim Chief Financial Officer and
Controller
(Principal Financial Officer and Chief
Accounting Officer)
Date: August 25, 2000
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by a majority of the Board of Directors of the Registrant
on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Robert A. Yellowlees Chairman of the Board, August 25, 2000
- ------------------------
Robert A. Yellowlees Chief Executive Officer
/s/ Edward L. Barlow Director August 15, 2000
- ------------------------
Edward L. Barlow
/s/ J. Veronica Biggins Director August 15, 2000
- ------------------------
J. Veronica Biggins
/s/ James F. McDonald Director August 15, 2000
- ------------------------
James F. McDonald
/s/ Neil Williams Director August 15, 2000
- ------------------------
Neil Williams
34
APPENDIX A
to
ANNUAL REPORT ON FORM 10-K
NATIONAL DATA CORPORATION AND ITS SUBSIDIARIES
FINANCIAL STATEMENTS AND SCHEDULES
CONTENTS
Selected Financial Data........................................................................ A-1
Market Price and Dividend Information.......................................................... A-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... A-3
Consolidated Statements of Income (Loss) for each of the three years
ended May 31, 2000........................................................................ A-15
Consolidated Statements of Cash Flows for each of the three years ended
May 31, 2000.............................................................................. A-16
Consolidated Balance Sheets at May 31, 2000 and 1999........................................... A-17
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years ended May 31, 2000........................................................ A-18
Notes to Consolidated Financial Statements..................................................... A-19
Report of Independent Public Accountants....................................................... A-48
Consolidated Schedule II - Valuation and Qualifying Accounts................................... A-49
Report of Independent Public Accountants As to Schedule........................................ A-50
Index to Exhibits ............................................................................. A-51
35
Selected Consolidated Financial Data
The following table summarizes selected historical financial information of
National Data Corporation and its subsidiaries for each of the last five fiscal
years. All amounts have been restated on a continuing operations basis.
Discontinued operations and restructuring, impairment, and non-recurring charges
are more fully discussed in the Notes to Financial Statements. The selected
financial information shown below has been derived from the Company's audited
financial statements. This table should be read in conjunction with other
financial information of the Company, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements included elsewhere herein.
(In thousands, except per share data) Fiscal Years Ended
--------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------
Revenue:
Health Information Services 345,673 $338,996 $ 249,147 $173,821 $ 145,548
eCommerce 340,033 330,051 291,546 257,679 180,924
--------------------------------------------------------------------
Total $685,706 $669,047 $ 540,693 $431,500 $ 326,472
Operating Income (Loss) $ 75,595 $138,779 ($24,621) $ 54,793 ($14,816)
Income (Loss) Before Discontinued
Operations $ 31,884 $ 75,198 ($58,936) $ 26,808 ($10,907)
Diluted Earnings (Loss) Per Share
Before Discontinued Operations $ .93 $ 2.11 ($1.83) $ .83 ($.36)
Dividends Per Share $ .30 $ .30 $ .30 $ .30 $ .30
Total Assets $703,576 $748,597 $ 712,144 $570,474 $ 428,300
Long-Term Obligations $167,482 $186,287 $ 178,156 $161,422 $ 28,661
Total Shareholders' Equity $330,136 $409,094 $ 347,935 $323,249 $ 286,821
The Company incurred restructuring and impairment charges of $34.4 million
in fiscal 2000 and non-recurring charges of $120.2 million, $9.5 million and
$47.7 million in fiscal 1998, 1997 and 1996, respectively. Operating income
excluding these charges was $110.0 million, $95.6 million, $64.3 million and
$32.9 million in fiscal 2000, 1998, 1997 and 1996, respectively. Net income
excluding these charges was $54.2 million or $1.57 per share, $52.3 million or
$1.55 per share, $37.2 million or $1.15 per share, and $21.9 million or $0.71
per share in fiscal 2000, 1998, 1997 and 1996, respectively.
A-1
MARKET PRICE AND DIVIDEND INFORMATION
_____________________________________
National Data Corporation's common stock is traded on the New York Stock
Exchange under the ticker symbol "NDC." The high and low sales prices and
dividends paid per share of the Company's common stock for each quarter during
the last two fiscal years were as follows:
Dividend Per
High Low Share
- -------------------------------------------------------------------------
Fiscal Year 2000
First Quarter $51.56 $37.14 $.075
Second Quarter 40.62 21.58 .075
Third Quarter 42.79 30.04 .075
Fourth Quarter 31.34 22.00 .075
Fiscal Year 1999
First Quarter $44.86 $34.81 $.075
Second Quarter 38.54 26.36 .075
Third Quarter 55.07 35.82 .075
Fourth Quarter 48.63 36.81 .075
The number of shareholders of record as of August 16, 2000 was 3,730.
A-2
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 three 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.
National Data Corporation classifies its businesses into two fundamental
business segments: NDC Health Information Services and NDC eCommerce.
NDC Health Information Services provides diverse network based information
solutions to address administrative, clinical and decision support information
needs throughout the healthcare environment. The Company's products include
electronic claims processing, claims adjudication and payment systems, funding
capabilities, practice management systems, and information management
applications. The Company provides these products and services to pharmacies,
pharmaceutical manufacturers, physicians, hospitals, integrated delivery
systems, managed care organizations, payers, government health care agencies,
distributors, clinics, nursing homes and internet portals. These solutions
enable the Company's customers to increase efficiency, enhance the quality of
patient care, strengthen their management of revenue and cash flow, reduce
overhead costs, react quickly to changing market conditions, improve business
operations, and streamline administrative processes. NDC Health Information
Services provides a greater range of electronic information products and
services to more segments of the industry than any other company.
NDC eCommerce offers a broad range of value-added end-to-end electronic
commerce and payment processing solutions to the retail, hospitality,
automotive, health care, cable providers, cellular telephone providers,
government and other markets. It has expanded from a credit card authorization
company to one offering a full range of services from business origination,
terminal deployment, credit card authorization, merchant accounting and other
back office services to customer support. NDC eCommerce has been one of the
leaders in diversifying its distribution channels to complement the original
financial institution model. In concert with this, it has developed specific
value added applications for a range of vertical market segments. NDC eCommerce
provides a wide range of end-to-end information solutions for the business to
business markets offering multiple payment-processing alternatives. The Company
offers electronic data interchange ("EDI") and Internet-based purchasing and
payment services, credit and debit card authorization and processing services,
check verification and guarantee, cash management, Internet based tax payment,
and other related services directly to merchants and indirectly through
financial institutions. The Company is one of the largest independent
transaction processors of credit cards in the world.
The All Other and Corporate category is comprised mostly of unallocated,
direct corporate operations.
A-3
Results of Operations
During fiscal 2000, the Company completed the evaluation of strategic
alternatives relating to the Health Management Services business. These include
the units that were acquired through the PHSS acquisition in December 1997 and
other related activities. The Company concluded that these operations no longer
logically integrate with the Company's core Health Information Services
business. On July 20, 2000, the Company announced that it has entered into
definitive agreements for the sale of its Health Information Services businesses
that were acquired through the acquisition of PHSS in December 1997. The Company
is accounting for this business as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30, " Reporting the Results of
Operations". Accordingly, results of these operations have been classified as
discontinued and prior periods have been restated.
The following tables are a summary of the Company's results of continuing
operations as reported and excluding the effects of non-recurring, restructuring
and impairment charges (In millions, except per share data):
2000 vs. 1999 1999 vs. 1998
2000 1999 1998 Change Change
- ---------------------------------------------------------------------------------------------------
As Reported
Revenue $685.7 $669.0 $540.7 $ 16.7 2% $128.3 24%
Operating Income (Loss) 75.6 138.8 (24.6) (63.2) (46%) 163.4 *
Income (Loss) Before
Discontinued Operations 31.9 75.2 (58.9) (43.3) (58%) 134.1 *
Diluted Earnings (Loss) Per Share
Before Discontinued Operations 0.93 2.11 (1.83) (1.18) (56%) 3.94 *
Excluding Non-recurring,
Restructuring and
Impairment Charges
Revenue $685.7 $669.0 $540.7 $ 16.7 2% $128.3 24%
Operating Income 110.0 138.8 95.6 (28.8) (21%) 43.3 45%
Income Before Discontinued
Operations 54.2 75.2 52.3 (21.0) (28%) 22.9 44%
Diluted Earnings Per Share
Before Discontinued Operations 1.57 2.11 1.55 (0.54) (26%) 0.56 36%
* - percentage change deemed not meaningful
The Company incurred restructuring and impairment charges of $34.4 million
in fiscal 2000 and incurred non-recurring charges of $120.2 million in fiscal
1998. After-tax, these charges were $22.4 million or $0.64 per share and $111.2
million or $3.38 per share in fiscal 2000 and 1998, respectively. In general,
the restructuring and impairment charges were incurred in connection with
restructuring activities that included charges for closing facilities, severance
and other related costs associated with plans to reduce redundant operations and
A-4
activities and impairment losses. The non-recurring charges were incurred in
connection with mergers that occurred during fiscal 1998. The components of the
merger related charges include asset impairment losses and transaction costs in
addition to restructuring activities. The 1998 charge also includes a $67.0
million in-process research and development charge as a result of the
acquisition of Source Informatics Inc. For more detailed discussion of these
charges, refer to Note 13 to the Consolidated Financial Statements. The
remainder of the results of operations discussion will exclude the impacts of
these charges, as the Company believes that this will provide for more
meaningful comparisons.
A-5
Fiscal Years 2000 and 1999
The following tables provide comparisons of the Company's results of
operations for fiscal years 2000 and 1999 and exclude restructuring and
impairment charges:
(In millions and excluding restructuring and impairment charges)
2000 1999 Change
--------------- --------------- --------
Revenue:
NDC Health Information Services $345.7 50% $339.0 51% 2%
NDC eCommerce 340.0 50% 330.0 49% 3%
--------------------------------------------------
Total Revenue $685.7 100% $669.0 100% 2%
==================================================
Depreciation and Amortization:
NDC Health Information Services $ 29.1 56% $ 26.7 54% 9%
NDC eCommerce 20.7 40% 20.8 42% 0%
All Other and Corporate 2.1 4% 2.1 4% 0%
--------------------------------------------------
Total Depreciation and Amortization $ 51.9 100% $ 49.6 100% 5%
==================================================
The Company's earnings before interest, taxes, depreciation and
amortization (EBITDA) is defined as operating income plus depreciation and
amortization and restructuring and impairment charges. 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, non-recurring, restructuring and impairment
charges.
(In millions and excluding restructuring and impairment charges)
EBITDA:
NDC Health Information Services $ 84.5 52% $ 97.5 52% (13%)
NDC eCommerce 88.9 55% 100.7 53% (12%)
All Other and Corporate (11.5) (7%) (9.8) (5%) (17%)
-------------------------------------------------------
Total EBITDA $161.9 100% $188.4 100% (14%)
=======================================================
Income before Income Taxes (IBIT):
NDC Health Information Services $ 54.2 61% $ 70.5 58% (23%)
NDC eCommerce 63.4 71% 74.8 61% (15%)
All Other and Corporate (28.8) (32%) (23.0) (19%) (25%)
-------------------------------------------------------
Total IBIT $ 88.8 100% $122.3 100% (27%)
=======================================================
A-6
Consolidated
Total revenue for fiscal 2000 was $685.7 million, an increase of $16.7
million, or 2%, from fiscal 1999. This increase was the result of growth in
customer base, transaction volumes and new services to our customers in the core
areas of both business segments while other non-core business areas declined.
Cost of service, as a percentage of revenue, increased to 49% in fiscal
2000 from 48% in fiscal 1999 due to reduced revenue for non-core products and
services and one-time expenditures of $1.9 million recorded in the second
quarter described in Note 13 to the Consolidated Financial Statements. Total
cost of service increased $18.0 million (6%) in fiscal 2000 from fiscal 1999 due
primarily to the factors described above and increases in depreciation and
amortization from increased capital expenditures for network and database
infrastructure made during the year to support future revenue and profitability
growth.
Sales, general and administrative expenses ("SG&A") increased $27.5 million
(13%) from the prior year. This was due primarily to investments in distribution
channel expansion, sales staffing and programs, customer service as well as
Internet development activities and $9.2 million of unusual expenses recorded in
the second quarter as described in Note 13 to the Consolidated Financial
Statements,. As a percentage of revenue, these SG&A expenses, increased to 35%
for fiscal 2000 from 31% for fiscal 1999 due to the factors described above.
Operating income, excluding non-recurring charges, decreased 21% to $110.0
million in fiscal 2000 from $138.8 million in fiscal 1999. As a percentage of
revenue, the Company's operating income margin decreased to 16% in fiscal 2000
from 21% in fiscal 1999. This decline is due primarily to the operating losses
in the non-core businesses and the unusual expenses described above.
EBITDA for fiscal 2000 decreased by $26.5 million or 14% to $161.9 million
due to the factors described above. The EBITDA margin percentage was 24% in
fiscal 2000, compared to 28% in fiscal 1999.
Total other expense increased $4.7 million for fiscal 2000 compared to
fiscal 1999. This increase was primarily the result of the net gains received
on the sale of marketable securities in the first quarter ($1.6 million) and the
sale of a dental system business in the second quarter ($2.3 million) offset by
the non-cash loss recorded to mark to market the Company's position in
MedicaLogic/Medscape, Inc. in the fourth quarter ($9.7 million) and increased
interest expense due to increased average borrowings.
IBIT for fiscal 2000 was $88.8 million compared to $122.3 million for
fiscal 1999. Diluted earnings per share, excluding non-recurring charges and
discontinued operations, for fiscal 2000 was $1.57 versus a comparable $2.11 for
fiscal 1999.
A-7
NDC Health Information Services
NDC Health Information Services revenue grew by 2% in fiscal 2000. Revenue
from the core strategic products and services including the point of service
systems, value-added network and information solutions businesses grew at a
strong rate while non-core legacy systems revenue declined - partially
offsetting revenue increases in the core areas.
EBITDA for fiscal 2000 was $84.5 million compared to $97.5 million in
fiscal 1999. This 13% decline in EBITDA was due to the operating losses in the
non-core products and services and the unusual expenses described previously.
The EBITDA margin percentage was 24% in fiscal 2000 compared to 29% in fiscal
1999. Margins as a percentage of revenue declined primarily due to the factors
described above. IBIT in fiscal 2000 declined by 23% to $54.2 million from
$70.5 million in fiscal 1999.
NDC eCommerce
The NDC eCommerce revenue increase of 3% reflects modest growth in the
primary direct mercrant acquiring services and nominal growth in the primary
indirect mechant acquiring services partially offset by declines in electronic
funds transfer and other secondary businesses compared to the prior year.
EBITDA for fiscal 2000 was $88.9 million compared to $100.7 million in
fiscal 1999. This 12% decline in EBITDA was due to the 3% increase in revenue
combined with a reduction in the EBITDA margin percentage from 31% in fiscal
1999 to 26% in fiscal 2000. This reflects the mix of product sales as well as
increased investments in sales, systems conversions and new product development.
IBIT was $63.4 million in fiscal 2000 compared to $74.8 million in fiscal 1999.
All Other and Corporate
All Other and Corporate is comprised primarily of corporate overhead
functions. This expense grew by 25% to $28.8 million in fiscal 2000 from $23.0
million in fiscal 1999 primarily due to the non-cash loss recorded to mark to
market the position in MedicaLogic/Medscape, Inc. previously described. While
the Company's investment position in this Internet company did not change, the
merger of MedicaLogic, Inc. and Medscape, Inc. required this mark to market non-
cash transaction. All Other and Corporate expense percentage increased to 4% in
fiscal 2000 from 3% of total revenue in fiscal 1999.
A-8
Fiscal Years 1999 and 1998
The following tables provide comparisons of the Company's results of
operations for fiscal years 1999 and 1998 and exclude non-recurring charges:
(In millions and excluding non-recurring charges)
1999 1998 Change
--------------- --------------- --------
Revenue:
NDC Health Information Services $339.0 50% $249.2 46% 36%
NDC eCommerce 330.0 50% 291.5 54% 13%
------------------------------------------------
Total Revenue $669.0 100% $540.7 100% 24%
================================================
Depreciation and Amortization:
NDC Health Information Services $ 26.7 54% $ 20.8 50% 28%
NDC eCommerce 20.8 42% 19.2 46% 8%
All Other and Corporate 2.1 4% 1.9 4% 11%
------------------------------------------------
Total Depreciation and Amortization $ 49.6 100% $ 41.9 100% 18%
================================================
EBITDA:
NDC Health Information Services $ 97.5 52% $ 64.3 47% 52%
NDC eCommerce 100.7 53% 83.8 61% 20%
All Other and Corporate (9.8) (5%) (10.6) (8%) (8%)
------------------------------------------------
Total EBITDA $188.4 100% $137.5 100% 37%
================================================
Income before Income Taxes (IBIT):
NDC Health Information Services $ 70.5 58% $ 43.3 52% 63%
NDC eCommerce 74.8 61% 60.9 73% 23%
All Other and Corporate (23.0) (19%) (20.6) (25%) 12%
------------------------------------------------
Total IBIT $122.3 100% $ 83.6 100% 46%
================================================
Consolidated
Total revenue for fiscal 1999 was $669.0 million, an increase of $128.3
million (or 24%) from fiscal 1998 due to growth in distribution channels,
customer base, transaction volumes and new services to our customers in both of
our business segments and the full year effect of acquisitions completed in
1998.
Cost of service increased $61.9 million (24%) in fiscal 1999 from fiscal
1998. The increase was the result of increased operating costs associated with
the 24% revenue growth. Total cost of service, as a percentage of revenue, was
48% in both fiscal 1998 and fiscal 1999.
Sales, general and administrative expenses ("SG&A") increased $23.2 million
(13%) from the prior year. This increase was primarily due to expenses
associated with continuing investments in product development and distribution
channel expansion. However, as a percentage of revenue, these expenses decreased
to 31% for fiscal 1999 from 34% for fiscal 1998. SG&A
A-9
expenses decreased as a percentage of revenue due to effective expense control
initiatives combined with synergies realized from the integration of
acquisitions.
Operating income, excluding non-recurring charges, increased 45% to $138.8
million in fiscal 1999 from $95.6 million in fiscal 1998. As a percentage of
revenue, the Company's operating income margin increased by 17% to 21% in fiscal
1999 from 18% in fiscal 1998. These improvements reflect improved margins in
operations gained through improved efficiencies.
EBITDA for fiscal 1999 increased by $50.9 million or 37% to $188.4 million
due to the 24% revenue increase and significant productivity improvements which
led to the Company's margin improvements. The EBITDA margin percentage was 28%
in fiscal 1999, compared to 25% in fiscal 1998.
Total other expense increased $4.6 million for fiscal 1999 compared to
fiscal 1998. This increase was primarily the result of higher interest expense
due to increased utilization of capital leases as a financing option for capital
expenditures.
IBIT for fiscal 1999 improved to $122.3 million from $83.6 million in
fiscal 1998, a 46% increase. Diluted earnings per share before discontinued
operations for fiscal 1999 was $2.11 versus a comparable $1.55 for fiscal 1998.
NDC Health Information Services
NDC Health Information Services revenue growth of 36% in fiscal 1999 was a
result of increases from internally developed products and services, primarily
electronic transaction processing, information management, physician practice
management, Internet services and by the impact of acquisition activity. Revenue
growth was positively impacted by the full year effect of the Company's third
quarter fiscal 1998 acquisition of the healthcare information management
business Source Informatics Inc. ("Source").
EBITDA for fiscal 1999 was $97.5 million compared to $64.3 million in
fiscal 1998. This 52% growth in EBITDA was due to the 36% increase in revenue
and substantial productivity improvements as measured by the EBITDA margin
percentage that improved from 26% in fiscal 1998 to 29% in fiscal 1999. The
Company improved EBITDA margins by offering higher margin value-added services,
by leveraging its fixed investments, through synergies realized from the
integration of acquisitions and through expense control. Margins as a percentage
of revenue continued to increase because revenues grew at a faster rate than
these expenses, including synergies realized from the integration of
acquisitions. IBIT in fiscal 1999 grew by 63% to $70.5 million from $43.3
million in fiscal 1998.
A-10
NDC eCommerce
The NDC eCommerce revenue increase of 13% reflects the impact of growth of
programs directed at new vertical industry offerings and new distribution
channels in addition to growth in basic market demand and the full year effect
of acquisitions. This growth was reflected in an increase in the volumes of
merchant sales and authorizations processed due to a larger customer base and
higher consumer credit card spending.
EBITDA for fiscal 1999 was $100.7 million compared to $83.8 million in
fiscal 1998. This 20% growth in EBITDA was due to the 13% increase in revenue
and strong productivity improvements as measured by the EBITDA margin percentage
that improved from 29% in fiscal 1998 to 31% in fiscal 1999 as a result of
increased revenue per transaction in check processing services and credit card
processing. The Company continues to leverage its computer operations,
telecommunication infrastructure, and investments in new market opportunities.
Margins as a percentage of revenue continued to increase because revenues are
growing at a faster rate than these expenses. IBIT in fiscal 1999 grew by 23% to
$74.8 million from $60.9 million in fiscal 1998.
All Other and Corporate
All Other and Corporate is comprised primarily of corporate overhead
functions. This expense grew by 12% to $23.0 million in fiscal 1999 from $20.6
million in fiscal 1998 due primarily to support operations growth (24% revenue
increase), partially offset by continued productivity improvement. All Other
and Corporate expense percentage improved to 3% in fiscal 1999 from 4% of total
revenue in fiscal 1998 due to strong productivity improvements.
A-11
Liquidity and Capital Resources
Cash flow generated from operations provides the Company with a significant
source of liquidity to meet its needs. At May 31, 2000, the Company and its
subsidiaries had cash and cash equivalents totaling $4.6 million. Cash provided
by operations before changes in assets and liabilities was $103.0 million for
fiscal 2000 compared to $149.8 million in fiscal 1999. This difference is driven
primarily by the decrease in earnings and changes in deferred income taxes. Cash
was required in fiscal 2000 to fund net changes in assets and liabilities of
$3.7 million compared to $20.1 million for fiscal 1999. This decline in the cash
required to fund net changes in assets and liabilities resulted primarily from
reductions in accounts receivable, an increase in accounts payable and accrued
liabilities, and changes in income taxes partially offset by changes in net
merchant processing funds. The reductions in accounts receivables resulted from
improved collections and unusual write-offs as discussed in Note 13 to the
Consolidated Financial Statements. The increase in accounts payable and accrued
liabilities primarily relates to timing of payments and accruals for
restructuring items as discussed in Note 13 to the Consolidated Financial
Statements. The change in income taxes was due to reduced taxable income. The
changes in net merchant processing funds reflect fluctuations in the timing of
credit card settlement and funding of merchants and may vary from month to
month. In addition to timing and cutoff, the balance is also influenced by
volume growth and interchange rates. Net cash provided by operating activities
decreased 23% to $99.3 million for fiscal 2000 from $129.7 million for fiscal
1999.
Net cash used in investing activities was $79.2 million for fiscal 2000
compared to $40.7 million for fiscal 1999. This increase is primarily due to one
acquisition and other unrelated investments to complement the Company's Internet
initiatives. In fiscal 2000, the Company acquired The Computer Place, Inc., for
an aggregate cash consideration of $38.1 million, net of acquired cash, and made
a cash investment of $10.0 million in MedicaLogic/Medscape, Inc. In fiscal 1999,
the Company completed one acquisition for an aggregate cash consideration of
approximately $8.1 million, net of cash acquired. The fiscal 2000 investments
were partially offset by proceeds from the sale of business divestiture related
marketable securities and proceeds from a business divestiture. Additionally,
the Company continues to invest in capital expenditures related to growth in the
business and acceleration of certain strategic initiatives. The Company will
periodically include sales of assets and investments in the future.
Net cash used in financing activities decreased to $31.5 million for fiscal
2000 from $70.6 million in the prior year. The net effect of the payments and
borrowings against the lines of credit is $33.5 million in borrowings for fiscal
2000 compared to a $40.0 million payment for fiscal 1999. Principal payments
under capital lease arrangements and other long term debt increased to $20.9
million for fiscal 2000 from $15.2 million in fiscal 1999 due primarily to the
payoff of the $6.0 million Electronic Data Systems Corporation note payable
related to prior acquisitions. The Company repurchased 1.7 million shares of
treasury stock valued at $42.8 million and reissued $13.0 million under Company
stock plans. Dividends of $9.9 million were paid during fiscal 2000 versus
$10.1 million during the prior year.
The Company has a $125.0 million revolving line of credit that expires in
December 2002. This includes a committed, unsecured $110.0 million revolving
line of credit. At May 31,
A-12
2000, there was $64.0 million outstanding under this line of credit. Also
included in the $125.0 million revolving line of credit is a $15.0 million line
of credit to fund working capital requirements. At May 31, 2000, there was $4.5
million outstanding under this line of credit. 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.
Net cash provided by discontinued operations was $12.5 million in fiscal
2000 compared to a use of $16.2 million in fiscal 1999.
Market Risk
The Company is not exposed to material market risk from changes in interest
rates, foreign currency rates and/or Company equity prices.
Interest Rate
The Company has a line of credit which has a variable interest rate based
on the London Interbank Offered Rates ("LIBOR"). Accordingly, the Company is
exposed to the impact of interest rate movement. The Company has performed an
interest rate sensitivity analysis over the near term with a 10% change in
interest rates. Based on this analysis, the Company's Net Income is not subject
to material interest rate risk.
Foreign Currency Risk
The Company generates a percentage of its Net Income from its foreign
operations. The Company has performed a foreign exchange sensitivity analysis
over the near term with a 10% change in foreign exchange rates. Based on this
analysis, the Company's Net Income is not subject to material foreign exchange
rate risk.
Convertible Debt
The Company has Convertible Debt which is convertible into the Company's
common stock at a certain level. The Company has performed an equity price
sensitivity analysis over the near term with a 10% change in the Company's
equity price. The Company's Net Income is not subject to material equity price
risk based on this analysis. The Company's Diluted Earnings Per Share
incorporates the effect of this debt conversion, where applicable.
Forward-Looking Information
While past performance does not guarantee future results, the Company is
committed to continuing to sustain quality earnings growth. The Company's
strategy to attain growth is to position the Company for continued future
success through ongoing investment in new market opportunities as well as
through strategic alliances and acquisitions. The Company also intends to
continue expansion into additional market segments related to its two primary
markets. The Company will continue to make investments in new technology
infrastructure and productivity tools to ensure long-term competitiveness and
maximize operating capacity and efficiency.
A-13
When used in this Annual Report on Form 10-K, in documents incorporated
herein and elsewhere by management of 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, cannot be foreseen, and reflect future
business decisions that are subject to change. Actual revenues, revenue growth
and margins will be dependent upon all such factors and their results subject to
risks related to the implementation of changes by the Company, the failure to
implement changes, customer acceptance of such changes or lack of 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 this Annual Report on
Form 10-K which are incorporated herein by this reference, and those set forth
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. Subsequent to year-end, the Company has announced that it
has entered into definitive agreements for the sale of its Health Information
Services businesses that were acquired through the acquisition of PHSS in
December 1997 and other related businesses. Additionally, subsequent to year-
end, the Company announced plans to merge its Pharmacy Systems business activity
with another company. Both of these transactions closed in the first quarter of
fiscal 2001. There can be no assurance that this divestiture and other plans to
curtail non-core products and services in the business will have the effects
anticipated by the Company. The Company has announced its intent to spin-off the
NDC eCommerce business segment into a separate publicly traded company with its
own management and Board of Directors. Although it is expected to be completed
in the first half of fiscal 2001, this spin-off has not yet been completed and
there can be no assurance that it will be completed. 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.
A-14
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
NATIONAL DATA CORPORATION AND SUBSIDIARIES
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------
Year Ended May 31,
-----------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------
Revenues $ 685,706 $ 669,047 $ 540,693
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 339,217 321,259 259,371
Sales, general and administrative 236,501 209,009 185,780
Non-recurring, restructuring and impairment charges 34,393 - 120,163
-----------------------------------------------------
610,111 530,268 565,314
-----------------------------------------------------
Operating income 75,595 138,779 (24,621)
- ---------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 5,345 2,284 1,685
Interest and other expense (22,389) (14,932) (10,964)
Minority interest in earnings (4,117) (3,809) (2,626)
-----------------------------------------------------
(21,161) (16,457) (11,905)
-----------------------------------------------------
Income (loss) before income taxes and discontinued operations 54,434 122,322 (36,526)
Provision for income taxes 22,550 47,124 22,410
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before discontinued operations 31,884 75,198 (58,936)
Discontinued operations including cumulative change in
accounting principle of $(13,760) in 2000, net of income taxes (72,049) (3,761) (2,390)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (40,165) $ 71,437 $ (61,326)
-----------------------------------------------------
Basic earnings (loss) per share:
Income (loss) before discontinued operations $ 0.96 $ 2.23 $ (1.83)
-----------------------------------------------------
Discontinued operations $ (2.17) $ (0.11) $ (0.07)
-----------------------------------------------------
Basic earnings (loss) per share $ (1.21) $ 2.12 $ (1.90)
-----------------------------------------------------
Diluted earnings (loss) per share:
Income (loss) before discontinued operations $ 0.93 $ 2.11 $ (1.83)
-----------------------------------------------------
Discontinued operations $ (2.17) $ (0.11) $ (0.07)
-----------------------------------------------------
Diluted earnings (loss) per share $ (1.21) $ 2.02 $ (1.90)
-----------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
A-15
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION AND SUBSIDIARIES
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------
Year Ended May 31,
--------------------------------------------------
2000 1999 1998
---- ----- ----
Cash flows from operating activities:
Net income (loss) $ (40,165) $ 71,437 $ (61,326)
Adjustments to reconcile net income (loss) to cash provided by
operating activities before changes in assets and liabilities:
Non-cash non-recurring, restructuring and impairment charges 23,880 - 110,340
Loss on discontinued operations 72,049 3,761 2,390
Depreciation and amortization 28,473 27,225 21,456
Amortization of acquired intangibles and goodwill 23,390 22,389 20,477
Deferred income taxes (31,320) 14,554 (9,353)
Minority interest in earnings 4,117 3,809 2,626
Provision for bad debts 11,217 2,625 2,237
Non-cash valuation adjustment in investment 9,738 - -
Other, net 1,610 3,988 1,373
--------------------------------------------------
Subtotal 102,989 149,788 90,220
--------------------------------------------------
Changes in assets and liabilities which provided (used) cash,
net of the effects of acquisitions:
Accounts receivable, net 10,513 (19,088) (19,457)
Merchant processing working capital (22,280) 1,488 (2,386)
Inventory (641) (2,598) (2,597)
Prepaid expenses and other assets (3,065) 89 (2,915)
Accounts payable and accrued liabilities 15,713 1,276 (9,856)
Deferred income (6,309) 2,366 (2,248)
Income taxes 2,392 (3,641) (2,492)
--------------------------------------------------
Net cash provided by operating activities 99,312 129,680 48,269
--------------------------------------------------
Cash flows from investing activities:
Capital expenditures (32,519) (33,789) (19,590)
Business acquisitions, net of acquired cash (38,098) (8,055) (63,113)
Business divestiture and sale of marketable securities 6,474 - -
(Purchase) sale of investment (15,045) 1,125 2,500
--------------------------------------------------
Net cash used in investing activities (79,188) (40,719) (80,203)
--------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit 33,500 (40,000) 75,000
Net principal payments under capital lease arrangements
and other long-term debt (20,901) (15,189) (7,393)
Net issuances (purchases) related to stock activities (29,793) (1,198) 3,163
Distributions to minority interests (4,377) (4,080) (5,118)
Dividends paid (9,937) (10,109) (9,036)
--------------------------------------------------
Net cash provided by (used in) financing activities (31,508) (70,576) 56,616
--------------------------------------------------
Net cash provided by (used in) discontinued operations 12,525 (16,160) (42,733)
--------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,141 2,225 (18,051)
Cash and cash equivalents, beginning of period 3,414 1,189 19,240
--------------------------------------------------
Cash and cash equivalents, end of period $ 4,555 $ 3,414 $ 1,189
==================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
A-16
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION AND SUBSIDIARIES
(In thousands, except share data)
- -----------------------------------------------------------------------------------------------------------------------
May 31, May 31,
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,555 $ 3,414
Billed accounts receivable 103,590 124,072
Unbilled accounts receivable 4,611 3,048
Allowance for doubtful accounts (8,547) (5,184)
------------- -------------
Accounts receivable, net 99,654 121,936
------------- -------------
Income tax receivable 2,942 8,348
Inventory 8,558 7,927
Net merchant processing receivable 20,486 -
Deferred income taxes 19,630 1,191
Prepaid expenses and other current assets 15,524 13,023
------------- -------------
Total current assets 171,349 155,839
------------- -------------
Property and equipment, net 97,930 94,368
Intangible assets, net 388,526 369,076
Deferred income taxes 26,844 13,963
Investments 10,948 -
Other 4,676 5,397
Net assets of discontinued operations 3,303 109,954
------------- -------------
Total Assets $ 703,576 $ 748,597
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 68,500 $ 35,000
Current portion of long-term debt 159 6,148
Obligations under capital leases 8,703 11,980
Accounts payable and accrued liabilities 80,220 58,562
Net merchant processing payable - 1,794
Deferred income 23,430 29,945
------------- -------------
Total current liabilities 181,012 143,429
------------- -------------
Long-term debt 152,495 152,690
Obligations under capital leases 6,125 15,469
Other long-term liabilities 15,336 9,183
------------- -------------
Total liabilities 354,968 320,771
------------- -------------
Commitments and contingencies
Minority interest in equity of subsidiaries 18,472 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; 200,000,000 and 100,000,000 shares authorized at
May 31, 2000 and May 31, 1999, respectively, 33,953,008 and 33,953,031 shares issued,
respectively 4,244 4,244
Capital in excess of par value 349,387 345,639
Treasury stock, at cost, 1,095,320 and 175,442 shares, respectively (31,960) (5,857)
Retained earnings 20,763 70,865
Deferred compensation (7,332) (3,215)
Unrealized holding loss (1,727) -
Cumulative translation adjustment (3,239) (2,582)
------------- -------------
Total shareholders' equity 330,136 409,094
------------- -------------
Total Liabilities and Shareholders' Equity $ 703,576 $ 748,597
============= =============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
A-17
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NATIONAL DATA CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Accumulated Other
Comprehensive Loss
-----------------------
Common Stock Capital in Deferred Unrealized Cumulative
-----------------
Number Excess of Treasury Retained Compen- Holding Translation Total
of Shares Amount Par Value Stock Earnings sation Gain (Loss) Adjustment Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1997 30,802 $3,850 $240,917 $ - $80,127 $ (918) $ - $ (727) $323,249
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (61,326) (61,326)
Foreign currency translation
adjustment (1,284) (1,284)
--------
Total comprehensive loss (62,610)
--------
Cash dividends ($.30 per share) (9,036) (9,036)
PHSS conformity adjustment (228) (228)
Treasury shares purchased (6,383) (6,383)
Stock issued under employee stock
plans 256 32 6,102 403 6,537
Stock issued under non-employee
stock plans 27 3 375 378
Stock issued under restricted stock
plans 44 6 1,732 (1,738) -
Tax benefit from exercise of stock
options 2,478 2,478
Stock issued for acquisitions 2,663 333 92,415 92,748
Amortization of deferred
Compensation 802 802
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1998 33,792 4,224 344,019 (5,980) 9,537 (1,854) - (2,011) 347,935
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)
Net income 71,437 71,437
Foreign currency translation
adjustment (571) (571)
--------
Total comprehensive income (loss) 70,866
--------
Cash dividends ($.30 per share) (10,109) (10,109)
Treasury shares purchased (9,465) (9,465)
Stock issued under employee stock
plans 7 2,001 2,008
Stock issued under non-employee
stock plans 166 20 395 4,409 4,824
Stock issued under restricted stock
plans (5) (217) 3,178 (2,961) -
Tax benefit from exercise of stock
options 1,435 1,435
Amortization of deferred
compensation 1,600 1,600
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1999 33,953 4,244 345,639 (5,857) 70,865 (3,215) - (2,582) 409,094
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (40,165) (40,165)
Foreign currency translation
adjustment (657) (657)
Unrealized loss (1,727) (1,727)
--------
Total comprehensive loss (42,549)
--------
Cash dividends ($.30 per share) (9,937) (9,937)
Treasury shares purchased (42,844) (42,844)
Stock issued under employee
stock plans (1,615) 12,657 11,042
Stock issued under non-employee
stock plans (329) 329 -
Stock issued under restricted stock
plans 3,682 3,755 (7,437) -
Tax benefit from exercise of stock
options 2,010 2,010
Amortization of deferred
Compensation 3,320 3,320
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2000 33,953 $4,244 $349,387 $ (31,960) $20,763 $(7,332) $(1,727) $(3,239) $330,136
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
A-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
The financial statements included herein are based on the Company's current
structure. The Company is undergoing a strategy review and has announced its
intent to spin-off the NDC eCommerce business segment into a separate publicly
traded company with its own management and Board of Directors, to increase focus
on its core businesses. Additionally, the Company's Board of Directors decided
to pursue the divestiture of its Physician and Hospital Support Services
("PHSS") business and to place this business into a discontinued operations
category. As a result, all prior periods have been restated to reflect the
discontinued operations accounting treatment.
Nature of operations - The Company is primarily a provider of information
- --------------------
processing services and systems to the health care and electronic commerce
markets. The principal markets for the Company's products and services are
retailers, merchants, banks and financial institutions, health care providers,
payers, managed care organizations, pharmaceutical manufacturers and
distributors.
Basis of presentation - The consolidated financial statements include the
- ---------------------
accounts of the Company and its majority-owned subsidiaries. Significant
intercompany transactions have been eliminated in consolidation. Certain
reclassifications have been made to the fiscal 1999 and 1998 consolidated
financial statements to conform to the fiscal 2000 presentation.
Use of estimates - The preparation of financial statements in conformity with
- ----------------
generally accepted accounting principles requires management to make certain
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from these estimates.
Revenue - Revenue related to services provided is recognized as services are
- -------
performed. Revenue related to software sales is recognized when software is
installed at the customer site or when the customer obligations are fulfilled.
Revenue related to software license agreements and hardware sales is recognized
upon shipment. Revenue related to hardware and software maintenance contracts
is recognized ratably over the terms of the contracts.
Cash and cash equivalents - Cash and cash equivalents include cash on hand and
- -------------------------
all liquid investments with an initial maturity of three months or less when
purchased.
Inventory - Inventory, which includes microcomputer hardware and peripheral
- ---------
equipment, electronic point-of-sale terminals and purchased data, is stated at
the lower of cost or market. Cost is determined by using the average cost
method.
A-19
Property and equipment - Property and equipment, including equipment under
- ----------------------
capital leases, is stated at cost. Depreciation and amortization are calculated
using the straight-line method. Equipment is depreciated over 2 to 5 year
lives, and buildings are depreciated over 25 to 40 year lives. Leasehold
improvements and property acquired under capital leases are amortized over the
shorter of the useful life of the asset or the term of the lease. The costs of
purchased and internally developed software used to provide services to
customers or internal administrative services are capitalized and amortized on a
straight-line basis over their estimated useful lives, not to exceed five years.
Maintenance and repairs are charged to operations as incurred.
Intangible assets - Intangible assets primarily represent goodwill, customer
- -----------------
contracts and trademarks associated with the Company's acquisitions. Customer
contracts and trademarks acquired are amortized using the straight-line method
over their estimated useful lives of 4 to 25 years. Goodwill represents the
excess of the cost of acquired businesses over the fair market value of their
identifiable net assets. Goodwill is being amortized on a straight-line basis
over periods ranging from 10 to 40 years.
Impairment of long-lived assets - The Company regularly evaluates whether events
- -------------------------------
and circumstances have occurred that indicate the carrying amount of property
and equipment or goodwill and other intangibles may warrant revision or may not
be recoverable. When factors indicate that long-lived assets should be evaluated
for possible impairment, the Company uses an estimate of the future undiscounted
net cash flows associated with the asset over the remaining life of the asset in
measuring whether the long-lived asset is recoverable (see Notes 2 and 13). In
management's opinion, the long-lived assets, including property and equipment
and intangible assets, are appropriately valued at May 31, 2000 and 1999.
Investments - The Company's investments are classified as available-for-sale
- -----------
securities and are reported at fair value. Unrealized gains and losses are
reported, net of taxes, as a component of shareholders' equity. Unrealized
losses are charged against income when a decline in fair value is determined to
be other than temporary. The specific identification method is used to
determine the cost of securities sold. Realized gains and losses on investments
are included in other income/expense when realized.
Income taxes - Deferred income taxes are determined based on the difference
- ------------
between the financial statement and tax bases of assets and liabilities using
enacted tax laws and rates (see Note 9).
Fair value of financial instruments - Management considers that the carrying
- -----------------------------------
amounts of financial instruments, including cash, receivables, accounts payable
and accrued expenses, and current maturities of long-term obligations,
approximates fair value. Interest on long-term debt is primarily payable at
fixed rates, which approximate market rates at May 31, 2000 and 1999 (see Note
10).
A-20
Foreign currency translation - The assets and liabilities of foreign
----------------------------
subsidiaries are translated at the year-end rate of exchange, and income
statement items are translated at the average rates prevailing during the
year. The resulting translation adjustment is recorded as a component of
shareholders' equity. Exchange gains and losses on intercompany balances of
a long-term investment nature are also recorded as a component of
shareholders' equity. The effects of foreign exchange gains and losses
arising from these translations of assets and liabilities are included as a
component of other comprehensive income.
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 for the fiscal years ending May 31:
Fiscal Year Ended (Before Discontinued Operations)
(In thousands, except per share data)
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Per Per Per
--- --- ---
Income Shares Share Income Shares Share Loss Shares Share
------ ------ ----- ------ ------ ----- ---- ------ -----
Basic EPS:
Income (loss) before $31,884 33,232 $0.96 $75,198 33,725 $2.23 $(58,936) 32,200 $(1.83)
discontinued operations ----- ----- ------
Effect of dilutive securities:
Stock options - 1,216 - - 1,346 - - -
------------------ ------------------ ------------------
31,884 34,448 75,198 35,071 (58,936) 32,200
Convertible debt - - 4,778 2,752 - -
------------------ ------------------ ------------------
Diluted EPS:
Income (loss) before
discontinued operations available
to common stockholders plus
assumed conversions $31,884 34,448 $0.93 $79,976 37,823 $2.11 $(58,936) 32,200 $(1.83)
=========================================================================================
A-21
Fiscal Year Ended
(In thousands, except per share
data)
2000 1999 1998
------------------------------------------------------------------------------
Per Per Per
------ ----- ------
Loss Shares Share Income Shares Share Loss Shares Share
-------- ------ ------ ------- ------ ----- -------- ------ ------
Basic EPS:
Net income (loss) $(40,165) 33,232 $(1.21) $71,437 33,725 $2.12 $(61,326) 32,200 $(1.90)
------ ----- ------
Effect of dilutive securities:
Stock options - - - 1,346 - -
----------------- --------------- -----------------
(40,165) 33,232 71,437 35,071 (61,326) 32,200
Convertible debt - 4,778 2,752 -
----------------- --------------- -----------------
Diluted EPS:
Net income (loss) available to
common stockholders plus
assumed conversions $(40,165) 33,232 $(1.21) $76,215 37,823 $2.02 $(61,326) 32,200 $(1.90)
==============================================================================
Basic and diluted earnings per share for the fiscal years ended May 31,
2000 and 1998 are the same, as the effect of any potentially dilutive
securities and convertible debt is antidilutive due to the loss generated
by the restructuring and non-recurring charges and discontinued operations.
Note 2 - Business Acquisitions
During fiscal 2000, 1999, and 1998, the Company completed the following
acquisitions:
Date Ownership
Business Acquired Percentage
--------------------------------------------------------------------------------------
2000
----
The Computer Place, Inc. ("Medisoft") April 2000 100%
1999
----
John Richardson Computers January 1999 100%
1998
----
Chemtec Systems Limited July 1997 100%
Hadley Hutt Computing Limited July 1997 100%
PHSS - Physi-Bill, Inc. * October 1997 100%
Source Informatics Inc., a subsidiary
of Pharmaceutical Marketing Services
Inc. ("PMSI"), and a PMSI joint venture
formed with Source Informatics Inc. December 1997 100%
CheckRite International, Inc. May 1998 100%
* Acquired by PHSS prior to its merger with the Company on
December 19, 1997.
A-22
Each of the foregoing acquisitions has been recorded using the purchase method
of accounting, and accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair value as
of the date of acquisition. The operating results of the acquired businesses are
included in the Company's consolidated statements of income (loss) from the
respective dates of acquisition.
The aggregate price paid for the 2000 purchase acquisitions was $44.1 million,
consisting of $38.1 million cash and $6.0 million deferred purchase price. The
goodwill and other intangible assets are being amortized over periods ranging
from 5 to 15 years. The allocation of the purchase price of the 2000
acquisition is preliminary and will be adjusted when the necessary information
is available.
The total aggregate price paid for the 1999 purchase acquisition and final
adjustments to the 1998 purchase price allocation was $8.1 million, consisting
of cash. The excess of cost over tangible assets acquired of $6.6 million was
allocated to goodwill and other intangible assets. The goodwill and other
intangible assets will be amortized over periods ranging from 5 to 20 years.
On December 15, 1997, the Company acquired two related health care information
management businesses based in Phoenix, Arizona. In this transaction the
Company acquired the stock of Source Informatics Inc., a privately-held company,
and the stock of a subsidiary of Pharmaceutical Marketing Services Inc.
("PMSI"), which held its Over-The-Counter Physician Survey business unit as well
as PMSI's interest in a joint venture it formed with Source Informatics Inc.
(collectively "Source"). The total consideration paid for the Source
acquisition was $131.1 million, which consists of $38.6 million in cash and
2,658,468 shares of the Company's common stock valued at $92.5 million. The net
value of the tangible assets acquired was a deficit (liabilities assumed
exceeded tangible assets acquired) of approximately $7.2 million, creating an
excess of cost over tangible assets of $138.3 million. It was determined $67.0
million of the excess cost over tangible assets represented in-process research
and development costs which were appropriately expensed under SFAS 86, and
included as a component of the 1998 non-recurring charges (see Note 13). The
remainder of the intangible assets acquired was allocated to goodwill and
customer relationships, assembled work-force, and developed technology and are
being amortized over periods ranging from 7 to 20 years.
The total aggregate price paid for the 1998 purchase acquisitions was $159.4
million, consisting of cash of $65.1 million, common stock of $92.7 million and
notes of $1.6 million. The excess of cost over tangible assets acquired of
$165.5 million was allocated to goodwill and other intangible assets and the in-
process research and development charge. The goodwill and other intangible
assets are being amortized over periods ranging from 5 to 20 years.
In addition to the purchase acquisitions, the Company merged with Physician
Support Systems, Inc. ("PHSS") on December 19, 1997 and was accounted for using
the pooling-of-interests method. PHSS was engaged in the business of providing
business management services to hospitals and physicians. In this merger, each
share of PHSS common stock
A-23
was converted into the right to receive .435 shares of the Company's common
stock. The Company issued approximately 4,237,784 shares of its common stock
valued at approximately $140 million, in exchange for the outstanding PHSS
common stock.
Note 3 - Discontinued Operations
In the third quarter of fiscal 2000, the Company took action on a formal plan to
divest non-core units that were acquired through the PHSS acquisition in
December 1997. The Company has concluded that these operations are not
strategically compatible with NDC's core Health Information Services business.
The core business includes strategic provider point-of-service platforms, a
value added network, information management, and Internet oriented applications
and for each. The Company believes that the magnitude of opportunity in its
core business requires singular focus of management time and resources. Thus,
the decision was made to move to divest the line of business and account for it
as discontinued operations in accordance with Accounting Principles Board
Opinion No. 30, " Reporting the Results of Operations". Accordingly, results of
these operations have been classified as discontinued and prior periods have
been restated.
A-24
The operating results of the discontinued operations are summarized as follows
for the fiscal years ending May 31:
(In thousands, except per share data): 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Revenue $107,051 $115,859 $108,351
Operating loss (26,587) (5,773) (1,275)
Loss from operations, net of tax (16,848) (3,761) (2,390)
Projected phase-out loss from operations, net of tax (10,381) - -
Projected loss on disposal, net of tax (31,060) - -
------------------------------------------
Loss on discontinued operations before cumulative (58,289) (3,761) (2,390)
Effect of change in accounting principle
Cumulative effect of change in accounting principle,
Net of tax (13,760) - -
------------------------------------------
Net loss on discontinued operations $(72,049) $ (3,761) $ (2,390)
==========================================
Loss per share:
From operations $ (0.51) $ (0.11) $ (0.07)
Projected phase-out loss from operations (0.31) - -
Projected loss on disposal (0.94) - -
Cumulative effect of change in accounting principle (0.41) - -
------------------------------------------
Total $ (2.17) $ (0.11) $ (0.07)
==========================================
The net loss on discontinued operations for the period ending May 31, 2000 is
net of a $37.9 million tax benefit, of which $17.4 million is a current tax
benefit and $20.5 million is a deferred tax benefit.
For the Physician Management Services component of the discontinued operation,
the Company continued a revenue recognition accounting policy followed by this
business prior to its acquisition by the Company. The Company maintained this
generally accepted policy after the acquisition for Physician Management
Services offerings for which the Company invoices and collects amounts on its
customer's behalf. Previously, for customers where the amount and timing of
collection of their accounts receivable could be reasonably estimated, the
Company estimated the fees that it expected to invoice those customers upon
collection of their accounts receivable. It recognized such revenues when
substantially all services to be performed by the Company had been completed.
Estimated costs to complete were accrued separately.
Effective June 1, 1999, the Company elected to change its revenue recognition
policy. Effective with the change in policy, the Company will recognize revenue
when the services are billed to the customer, at which point all services to be
performed by the Company have been completed. The impact of this change results
in the elimination of estimated, or unbilled receivables and related accrued
collection costs. Management believes that this change is appropriate and is
consistent with recent authoritative literature, specifically SEC Staff
Accounting Bulletin No. 101, issued December 3, 1999.
A-25
The cumulative after-tax effect of this change in accounting principle was $13.8
million, net of income taxes of $8.6 million, at June 1, 1999. The cumulative
after-tax effect on both the basic and diluted earnings per share was $(0.41).
The following unaudited pro forma information assumes the new revenue
recognition policy is retroactively applied:
(In thousands) 2000 1999 1998
- -------------------------------------------------------------------------------
Net income (loss) $(26,405) $68,661 $(60,932)
Basic earnings (loss) per share $ (0.79) $ 2.04 $ (1.89)
Diluted earnings (loss) per share $ (0.79) $ 1.94 $ (1.89)
As of May 31, 2000 and 1999, the net assets of discontinued operations are
summarized as follows:
(In thousands) 2000 1999
- -----------------------------------------------------------------------------
Current assets $ 27,535 $ 56,989
Property and equipment, net 5,756 11,536
Intangible assets, net - 55,248
Other assets 1,384 2,512
Current liabilities (7,788) (13,008)
Other long-term liabilities (2,370) (3,323)
Provision for estimated losses (21,214) -
----------------------------
Net assets of discontinued operations $ 3,303 $109,954
============================
Management expects the carrying value of the net assets of the discontinued
operations to approximate the fair value to be received on disposal date (See
Note 19).
Note 4 - Property and Equipment
As of May 31, 2000 and 1999, property and equipment consisted of the following:
(In thousands) 2000 1999
- -------------------------------------------------------------------------------
Land $ 1,602 $ 1,602
Buildings 12,161 12,352
Property under capital leases 27,770 39,920
Equipment 66,228 63,815
Software 51,210 42,867
Leasehold improvements 13,807 14,865
Furniture and fixtures 6,997 9,232
Work in progress 24,895 14,327
--------------------------
204,670 198,980
Less: accumulated depreciation and amortization 106,740 104,612
--------------------------
$ 97,930 $ 94,368
==========================
A-26
Note 5 - Software Costs
The following table sets forth information regarding the Company's costs
associated with software development for the years ended May 31, 2000, 1999 and
1998:
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------
Total costs associated with software
development $15,314 $14,021 $15,576
In-process research and development charge
(see Note 13) - - 67,000
Less: capitalization of internally
developed software 10,493 10,096 5,013
--------------------------------
Net research and development expense $ 4,821 $ 3,925 $77,563
================================
The Company capitalizes costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed", capitalization of costs begins when technological feasibility has
been established and ends when the product is available for general release to
customers. Amortization is computed on an individual product basis and has been
recognized for those products available for market based on the products'
estimated economic lives, not to exceed five years.
Additionally, the Company capitalizes costs related to the development of
computer software developed or obtained for internal use in accordance with the
AICPA SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Costs incurred in the application development phase
are capitalized by the Company and amortized over the useful life, not to exceed
five years.
Total unamortized capitalized software costs (purchased and internally
developed) were approximately $26.3 million and $31.5 million as of May 31, 2000
and 1999, respectively. Total software amortization expense was approximately
$9.0 million, $6.8 million and $5.6 million in fiscal 2000, 1999 and 1998,
respectively.
Note 6 - Intangible Assets
As of May 31, 2000 and 1999, intangible assets consisted of the following:
(In thousands) 2000 1999
- -------------------------------------------------------------------
Customer base $158,414 $158,414
Trademarks 28,273 28,273
Goodwill and other intangibles 318,689 276,701
----------------------------
505,376 463,388
Less: accumulated amortization 116,850 94,312
----------------------------
$388,526 $369,076
============================
A-27
Note 7 - Accounts Payable and Accrued Liabilities
As of May 31, 2000 and 1999, accounts payable and accrued liabilities consisted
of the following:
(In thousands) 2000 1999
- -----------------------------------------------------------------------
Trade accounts payable $15,798 $18,483
Accrued compensation and benefits 22,165 13,551
Deferred purchase price on acquisition 6,000 -
Accrued restructuring and merger related costs 4,789 961
Accrued pensions 2,587 3,283
Other accrued liabilities 28,881 22,284
----------------------
$80,220 $58,562
======================
Note 8 - Retirement Benefits
The Company provides a variety of retirement benefits for its employees. During
fiscal year 1998, the Company made an evaluation of its current retirement plan
offerings and decided to provide its employees with a greater emphasis on its
deferred compensation 401(k) plan by substantially increasing the Company's
match of participants' contributions. At the same time, the Company closed the
defined benefit pension plan to new participants beginning June 1, 1998.
The Company has a noncontributory defined benefit pension plan (the "Plan")
covering substantially all of its United States employees who have met the
eligibility provisions of the plan as of May 31, 1998. Benefits are based on
years of service and the employee's compensation during the highest five
consecutive years of earnings of the last ten years of service. Plan provisions
and funding meet the requirements of the Employee Retirement Income Security Act
of 1974, as amended.
The following table provides a reconciliation of the changes in the Plan's
benefit obligations and fair value of assets over the two-year period ending May
31, 2000 and a statement of funded status at May 31 for each year:
Changes in benefit obligations
(In thousands) 2000 1999
- -----------------------------------------------------------------------
Balance at beginning of year $30,866 $31,610
Service cost - 386
Interest cost 2,203 2,266
Benefits paid (1,079) (872)
Actuarial gain (1,859) (2,524)
-------------------------
Balance at end of year $30,131 $30,866
=========================
A-28
Changes in plan assets
(In thousands) 2000 1999
- -------------------------------------------------------------------------
Balance at beginning of year $28,382 $25,841
Actual return on plan assets 3,160 2,457
Employer contributions - 956
Benefits paid (1,079) (872)
----------------------
Balance at end of year $30,463 $28,382
======================
The accrued pension costs recognized in the Consolidated Balance Sheets were as
follows:
(In thousands) 2000 1999
- ----------------------------------------------------------------------------
Funded status $ 332 $(2,484)
Unrecognized net (gain) loss (1,925) 291
Unrecognized prior service cost 199 289
Unrecognized net asset at June 1, 1985, being
amortized over 17 years (441) (676)
----------------------
Accrued pension cost $(1,835) $(2,580)
======================
Net pension expense (income) included the following components for the fiscal
years ending May 31:
(In thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Service cost-benefits earned during the
period $ - $ 386 $ 2,146
Interest cost on projected benefit obligation 2,203 2,266 2,106
Expected return on plan assets (2,801) (2,602) (2,168)
Net amortization and deferral (147) (147) (147)
-------------------------------------
Net pension expense (income) $ (745) $ (97) $ 1,937
=====================================
Significant assumptions used in determining net pension expense and related
obligations were as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------------
Discount rate 7.75% 7.50% 7.25%
Rate of increase in compensation levels 4.33% 4.33% 4.33%
Expected long-term rate of return on assets 10.00% 10.00% 10.00%
- -----------------------------------------------------------------------------------------------
A-29
The Company has a retirement plan for non-employee directors of the Company
elected prior to January 1, 1995 with five or more years of service ("the
Directors' Plan"). The Directors' Plan benefits are based on 50% of the annual
director retainer amount in effect on the date of a director's retirement plus
10% for each year of service up to 100% of the base amount for 10 years'
service. The benefits are payable upon retirement, at or after age 70, for a
period equal to the number of years of service as a director, but not more than
15 years for participants with 15 or more years of board service as of the
effective date of the Directors' Plan and not more than 10 years for all other
participants. The expense related to the Directors' Plan was immaterial in 2000,
1999 and 1998.
On June 1, 1997, the Company adopted a pilot Supplemental Executive Retirement
Plan ("SERP") for certain key executives. Benefits payable under this plan are
based upon the participant's highest three consecutive years of earnings of the
last ten years of service. Retirement benefits are reduced by a portion of the
participant's annual social security benefits and any retirement benefits under
the company's tax-qualified or non-qualified defined benefit plans. Benefits
earned under the SERP are fully vested after five years of service. Expense
related to the plan was $.7 million, $1.0 million and $.9 million as of May 31,
2000, 1999 and 1998, respectively. The projected benefit obligation for the plan
was $3.6 million and $4.8 million as of May 31, 2000 and 1999, respectively.
The Company sponsors a deferred compensation 401(k) plan that is available to
substantially all employees with three months of service. The charges to expense
for the Company match were $2.0 million in 2000, $3.1 million in 1999, and $2.0
million in 1998.
Note 9 - Income Taxes
The provision for income taxes for continuing operations includes:
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------
Current tax expense:
Federal $ 31,441 $ 25,321 $ 22,958
State 1,977 2,792 2,703
---------------------------------------
$ 33,418 $ 28,113 $ 25,661
---------------------------------------
Deferred (prepaid) tax expense:
Federal (10,010) 17,510 (2,994)
State (858) 1,501 (257)
---------------------------------------
(10,868) 19,011 (3,251)
---------------------------------------
Total $ 22,550 $ 47,124 $ 22,410
=======================================
A-30
The Company's effective tax rates differ from federal statutory rates as
follows:
2000 1999 1998
- --------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% (35.0%)
State income taxes, net of federal
income tax benefit 1.3% 2.3% 4.4%
Non-deductible amortization and
write-off of intangible assets 4.0% 1.6% 75.5%
Tax credits (1.7%) (0.5%) (1.1%)
Merger costs - - 13.3%
Other 2.8% 0.2% 4.3%
---------------------------
Total 41.4% 38.6% 61.4%
===========================
Deferred income taxes as of May 31, 2000 and 1999 reflect the impact of
temporary differences between the amounts of assets and liabilities for
financial accounting and income tax purposes. As of May 31, 2000 and 1999,
principal components of deferred tax items were as follows:
(In thousands) 2000 1999
- ------------------------------------------------------------------------------
Deferred tax assets:
Accrued non-recurring charges $21,402 $ 5,932
Projected loss on discontinued operations 16,583 -
Net operating loss and credit
carryforwards 14,027 17,413
Write-down of investment 4,493 -
Accrued expenses 2,329 5,247
Employee benefit plans 1,065 1,286
Acquired intangibles - 3,396
Other 1,916 (854)
Valuation allowance (1,687) (1,687)
-----------------------
60,128 30,733
Deferred tax liabilities:
Property and equipment 11,472 10,745
Unbilled accounts receivable - 4,166
Acquired intangibles 1,416 -
Prepaid expenses 766 668
-----------------------
13,654 15,579
-----------------------
Net deferred tax asset 46,474 15,154
Less: Current deferred tax asset 19,630 1,191
-----------------------
Non-current deferred tax asset $26,844 $13,963
=======================
A-31
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Realization of a
portion of the operating loss and credit carryforwards is considered by
management to be uncertain. The Company has established valuation allowances for
a portion of these tax assets. Net operating loss and credit carryforwards
expire between the years 2001 and 2018.
Note 10 - Long-Term Debt
As of May 31, 2000 and 1999, long-term debt consisted of the following:
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------
Mortgage payable - due in monthly installments until
May 15, 2005 with interest at 6.87% $ 3,195 $ 3,362
Convertible notes mature on November 1, 2003 143,750 143,750
Promissory notes issued in consideration for acquisitions:
Electronic Data Systems Corporation - 6,000
Spring Anesthesia Group, Inc. - 7.6% due August 2003 5,500 5,500
Hadley Hutt Computing Ltd. - 6.97% due June 2003 209 226
-----------------------
152,654 158,838
Less: current maturities 159 6,148
-----------------------
Long-term debt $152,495 $152,690
=======================
On November 6, 1996, the Company issued convertible notes ("the Notes"),
providing $139.7 million in proceeds, net of $4.1 million in debt issuance
costs. The issuance costs are included in other assets and are being amortized
over the life of the Notes. The Notes are unsecured subordinated obligations of
the Company, $143.8 million aggregate principal amount, and will mature on
November 1, 2003. The Notes bear interest at 5% per annum and are convertible
into approximately 2,752,000 shares of common stock at $52.23 per share at any
time prior to maturity. Subsequent to November 1, 1999, the Notes are
redeemable at the option of the Company, in whole or in part, initially at
102.857% and thereafter at prices declining to 100% at maturity, together with
accrued interest.
On April 29, 1999, the Company assumed a mortgage payable in connection with the
purchase of an office building. The mortgage is due in monthly installments
with a fixed rate of 6.87% per annum with the final installment due on May 15,
2005. This final installment includes a balloon payment of $2.4 million.
Scheduled maturities of the Company's long-term debt during the years subsequent
to May 31, 2000 are as follows: $.2 million in 2001; $.2 million in 2002; $.2
million in 2003; $149.7 million in 2004; and $2.5 million in 2005.
A-32
Note 11 - Shareholders' Equity
Stock Option Plans - On October 28, 1999, the Company adopted a stock-based
- ------------------
compensation plan, the 2000 Long-Term Incentive Plan (the "2000 Plan"). The
aggregate number of shares of Common Stock reserved and available for awards is
1,000,000 shares, plus an annual increase to be added on the last day of the
Company's fiscal year, in each year, beginning in 2000 and ending in 2004. The
2000 Plan authorizes the granting of awards to employees, officers and directors
of the Company or its subsidiaries in the following forms: (i) options to
purchase shares of Common Stock, as the case may be, which may be incentive
stock options or nonqualified stock options, (ii) stock appreciation rights
("SARs"); (iii) performance shares; (iv) restricted stock; (v) dividend
equivalents; (vi) other stock-based awards; or (vii) any other right or interest
relating to Common Stock or cash. During fiscal 2000, the Company has only
granted awards in the forms of options and restricted stock. Not more than 15%
of the total authorized shares may be granted as awards of restricted stock or
unrestricted stock awards. Shares awarded under the restricted portion of the
plan are held in escrow and released to the grantee upon the grantee's
satisfaction of conditions of the grantee's restricted stock agreement. Awards
are recorded as deferred compensation, a reduction of shareholders' equity based
on the quoted fair market value of the Company's common stock at the award date.
Compensation expense is recognized ratably during the escrow period of the
award. Options may be issued at, below, or above the fair market value of the
common stock at the time of grant. No awards have been granted below the fair
market value since the 2000 Plan's inception. Options granted become
exercisable in various annual increments and terminate over a period not to
exceed 10 years.
The Company has two employee stock option plans, the 1997 Stock Option Plan
("the 1997 Plan") and the 1987 Stock Option Plan ("the 1987 Plan"), that provide
for the granting of options to certain officers and key employees to purchase
the Company's common stock. No additional options will be granted under either
plan. Options granted become exercisable in various annual increments and
terminate over a period not to exceed 10 years.
The Company's 1984 Non-Employee Directors Stock Option Plan which provides for
grants of options, consisting of 5,000 shares of the Company's common stock for
each completed year of service, to directors who are not employees of the
Company. A maximum of five options may be granted to each such director, and
the maximum number of shares for which options may be granted is 545,000. This
plan is amended from time to time. Approximately every five years, the maximum
number of options which may be granted is increased by five. Options granted
prior to October 26, 1995 are exercisable immediately at the current market
value on the date of grant. Options granted on or after October 26, 1995 vest
20% two years after the date of grant, an additional 25% after three years,
another 25% after four years, and the remaining 30% after five years.
Additionally, as a result of the merger with PHSS on December 19, 1997, the
Company has the Physician Support Systems, Inc. Stock Option Plan and the
Synergistic Systems, Inc. Stock Option Plan ("the PHSS Plans"). However, no
additional options will be granted
A-33
under the PHSS Plans. All options issued under the PHSS Plans have an exercise
price of not less than 100% of the fair market value of a share of the Company's
common stock on the date of the grant, vest over five years and must be
exercised within 10 years from the date of the grant. Each PHSS option
outstanding on December 19, 1997 was converted to .435 options to receive the
Company's common stock.
Other Stock Plans - The Company has an Employee Stock Purchase Plan under which
- -----------------
the sale of 1,350,000 shares of its common stock has been authorized. Employees
may designate up to the lesser of $25,000 or 20% of their annual compensation
for the purchase of stock. The price for shares purchased under the plan is the
lower of 85% of market value on the first day or the last day of the purchase
period. At May 31, 2000, 1,227,366 shares have been issued under this plan,
with 122,634 shares reserved for future issuance.
The Company's 1983 Restricted Stock Plan ("the Restricted Plan") authorizes
shares of the Company's common stock to be awarded to key employees. No
additional shares will be awarded under the Restricted Plan. Shares previously
awarded under the Restricted Plan are held in escrow and released to the grantee
upon the grantee's satisfaction of conditions of the grantee's restricted stock
agreement. Awards are recorded as deferred compensation, a reduction of
shareholders' equity based on the quoted fair market value of the Company's
common stock at the award date. Compensation expense is recognized ratably
during the escrow period of the award.
Under the 1983 Restricted Stock Plan and the 2000 Long-Term Incentive Plan,
there were 311,850, 83,138 and 44,111 shares of the Company's common stock
awarded as restricted stock during fiscal years 2000, 1999 and 1998,
respectively. These awards have restriction periods of one to four years. As of
May 31, 2000, 306,651 shares remained in escrow. The Company expensed $3.4
million, $1.4 million and $.6 million for the years ended May 31, 2000, 1999 and
1998, respectively, in connection with the Restricted Plans.
A-34
Transactions under the Stock Option Plans are summarized as follows:
Non-Employee Directors
1987 Plan Plan
-------------------------------------------------------------
Weighted Weighted
Shares Under Average Shares Under Average
Option Option Option Option
Price Per Price Per
Share Share
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 1997 2,469,832 17.21 245,000 16.14
Granted 212,950 37.56 25,000 36.94
Exercised (279,417) 11.16 (25,500) 12.48
Expired or terminated (131,382) 28.36 - -
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 1998 2,271,983 19.21 244,500 18.65
Granted - - 20,000 33.88
Exercised (220,073) 11.64 (27,000) 16.64
Expired or terminated (114,585) 37.59 (14,000) 35.01
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 1999 1,937,325 18.98 223,500 19.23
Granted - - 29,000 29.25
Exercised (298,452) 9.58 (45,000) 14.71
Expired or terminated (63,923) 30.52 - -
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 2000 1,574,950 20.30 207,500 21.61
- ------------------------------------------------------------------------------------------------
Exercisable at May 31, 2000 1,186,117 17.01 131,250 14.91
- ------------------------------------------------------------------------------------------------
Available for future grants - 157,500
- ------------------------------------------------------------------------------------------------
1997 Plan PHSS Plans
-------------------------------------------------------------
Weighted Weighted
Shares Under Average Shares Under Average
Option Option Option Option
Price Per Price Per
Share Share
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 1997 - - 311,317 34.48
Granted 142,800 33.81 20,515 36.77
Exercised - - (84,517) 25.71
Expired or terminated (28,000) 35.50 (5,544) 32.20
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 1998 114,800 33.40 241,771 37.79
Granted 817,075 35.88 - -
Exercised - - (62,442) 31.05
Expired or terminated (38,325) 34.09 - -
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 1999 893,550 35.63 179,329 40.14
Granted 322,525 25.45 - -
Exercised - - (14,167) 27.91
Expired or terminated (237,066) 33.36 (121,306) 42.18
- ------------------------------------------------------------------------------------------------
Outstanding at May 31, 2000 979,009 32.83 43,856 38.46
- ------------------------------------------------------------------------------------------------
Exercisable at May 31, 2000 54,610 36.00 43,856 38.46
- ------------------------------------------------------------------------------------------------
Available for future grants - -
- ------------------------------------------------------------------------------------------------
A-35
2000 Plan
------------------------------
Weighted
Shares Under Average
Option Option
Price Per
Share
- -----------------------------------------------------------------
Outstanding at May 31, 1999
Granted 824,200 25.48
Exercised - -
Expired or terminated (5,880) 31.48
- -----------------------------------------------------------------
Outstanding at May 31, 2000 818,320 25.44
- -----------------------------------------------------------------
Exercisable at May 31, 2000 - -
- -----------------------------------------------------------------
Available for future grants 1,301,990
- -----------------------------------------------------------------
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant dates:
1987 Plan Non-Employee Director Plan
-------------------------------------------------------------------------------
Number Weighted Weighted Number Weighted Weighted
Exercise Price of Average Average of Average Average
Range Shares Price Contractual Shares Price Contractual
Life Life
- -------------------------------------------------------------------------------------------------
$ 6.50 - $ 9.17 205,925 $ 6.79 2.1 years 67,500 $ 8.10 1.8 years
$ 9.67 - $14.33 448,186 10.50 3.5 years 30,000 10.83 3.5 years
$18.13 - $22.54 398,460 21.15 5.0 years - - -
$24.48 - $34.38 312,667 28.62 5.3 years 60,000 27.73 7.4 years
$35.99 - $53.27 190,673 38.09 6.9 years 50,000 38.97 6.9 years
$56.15 - $78.47 19,039 64.17 2.4 years - - -
1997 Plan PHSS Plans
-------------------------------------------------------------------------------
Number Weighted Weighted Number Weighted Weighted
Exercise Price of Average Average of Average Average
Range Shares Price Contractual Shares Price Contractual
Life Life
- -------------------------------------------------------------------------------------------------
$15.25 - $22.54 - - - 11,853 $18.39 6.9 years
$23.28 - $32.63 629,315 29.40 8.8 years - - -
$35.20 - $50.00 349,694 39.01 8.5 years 32,003 45.89 6.4 years
A-36
2000 Plan
---------------------------------------
Number Weighted Weighted
Exercise Price of Average Average
Range Shares Price Contractual
Life
- ---------------------------------------------------------
$22.19 - $22.54 382,050 $22.19 10.0 years
$23.88 - $33.00 369,070 26.79 9.7 years
$35.20 - $36.50 67,200 36.50 9.5 years
The Company has chosen the disclosure option under SFAS No. 123 and continues to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for options granted under the plans. Had
compensation cost for these plans been recognized based on the fair value of the
options at the grant dates for awards under the plans consistent with the method
of SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
(In thousands, except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------
Net income (loss):
As reported $(40,165) $71,437 $(61,326)
Pro forma (44,461) 68,250 (63,796)
Basic earnings (loss) per share:
As reported (1.21) 2.12 (1.90)
Pro forma (1.34) 2.02 (1.98)
Diluted earnings (loss) per share:
As reported (1.21) 2.02 (1.90)
Pro forma (1.34) 1.97 (1.98)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for the grants during the respective fiscal year:
2000 1999 1998
---------------------------------------------
1987 Plan
Risk-free interest rates - - 6.3%
Expected dividend yields - - 0.8%
Expected lives - - 7 years
Non-employee Directors Plan
Risk-free interest rates 6.6% 4.5% 4.2%
Expected dividend yields 1.3% 0.9% 0.6%
Expected lives 10 years 10 years 10 years
A-37
2000 1999 1998
--------------------------------------------
1997 Plan
Risk-free interest rates 6.3% 4.7% 5.8%
Expected dividend yields 1.1% 0.9% 0.9%
Expected lives 7 years 7 years 7 years
PHSS Plan
Risk-free interest rates - - 6.0%
Expected dividend yields - - 0.8%
Expected lives - - 7 years
2000 Plan
Risk-free interest rates 6.5% - -
Expected dividend yields 1.0% - -
Expected lives 7 years - -
Employee Stock Purchase Plan
Risk-free interest rates 5.5% 4.4% 5.5%
Expected dividend yields 1.4% 1.0% 0.8%
Expected lives 1 year 1 year 1 year
Expected volatility-all plans 50% 40% 40%
Note 12 - Segment Information
SFAS 131 defines operating segments as components of an enterprise whose
operating results are regularly reviewed by the chief operating decision maker
to make decisions about resources to be allocated to the segment and to assess
performance. The chief operating decision making group for National Data
Corporation consists of the Chairman of the Board and Chief Executive Officer,
the Chief Financial Officer, the Segment Chief Executive Officers and/or the
Chief Operating Officers and certain Senior Executive Officers. The operating
segments are reviewed separately because each segment offers different products
and services to different markets.
National Data Corporation classifies its businesses into two fundamental
segments: Health Information Services and eCommerce. Health Information
Services provides solutions to address administrative, clinical and decision
support information needs throughout the health care environment. eCommerce
provides a wide range of end-to-end transaction processing alternatives to the
merchant markets. The segment offers credit and debit card services, check
verification and guarantee and other related services directly to merchants and
indirectly through financial institutions. It also provides cash management and
financial EDI services. The All Other and Corporate category is comprised
mostly of unallocated, direct corporate operations.
A-38
The accounting policies of the operating segments are generally the same as
those described in the summary of significant accounting policies. Corporate
overhead directly related to segment operations is allocated to the segments
based on various methodologies (i.e., percentage of revenue, square footage,
headcount, etc.). These various methodologies allow the Company to equitably
allocate overhead costs based on the demands of the individual departments.
Gains or losses arising from business divestitures, restructuring, asset
impairment charges, interest expense on general corporate debt, and income taxes
are not allocated to the segments incurring them for internal evaluation
purposes. As discussed in Note 13, substantially all of the Non-recurring,
restructuring and impairment charges relate to the Health Information Services
Segment. Net assets of discontinued operations are included in the All Other and
Corporate segment. Revenues are attributed to geographic region based on the
location of the business unit processing the transactions. No individual
foreign country accounted for more than 10% of consolidated revenues in any
period presented.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as operating income plus depreciation and amortization,
restructuring and impairment and non-recurring charges. 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 operating
income/cash earnings measure, excluding the impact of the amortization of
acquired intangibles, potential timing differences associated with capital
expenditures and the related depreciation charges, restructuring and impairment
and non-recurring charges.
Restructuring
Health and All Other
Year Ended May 31, 2000 Information Impairment and
(In thousands) Services eCommerce Charges Corporate Totals
- --------------------------------------------------------------------------------------------------------------------
Revenues $345,673 $340,033 $ - $ - $685,706
Depreciation and amortization 29,084 20,644 - 2,135 51,863
EBITDA 84,534 88,869 - (11,552) 161,851
Income (loss) before income tax
and discontinued operations 54,205 63,380 (34,393) (28,758) 54,434
Segment assets 348,820 274,175 - 80,581 703,576
A-39
Health
Year Ended May 31, 1999 Information Non-Recurring All Other and
(In thousands) Services eCommerce Charges Corporate Totals
- -------------------------------------------------------------------------------------------------------------------------
Revenues 338,996 $330,051 $ - $ - $669,047
Depreciation and Amortization 26,694 20,765 - 2,155 49,614
EBITDA 97,560 100,669 - (9,839) 188,390
Income (loss) before income tax
and discontinued operations 70,504 74,808 - (22,990) 122,322
Segment assets 433,266 259,272 - 56,059 748,597
Health
Year Ended May 31, 1998 Information Non-Recurring All Other and
(In thousands) Services eCommerce Charges Corporate Totals
- -------------------------------------------------------------------------------------------------------------------------
Revenues 249,147 $291,546 $ - $ - $540,693
Depreciation and Amortization 20,771 19,211 - 1,951 41,933
EBITDA 64,322 83,795 - (10,642) 137,475
Income (loss) before income tax
and discontinued operations 43,273 60,905 (120,163) (20,541) (36,526)
Segment Assets 415,098 254,799 - 42,247 712,144
Note 13 -Non-recurring, Restructuring and Impairment Charges and Other
Unusual Expenses:
During the second quarter of fiscal year 2000, the Company updated its
Health Information Services strategy. This included evaluation of the
Company's current product and service offerings in light of changing market
and technological environments, as well as their leverage ability with
related product and service offerings. The decision was made to focus
management attention on the core value-added network, information
management, and strategic point-of-service provider systems and related
Internet initiatives. This decision led to the evaluation of business
areas, products and services, the assets needed as part of the business
strategy, their current and projected revenue and profit growth rates,
resource requirements, as well as management time demands. This resulted in
the identification of obsolete and/or non-strategic product offerings. The
Company has already executed the first step in this plan via the sale of
part of its dental systems product line during the second quarter.
A-40
Accordingly, actions were initiated on non-core products and services which
included acceleration of clearing house integration, consolidation of
locations, associated staff and expense reductions, and elimination of
obsolete and redundant product and service offerings. Total charges related
to the restructuring and asset impairment were $34.4 million and are
categorized as follows:
(in thousands) Total Cash Non-cash
- ---------------------------------------------------------------------------------------------------
Impairment of goodwill and other intangibles $15,972 $ - $15,972
Impairment of property and equipment 6,908 - 6,908
Closed or planned closings of facilities 6,100 6,100 -
Estimated costs for settlements on contracts 3,236 2,236 1,000
Severance and related costs 2,177 2,177 -
-------------------------------------------
Total $34,393 $10,513 $23,880
===========================================
The items considered cash items were accrued at the time the charges were
incurred. In addition, the Company expects additional charges will be
incurred during the next six months as additional actions are finalized and
implemented.
During the second quarter of fiscal 2000, the Company evaluated whether
events and circumstances had occurred that indicated the carrying amount of
property and equipment or goodwill and other intangibles may warrant
revision or may not be recoverable. The Company uses an estimate of the
future undiscounted net cash flows associated with the asset over the
remaining life of the asset in measuring whether the long-lived asset is
recoverable. Management believes this approach is consistent with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS
121"). As a result, it was determined the above impairment losses should be
recognized under SFAS 121.
The charges relating to facilities represent the locations that are either
already closed or have management approved plans to close within the next
six months. These charges include future minimum lease and operating
payments, commencing upon the planned exit timing, for all noncancelable
leases under remaining terms of the 15 locations identified, net of current
and estimated future sublease income. The charges also include facility
exit costs. Normal lease payments and operating costs will continue to be
charged to operating expenses prior to actually vacating the specific
facilities.
Estimated costs for fulfillment of contract provisions primarily represent
certain payments due upon termination of customer relationships relating to
eliminated products, services and locations. The impact of these actions on
future revenues and operating income is not expected to be material. The
activities being executed involve the consolidation of numerous sites into
fewer locations with resulting product specialization. The majority of the
customers will be transferred to the consolidated locations. The Company
expects these actions to be completed over the next three to six months.
A-41
The severance and related costs arise from the Company's actions to reduce
personnel staffing in areas of redundant operations and activities. The
charges reflect specifically identified executives and employees whose
employment will be terminated who were informed during the second quarter
of fiscal 2000. There were approximately 115 employees in the consolidation
efforts and approximately 35 as a part of reductions related to project
completions or phase-outs.
As of May 31, 2000, $4.4 million of the cash portion of the restructuring
charges remains accrued as a current liability and $2.2 million is accrued
as a long-term liability in the respective other liabilities sections of
the balance sheet as follows:
Original Payments Long-
(In thousands) Total To Date Current Term
- -----------------------------------------------------------------------------------------------------
Closed or planned closings of facilities $ 6,100 $1,768 $2,512 $1,820
Estimated costs for settlements on
contracts 2,236 498 1,738 -
Severance and related costs 2,177 1,621 169 387
---------------------------------------------------
Total $10,513 $3,887 $4,419 $2,207
===================================================
Additionally, as a result of business events and information arising during
the second quarter, management evaluated certain significant business risks
and exposures that included bankrupt accounts and customer disputes. This
evaluation resulted in the Company recording unusual expenses of $13.3
million in the second quarter of fiscal 2000. This amount consisted of:
accounts receivable write-off of $8.0 million; allowance increases of $2.0
million; litigation settlement expenses of $1.3 million; write-off of $0.8
million of prepaid expenses and $1.2 million of accrued expenses.
Based on the decision to divest PHSS and move it to discontinued operations
during the third quarter, approximately $2.2 million of these unusual
sales, general and administrative expenses were related to the PHSS
operation and are reflected in the results of the discontinued operations.
Accordingly, the results of the year ended May 31, 2000 include
approximately $45.5 million of charges related to restructuring and asset
impairment ($34.4 million) and other unusual expenses ($11.1 million).
These unusual expenses are included in the sales, general and
administrative expenses ($9.2 million) and cost of services ($1.9 million).
In connection with the December 1997 mergers with PHSS and Source (Note 2),
the Company incurred a non-recurring, pre-tax charge of $120.2 million.
Included in this charge was $67.0 million for in-process research and
development, $32.4 million for asset impairment, and $20.8 million for
merger related expenses ($14.3 million of cash items and $6.5 million, non-
cash). The in-process research and development charge, asset impairment and
portions of the merger related expenses were considered non-cash items,
totaling $110.3 million. The cash merger related expenses were either paid
at the time of the merger or accrued at the time the expenses were
incurred. Assets impaired included
A-42
intangible assets and capitalized software.
In fiscal 1998, as a result of the Source and PMSI acquisition, the Company
obtained an independent third party valuation of the research and
development activities of the acquired companies. The valuation determined
that $67.0 million of the acquired companies' projects represented in-
process research and development that was not capitalizable under generally
accepted accounting principles.
The merger related expenses consisted of transaction costs of $7.0 million,
anticipated severance benefits and other related costs of $7.3 million
arising from the Company's plans to realign redundant operations and
activities, and restructuring charges of $6.5 million. Merger transaction
costs primarily consisted of investment banking and professional fees.
Restructuring charges included the write-off of PHSS prepaid expenses from
which the Company will not realize future economic value and a provision
for additional PHSS integration costs.
As of May 31, 2000, $0.4 million remains accrued under the 1998 non-
recurring charges, expending $0.6 million, primarily for severance costs
during the fiscal year. The remaining accruals (primarily for severance
costs) are included as part of the net assets of discontinued operations.
(See Note 3). As of May 31, 1999, $1.0 million remains accrued under the
1998 non-recurring charges, expending $3.9 million, primarily for severance
costs, during the fiscal year
Note 14 - Related Party Transactions
In connection with the fiscal 1996 purchase of Merchant Automated Point of
Sale Program ("MAPP") from MasterCard International Incorporated,
MasterCard holds a 7.5% minority interest in Global Payment Systems LLC.
MasterCard provides certain services for the MAPP business unit. For the
years ended May 31, 2000, 1999 and 1998, the Company incurred expenses of
approximately $.2 million, $3.0 million and $6.8 million, respectively,
related to these services.
Also, during fiscal 1996, National Data Payment Systems, Inc., a subsidiary
of the Company, formed an alliance with Comerica Bank and purchased 51%
ownership interest in NDPS Comerica Alliance, LLC. There are agreements in
place for the Company to reimburse Comerica Bank for any expenses incurred
on behalf of the alliance. For the years ended May 31, 2000, 1999 and 1998,
the Company incurred expenses of approximately $.9 million, $.6 million and
$.6 million, respectively, related to these services.
Legal services provided by related parties were $.9 million, $.7 million,
and $.8 million for the years ended May 31, 2000, 1999 and 1998,
respectively.
A-43
Note 15 - Lease Obligations
The Company conducts a major part of its operations using leased facilities
and equipment. Many of these leases have renewal and purchase options and
provide that the Company pay the cost of property taxes, insurance and
maintenance.
Rent expense on all operating leases for fiscal 2000, 1999 and 1998 was
approximately $16.0 million, $15.7 million and $15.1 million, respectively.
Future minimum lease payments for all noncancelable leases at May 31, 2000
were as follows:
Capital Operating
(In thousands) Leases Leases
- --------------------------------------------------------------------------------------------
2001 $ 9,134 $16,842
2002 4,948 11,835
2003 1,754 6,173
2004 386 3,323
2005 - 2,389
Thereafter - 3,846
--------------------------
Total future minimum lease payments 16,222 $44,408
==========
Less: amount representing interest 1,394
-----------
Present value of net minimum lease payments 14,828
Less: current portion 8,703
-----------
Long-term obligations under capital leases at May 31, 2000 $ 6,125
===========
Note 16 - Commitments and Contingencies
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.
The Company has a $125.0 million committed line of credit primarily to fund
the Company's acquisition and other short-term financing requirements. This
includes a $15.0 million line of credit to fund working capital
requirements. The lines of credit are not secured. These agreements require
the Company to maintain certain financial ratios and contain other
restrictive covenants. As of May 31, 2000 and 1999, there was $68.5 million
and $35.0 million, respectively, outstanding under the lines of credit and
the Company was in compliance with all restrictive covenants. The committed
line of credit expires in 2002.
The Company processes credit card transactions for direct merchant
locations. The Company's merchant customers have liability for charges
disputed by cardholders.
A-44
However, in the case of merchant fraud or insolvency or bankruptcy of the
merchant, the Company may be liable for any of such charges disputed by
cardholders. The Company requires cash deposits and other types of
collateral by certain merchants to minimize any such contingent liability.
In addition, the Company believes that the diversification of its merchant
portfolio among industries and geographic regions minimizes its risk of
loss. The Company recognizes revenue based on a percentage of the gross
amount charged and has a potential liability for the full amount of the
charge. The Company establishes reserves for operational losses based on
historical and projected experiences concerning such charges. In the
opinion of management, such reserves for losses are adequate.
The Company also has a check guarantee business. Similar to the credit card
business, the Company charges its merchants a percentage of the gross
amount of the check and guarantees payment of the check to the merchant in
the event the check is not honored by the checkwriter's bank. As a result,
the Company incurs operational charges in this line of business. The
Company has the right to collect the full amount of the check from the
checkwriter but has not historically recovered 100% of the guaranteed
checks. The Company establishes reserves for this activity based on
historical and projected loss experiences. Expenses of $10.1 million, $8.5
million and $8.8 million were recorded for fiscal 2000, 1999 and 1998,
respectively, for these reserves.
In connection with the Company's acquisition of merchant credit card
operations of banks, the Company has also entered into depository and
processing agreements ("the Agreements") with certain of the banks. The
Agreements allow the Company to use the banks' "Bank Identification Number"
("BIN") to clear credit card transactions through VISA and MasterCard.
Certain Agreements contain financial covenants, and the Company was in
compliance with all such covenants as of May 31, 2000 or had obtained a
verbal waiver of such covenants. In management's opinion, the Company would
be able to obtain alternative BIN agreements without material harm to the
Company in the event of the termination of these Agreements.
Note 17 - Supplemental Cash Flow Information
Supplemental cash flow disclosures and non-cash investing and financing
activities for the years ended May 31, 2000, 1999 and 1998 are as follows:
(In thousands) 2000 1999 1998
---------------------------------------------------------------------------------------------
Supplemental cash flow information:
Income taxes paid, net of refunds $ 6,570 $34,256 $32,023
Interest paid 17,012 14,140 11,424
Supplemental non-cash investing and financing activities:
Capital leases entered into in exchange for property 2,112 19,901 10,426
and equipment - 3,362 -
Mortgage assumed with purchase of office building 7,000 - -
Investment in MedicaLogic/Medscape, Inc.
A-45
In fiscal 2000, 1999 and 1998, the Company acquired various businesses that were
accounted for as purchases (see Note 2). In conjunction with these
transactions, liabilities were assumed as follows:
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Fair value of assets acquired $46,160 $10,473 $209,128
Notes and deferred payments (6,000) - (1,528)
Stock issued - - (92,748)
Cash acquired (902) - (1,982)
Liabilities assumed (1,160) (2,418) (49,757)
----------------------------------------------
Cash paid for acquisitions $38,098 $ 8,055 $ 63,113
==============================================
Note 18 - Quarterly Consolidated Financial Information (Unaudited)
(In thousands, except per share data) Quarter Ended
- ---------------------------------------------------------------------------------------------------
August 31 November 30 February 28 May 31
--------- ----------- ----------- ------
Fiscal Year 2000
- ----------------
Revenue $175,548 $169,201 $167,695 $173,262
Restructuring and impairment
charge - 34,393 - -
Operating income (loss) 36,362 (17,055) 27,751 28,537
Income (loss) before discontinued
operations 20,837 (13,145) 14,740 9,452
Discontinued operations (15,900) (2,323) (13,546) (40,280)
Net income 4,937 (15,468) 1,194 (30,828)
Basic earnings (loss) per share:
Income (loss) before discontinued
operations .62 (.39) .45 .29
Discontinued operations (.47) (.07) (.41) (1.23)
Basic earnings (loss) per share .15 (.46) .04 (.94)
Diluted earnings (loss) per share:
Income (loss) before discontinued
operations .58 (.39) .44 .28
Discontinued operations (.47) (.07) (.41) (1.23)
Diluted earnings (loss) per share .14 (.46) .04 (.94)
A-46
Quarter Ended
- ---------------------------------------------------------------------------------------------------
August 31 November 30 February 28 May 31
--------- ----------- ----------- ------
Fiscal Year 1999
- ----------------
Revenue $163,738 $162,989 $165,437 $176,883
Operating income 33,310 30,908 33,433 41,128
Income before discontinued
operations 17,841 16,552 17,894 22,911
Discontinued operations (1,518) (815) 792 (2,220)
Net income 16,323 15,737 18,686 20,691
Basic earnings per share:
Income before discontinued .53 .49 .53 .68
operations
Discontinued operations (.04) (.02) .02 (.07)
Basic earnings per share .48 .47 .55 .61
Diluted earnings per share:
Income before discontinued .51 .48 .50 .64
operations
Discontinued operations (.04) (.02) .02 (.07)
Diluted earnings per share .47 .45 .52 .58
Note 19 - Subsequent event (Unaudited)
On July 20, 2000 the Company announced it has entered into definitive agreements
for the sale of its Physician and Hospital Support Services business, and its
related Hospital Management Services units. Under the terms of the agreements,
NDC Health Information Services will receive $20.0 million in cash. This
transaction is subject to customary closing conditions, including expiration of
the waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act.
A-47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Data Corporation:
We have audited the accompanying consolidated balance sheets of National Data
Corporation (a Delaware corporation) and subsidiaries as of May 31, 2000 and
1999 and the related consolidated statements of income (loss), changes in
shareholders' equity, and cash flows for each of the three years in the period
ended May 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Data Corporation and
subsidiaries as of May 31, 2000 and 1999 and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 2000,
in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 3 to the consolidated financial statements, effective June
1, 1999, the Company changed the method of revenue recognition in its Physicians
Management Services business.
/s/ Arthur Andersen LLP
Atlanta, Georgia
July 14, 2000
A-48
NATIONAL DATA CORPORATION
CONSOLIDATED SCHEDULE II
Valuation and Qualifying Accounts
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Column A Column B Column C Column D Column E
1 2
Balance at Charged to Uncollectible Balance at
Beginning Costs and Acquired Accounts End
Description of Period Expenses Balances Write-Off of Period
Trade Receivable Allowances
May 31, 1998 2,868 $ 5,890 $619 $ 5,620 $3,757
May 31, 1999 3,757 3,069 - 1,642 5,184
May 31, 2000 5,184 16,507 - 13,144 8,547
A-49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements included in National Data Corporation's
annual report to shareholders in this Form 10-K and have issued our report
thereon dated July 14, 2000. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the index
on page 35 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
July 14, 2000
A-50
NATIONAL DATA CORPORATION
FORM 10-K
INDEX TO EXHIBITS
Exhibit
Numbers Description
(iv) Certificates of Amendment to Certificate of Incorporation of the
Registrant, dated March 22, 1999; May 26, 1999; June 21, 1999 and
June 30, 2000.
(viii) Fifth Amendment dated September 29, 1999 to the Credit Agreement dated
as of December 19, 1997, among the Registrant, Bank One, NA (formerly
The First National Bank of Chicago), as Administrative Agent, Wachovia
Bank, N.A., as Documentation Agent, and the Lenders named therein.
(ix) Sixth Amendment dated April 13, 2000 to the Credit Agreement dated as
of December 19, 1997, among the Registrant, Bank One, NA (formerly The
First National Bank of Chicago), as Administrative Agent, Wachovia
Bank, N.A., as Documentation Agent, and the Lenders named therein.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule (for SEC use only)
(99.1) Safe Harbor Compliance Statement For Forward-Looking Statements
A-51