-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K09vXBMWIjiE3SCE7R+G19nM77y9OA0YHMA0QDfKK0jmpiPZDA6zXnJwX4CubNws Cuk1HBkUi8zeLYa5apJzQw== /in/edgar/work/20000829/0000931763-00-002101/0000931763-00-002101.txt : 20000922 0000931763-00-002101.hdr.sgml : 20000922 ACCESSION NUMBER: 0000931763-00-002101 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000829 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL DATA CORP CENTRAL INDEX KEY: 0000070033 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 580977458 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12392 FILM NUMBER: 712247 BUSINESS ADDRESS: STREET 1: NATIONAL DATA COPRORATION STREET 2: NATIONAL DATA PLAZA CITY: ATLANTA STATE: GA ZIP: 30329 BUSINESS PHONE: 4047282000 MAIL ADDRESS: STREET 1: NATIONAL DATA PLZ CITY: ATLANTA STATE: GA ZIP: 30329-2010 10-K 1 0001.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 EX-3.IV 2 0002.txt CERTIFICATE OF AMENDMENT EXHIBIT 3(IV) CERTIFICATE OF MERGER OF C.I.S. TECHNOLOGIES, INC. INTO NATIONAL DATA CORPORATION The undersigned corporation organized and existing under and by virtue of the General Corporation Law of Delaware, DOES HEREBY CERTIFY: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger is as follows: NAME: C.I.S. TECHNOLOGIES, INC. A DELAWARE CORPORATION NATIONAL DATA CORPORATION A DELAWARE CORPORATION SECOND: That an agreement of merger between the parties to the merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of section 251 of the General Corporation Law of Delaware. THIRD: That the name of the surviving corporation of the merger is NATIONAL DATA CORPORATION. FOURTH: That the Certificate of Incorporation of National Data Corporation, a Delaware corporation, shall be the Certificate of Incorporation of the surviving corporation. FIFTH: That the executed Agreement of Merger is on file at an office of the surviving corporation, the address of which is 1564 NE Expressway, Atlanta, Georgia 30329. SIXTH: That a copy of the Agreement of Merger will be furnished by the surviving corporation, on written request and without cost, to any stockholder of any constituent corporation. SEVENTH: That the effective date of said merger shall be March 1, 1999. Dated: March 22nd, 1999. NATIONAL DATA CORPORATION /s/ E. Michael Ingram -------------------------------------- E. Michael Ingram, Secretary, Senior Vice President and General Counsel 1564 NE Expressway Atlanta, Georgia 30329 [corporate seal] CERTIFICATE OF OWNERSHIP AND MERGER MERGING PMSI DATABASE HOLDINGS INC. INTO NATIONAL DATA CORPORATION National Data Corporation a corporation organized and existing under the laws of Delaware, DOES HEREBY CERTIFY: FIRST: That this corporation was incorporated on the 20th day of July, 1967, pursuant to Section 101 of the General Corporation Law of the State of Delaware. SECOND: That this corporation owns all of the outstanding shares of the stock of PMSI Database Holdings Inc. a corporation incorporated on the 24th day of June, 1997, pursuant to Section 101 of the General Corporation Law of the State of Delaware. THIRD: That this corporation, by the following resolutions of its Board of Directors, duly adopted by the unanimous written consent of its members on the 26th day of May, 1999, determined to and did merge into itself PMSI Database Holdings Inc.: WHEREAS, the Board of Directors of National Data Corporation (the "Company") has determined that it is in the best interest of the Company to merge (the "Merger") PMSI Database Holdings Inc. a wholly-owned subsidiary of the Company ("Subsidiary"), with and into the Company with the Company to remain as the resulting, continuing and surviving corporation; NOW, THEREFORE, BE IT RESOLVED, that pursuant to Section 253 of the General Corporation Law of the State of Delaware, Subsidiary shall merge with and into the Company, and the Company (or, with respect to the period following the Merger, the "Surviving Company") shall assume all of the Subsidiary's assets, liabilities, and obligations, and that pursuant thereto the separate corporate existence of Subsidiary shall cease, and the Surviving Company shall succeed to and assume all the rights and obligations of Subsidiary; RESOLVED FURTHER, that upon the Merger becoming effective, each outstanding share of Common Stock of Subsidiary owned of record by the Company which shares represent all of the issued and outstanding capital stock of Subsidiary, shall be cancelled; RESOLVED FURTHER, that the Merger shall become effective upon filing with the Secretary of State of the State of Delaware; RESOLVED FURTHER, that the officers of the Company, and each of them acting alone are hereby authorized and directed to execute and file, 1) a Certificate of Ownership and Merger, substantially in the form reviewed by the Board and attached hereto as Exhibit A, with the --------- Secretary of State of the State of Delaware, 2) any further necessary documents with the appropriate authorities; RESOLVED FURTHER, that any appropriate officer of the Company be, and each of them hereby is, authorized and directed for and in name and on behalf of the Company, to execute and deliver any and all certificates, authorizations, documents and other instruments or papers and to do any and all further things that may be necessary or advisable to carry out intent of the foregoing resolutions, all such action have heretofore been taken being hereby ratified, confirmed and approved; RESOLVED FURTHER, that these Resolutions may be executed in one or more counterparts each of which shall be deemed an original instrument and all of such counterparts shall constitute one document, and the signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart. FOURTH: Anything herein or elsewhere to the contrary notwithstanding, this merger may be amended or terminated and abandoned by the Board of Directors of National Data Corporation at any time prior to the time that this merger filed with the Secretary of State becomes effective. -2- IN WITNESS WHEREOF, said National Data Corporation has caused this Certificate to be signed by Kevin C. Shea, its Chief Financial Officer, this 26th day of May, 1999. NATIONAL DATA CORPORATION By: /s/ Kevin C. Shea ------------------------- Kevin C. Shea Chief Financial Officer -3- CERTIFICATE OF OWNERSHIP AND MERGER MERGING C.I.S., INC. INTO NATIONAL DATA CORPORATION National Data Corporation, a corporation organized and existing under the laws of Delaware, DOES HEREBY CERTIFY: FIRST: That this corporation was incorporated on the 20th day of July, 1967, pursuant to Section 101 of the General Corporation Law of the State of Delaware. SECOND: That this corporation owns all of the outstanding shares of the stock of C.I.S., Inc., a corporation incorporated on the 10th day of March, 1982, pursuant to Title 18, Section 1001 of the General Corporation Act of the State of Oklahoma. THIRD: That this corporation, by the following resolutions of its Board of Directors, duly adopted by the unanimous written consent of its members on the 26th day of May, 1999, determined to and did merge into itself C.I.S., Inc.: WHEREAS, the Board of Directors of National Data Corporation (the "Company") has determined that it is in the best interest of the Company to merge (the "Merger") C.I.S., Inc. a wholly-owned subsidiary of the Company ("Subsidiary"), with and into the Company with the Company to remain as the resulting, continuing and surviving corporation; NOW, THEREFORE, BE IT RESOLVED, that pursuant to Section 253 of the General Corporation Law of the State of Delaware and Title 18, Section 1083 of the General Corporation Act of the State of Oklahoma, Subsidiary shall merge with and into the Company, and the Company (or, with respect to the period following the Merger, the "Surviving Company") shall assume all of the Subsidiary's assets, liabilities, and obligations, and that pursuant thereto the separate corporate existence of Subsidiary shall cease, and the Surviving Company shall succeed to and assume all the rights and obligations of Subsidiary; RESOLVED FURTHER, that upon the Merger becoming effective, each outstanding share of Common Stock of Subsidiary owned of record by the Company which shares represent all of the issued and outstanding capital stock of Subsidiary, shall be cancelled; RESOLVED FURTHER, that the Merger shall become effective upon filing with the Secretaries of State of Oklahoma and Delaware; RESOLVED FURTHER, that the officers of the Company, and each of them acting alone are hereby authorized and directed to execute and file, 1) a Certificate of Ownership and Merger, substantially in the form reviewed by the Board and attached hereto as Exhibit A, with the --------- Secretary of State of the State of Delaware, 2) a Certificate of Ownership and Merger, substantially in the form reviewed by the Board and attached hereto as Exhibit B, with the Secretary of State of the --------- State of Oklahoma, and 3) any further necessary documents with the appropriate authorities; RESOLVED FURTHER, that the Surviving Company hereby agrees that it may be served with process in the State of Oklahoma in any proceeding for the enforcement of any obligation of Subsidiary, as well as for enforcement of any obligation of the Surviving Company arising from the Merger, and hereby irrevocably appoints the Secretary of State of Oklahoma as its agent to accept service of process in any such suit or other proceedings and agrees that the service of any such process may be made by personally delivering to and leaving with such Secretary of State of the State of Oklahoma duplicate copies of such process; and hereby authorizes the Secretary of State of the State of Oklahoma to send forthwith by registered or certified mail one of such duplicate copies of such process addressed to it c/o National Data Corporation, 1 National Data Plaza, Atlanta, Georgia 30329-2010, unless said Surviving Company shall hereafter designate in writing to such Secretary of State of the State of Oklahoma a different address for such process, in which case the duplicate copy of such process shall be mailed to the last address so designated; RESOLVED FURTHER, that any appropriate officer of the Company be, and each of them hereby is, authorized and directed for and in name and on behalf of the Company, to execute and deliver any and all certificates, authorizations, documents and other instruments or papers and to do any and all further things that may be necessary or advisable to carry out intent of the foregoing resolutions, all such action have heretofore been taken being hereby ratified, confirmed and approved; RESOLVED FURTHER, that these Resolutions may be executed in one or more counterparts each of which shall be deemed an original instrument and all of such counterparts shall constitute one document, and the signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart. FOURTH: Anything herein or elsewhere to the contrary notwithstanding, this merger may be amended or terminated and abandoned by the Board of Directors of National Data Corporation at any time prior to the time that this merger filed with the Secretary of State becomes effective. IN WITNESS WHEREOF, said National Data Corporation has caused this Certificate to be signed by Kevin C. Shea, its Chief Financial Officer this 26th day of May, 1999. NATIONAL DATA CORPORATION By: /s/ Kevin C. Shea ---------------------------- Kevin C. Shea Its: Chief Financial Officer CERTIFICATE OF OWNERSHIP AND MERGER MERGING HEALTH COMMUNICATION SERVICES, INC. INTO NATIONAL DATA CORPORATION National Data Corporation, a corporation organized and existing under the laws of Delaware, DOES HEREBY CERTIFY: FIRST: That this corporation was incorporated on the 20th day of July, 1967, pursuant to Section 101 of the General Corporation Law of the State of Delaware. SECOND: That this corporation owns all of the outstanding shares of the stock of Health Communication Services, Inc., a corporation incorporated on the 11th day of September, 1986, pursuant to Chapter 9 of Title 13.1 of the Code of Virginia. THIRD: That this corporation, by the following resolutions of its Board of Directors, duly adopted by the unanimous written consent of its members on the 26th day of May, 1999, determined to and did merge into itself Health Communication Services, Inc.: WHEREAS, the Board of Directors of National Data Corporation (the "Company") has determined that it is in the best interest of the Company to merge (the "Merger") Health Communication Services, Inc., a wholly- owned subsidiary of the Company ("Subsidiary"), with and into the Company with the Company to remain as the resulting, continuing and surviving corporation; NOW, THEREFORE, BE IT RESOLVED, that pursuant to Section 253 of the General Corporation Law of the State of Delaware and Title 13.1, Chapter 9, Article 12 of the Virginia Statutes, Subsidiary shall merge with and into the Company, and the Company (or, with respect to the period following the Merger, the "Surviving Company") shall assume all of the Subsidiary's assets, liabilities, and obligations, and that pursuant thereto the separate corporate existence of Subsidiary shall cease, and the Surviving Company shall succeed to and assume all the rights and obligations of Subsidiary; RESOLVED FURTHER, that pursuant to Title 13.1 of the Code of Virginia, the Agreement and Plan of Merger, attached hereto as Exhibit A --------- is hereby adopted, ratified and approved with such changes as any authorized officer of the Company shall approve to effect the intent of these resolutions; RESOLVED FURTHER, that upon the Merger becoming effective, each outstanding share of Common Stock of Subsidiary owned of record by the Company which shares represent all of the issued and outstanding capital stock of Subsidiary, shall be cancelled; RESOLVED FURTHER, that the Merger shall become effective upon filing with the Secretaries of State of Virginia and Delaware; RESOLVED FURTHER, that the officers of the Company, and each of them acting alone are hereby authorized and directed to execute and file, 1) a Certificate of Ownership and Merger, substantially in the form reviewed by the Board and attached hereto as Exhibit B, with the --------- Secretary of State of the State of Delaware, 2) Articles of Merger, substantially in the form reviewed by the Board and attached hereto as Exhibit C, with the Secretary of State of the State of Virginia, and 3) --------- any further necessary documents with the appropriate authorities; RESOLVED FURTHER, that the Surviving Company hereby agrees that it may be served with process in the State of Virginia in any proceeding for the enforcement of any obligation of Subsidiary, as well as for enforcement of any obligation of the Surviving Company arising from the Merger, and hereby irrevocably appoints the Secretary of State of Virginia as its agent to accept service of process in any such suit or other proceedings and agrees that the service of any such process may be made by personally delivering to and leaving with such Secretary of State of the State of Virginia duplicate copies of such process; and hereby authorizes the Secretary of State of the State of Virginia to send forthwith by registered or certified mail one of such duplicate copies of such process addressed to it c/o National Data Corporation, 1 National Data Plaza, Atlanta, Georgia 30329-2010, unless said Surviving Company shall hereafter designate in writing to such Secretary of State of the State of Virginia a different address for such process, in which case the duplicate copy of such process shall be mailed to the last address so designated; RESOLVED FURTHER, that any appropriate officer of the Company be, and each of them hereby is, authorized and directed for and in name and on behalf of the Company, to execute and deliver any and all certificates, authorizations, documents and other instruments or papers and to do any and all further things that may be necessary or advisable to carry out intent of the foregoing resolutions, all such action have heretofore been taken being hereby ratified, confirmed and approved; RESOLVED FURTHER, that these Resolutions may be executed in one or more counterparts each of which shall be deemed an original instrument and all of such counterparts shall constitute one document, and the signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart. RESOLVED, that National Data Corporation merge, and it hereby does merge into itself said Health Communication Services, Inc. and assumes all of its obligations; and FURTHER RESOLVED, that the merger shall be effective upon filing with the Secretaries of State of Delaware and Virginia. FOURTH: Anything herein or elsewhere to the contrary notwithstanding, this merger may be amended or terminated and abandoned by the Board of Directors of National Data Corporation at any time prior to the time that this merger filed with the Secretary of State becomes effective. IN WITNESS WHEREOF, said National Data Corporation has caused this Certificate to be signed by Kevin C. Shea, its Chief Financial Officer, this 26th day of May, 1999. NATIONAL DATA CORPORATION By: /s/ Kevin C. Shea ------------------------- Kevin C. Shea Chief Financial Officer CERTIFICATE OF MERGER OF WALSH INTERNATIONAL DOMESTIC FINANCE LIMITED INTO NATIONAL DATA CORPORATION The undersigned corporation organized and existing under and by virtue of the General Corporation Law of Delaware, DOES HEREBY CERTIFY: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger is as follows: NAME STATE OF INCORPORATION National Data Corporation Delaware Walsh International Domestic Finance Limited Delaware SECOND: That an agreement of merger between the parties to the merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of Section 251 of the General Corporation Law of Delaware. THIRD: That the name of the surviving corporation of the merger is National Data Corporation. FOURTH: That the Restated Certificate of Incorporation of National Data Corporation, a Delaware corporation, which will survive the merger, shall be the Restated Certificate of Incorporation of the surviving corporation. FIFTH: That the executed Agreement of Merger is on file at an office of the surviving corporation, the address of which is 1564 NE Expressway, Atlanta, GA 30329. SIXTH: That a copy of the Agreement of Merger will be furnished by the surviving corporation, on request and without cost, to any stockholder of any constituent corporation. SEVENTH: That this Certificate of Merger shall be effective on its date of filing. Dated: 6/21/99 ---------------------- NATIONAL DATA CORPORATION By /s/ Kevin C. Shea ----------------------------- Kevin C. Shea, CFO/Treasurer CERTIFICATE OF AMENDMENT OF NATIONAL DATA CORPORATION NATIONAL DATA CORPORATION (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware DOES HEREBY CERTIFY: 1. The Board of Directors of the Corporation, at a meeting duly called and held on July 21, 1999, unanimously adopted resolutions approving a proposed amendment to the Certificate of Incorporation, declaring such amendment to be advisable and directing that such amendment be considered at the Annual Meeting of Stockholders of the Corporation to be held on October 28, 1999. Such resolutions approved the deletion of Section 1.1 of Article Fourth of the Certificate of Incorporation in its entirety and the substitution in lieu thereof of a new Section 1.1 of Article Fourth which shall provide: "1.1 The Corporation shall have the authority to be exercised by its Board of Directors to issue 200,000,000 shares of Common Stock of the par value of $.125 per share (the "Common Stock") and 1,000,000 shares of Preferred Stock of the par value of $1.00 per share (the "Preferred Stock")." 2. The foregoing amendment to the Certificate of Incorporation of the Corporation was submitted to the stockholders of the Corporation for approval at the Annual Meeting of Stockholders of the Corporation duly called and held on October 28, 1999. Notice of the Annual Meeting of Stockholders was duly given in accordance with Sections 222 and 242 of the General Corporation Law of the State of Delaware. The foregoing amendment was duly adopted at the Annual Meeting of Stockholders held on October 28, 1999 by the holders of a majority of the issued and outstanding shares of Common Stock of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, National Data Corporation has caused this Certificate of Amendment to be executed by its duly authorized officer, this 30th day of June, 2000. NATIONAL DATA CORPORATION By: /s/ Suellyn P. Tornay --------------------------- Suellyn P. Tornay Vice President - Legal EX-10.VIII 3 0003.txt FIFTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10(viii) FIFTH AMENDMENT TO CREDIT AGREEMENT ----------------------------------- THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Fifth Amendment") dated as of September 29, 1999, among NATIONAL DATA CORPORATION, as Borrower, the banks and other financial institutions listed on the signature pages hereof, as Lenders, BANK ONE, NA (formerly The First National Bank of Chicago), as Administrative Agent for such Lenders, and WACHOVIA BANK, N.A., as Documentation Agent for such Lenders. W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Lenders, the Administrative Agent, and the Documentation Agent are parties to a certain Credit Agreement dated as of December 19, 1997, as amended by a certain First Amendment to Credit Agreement dated as of April 10, 1998, by a certain Second Amendment to Credit Agreement dated as October 14, 1998, by a certain Third Amendment to Credit Agreement dated as of February 26, 1999, and by a certain Fourth Amendment to Credit Agreement dated as of July 7, 1999 (as so amended, the "Credit Agreement"); WHEREAS, the parties hereto desire to amend the Credit Agreement in certain respects as more particularly set forth in this Fifth Amendment; NOW, THEREFORE, in consideration of the premises and for Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Defined Terms. Except as otherwise expressly defined herein, all ------------- capitalized terms used in this Sixth Amendment that are used in the Credit Agreement shall have the same meanings herein as are specified for such capitalized terms in the Credit Agreement. 2. Amendment to Section 6.04 ("Restricted Payments"). Section 6.04 of the ------------------------------------------------- Credit Agreement is hereby amended by deleting said Section 6.04 in its entirety and substituting in lieu thereof the following Section 6.04: SECTION 6.04. Restricted Payments. The borrower will not declare or ------------------- make any Restricted Payment if, after giving effect thereto, (I) the aggregate of all Restricted Payments declared or made (A) during Borrower's 1999 Fiscal Year exceeds $30,000,000, (B) during Borrower's 2000 Fiscal Year exceeds $60,000,000, (C) during Borrower's 2001 Fiscal Year exceeds the sum of (x) $20,000,000 and (y) the amount, if any, by which $60,000,000 exceeds the aggregate amount of Restricted Payments declared or made by the Borrower during Borrower's 2000 Fiscal Year or (D) during any other Fiscal Year of Borrower exceeds $20,000,000, or (ii) any Default shall be in existence (which has not been specifically waived in writing pursuant to section 9.06) either immediately preceding or succeeding the making or declaration or any such Restricted Payment. 3. Representations and Warranties. The Borrower represents and warrants to ------------------------------ the Lenders as follows: (a) All representations and warranties set forth in the Credit Agreement and the other Loan Documents are true and correct on and as of the date of this Fifth Amendment except for changes expressly permitted therein and except to the extent that such representations and warranties relate solely to an earlier date; and (b) After giving effect to this Fifth Amendment, no Default or Event of Default has occurred and is continuing. 4. Effect of Fifth Amendment. On and after the date this Fifth Amendment ------------------------- becomes effective as provided herein (i) each and every reference in the Credit Agreement to "hereof," "hereunder," "herein," "hereby" and each other similar reference, and each and every reference to "this Agreement" and each other similar reference, shall refer to the Credit Agreement as amended hereby, and as the same may be further amended, restated or supplemented from time to time, and (ii) each and every reference in the Loan Documents to the Credit Agreement shall be deemed to refer to and mean the Credit Agreement as amended by this Fifth Amendment, and as the same may be further amended, supplemented or restated from time to time. The Borrower confirms and agrees that (i) except as expressly amended herein, the Credit Agreement remains in full force and effect in accordance with its terms, and (ii) all other Loan Documents remain in full force and effect in accordance with their respective terms. 5. Ratification. The Borrower hereby restates, ratifies and reaffirms each and ------------ every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents effective as of the date hereof. To induce the Lenders to enter into this Fifth Amendment and to continue to make advances pursuant to the Credit Agreement, the Borrower acknowledges and agrees that, as of the date hereof and after giving effect to the terms hereof, there exists no right of offset, defense, counterclaim, claim or objection in favor of the Borrower arising out of or with respect to any of the obligations arising under the Credit Agreement or the other Loan Documents. 6. Counterparts. This Fifth Amendment may be executed in any number of ------------ counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. 7. Condition to Effectiveness of Fifth Amendment. This Fifth Amendment shall --------------------------------------------- not become effective or have any force or effect until (i) counterparts of this Fifth Amendment have been executed on behalf of the Borrower and those Lenders constituting the Required Lenders under the terms of the Credit Agreement, and all such executed counterparts shall have been delivered to the Administrative Agent. -2- 8. Miscellaneous. This Fifth Amendment shall be construed in accordance with ------------- and governed by the laws of the State of Georgia, without regard to the effect of conflicts of laws. This Fifth Amendment shall be binding on, and shall inure ----- to the benefit of and be enforceable by, the respective successors and permitted assigns of the parties hereto. -3- IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment to be executed by their duly authorized officers or representatives as of the date first above written. NATIONAL DATA CORPORATION By: /s/ Suellyn P. Tornay --------------------- Name: Suellyn P. Tornay Title: Corporate Secretary BANK ONE, N.A. (formerly The First National Bank of Chicago), as Administrative Agent and Lender By: /s/ David T. McNeela -------------------- Name: David T. McNeela Title: Vice President WACHOVIA BANK, N.A., as Documentation Agent and Lender By: /s/ Alyson Schattner -------------------- Name: Alyson Schattner Title: Assistant Vice President SUNTRUST BANK (formerly SunTrust Bank, Atlanta), as Lender By: /s/ Brian K. Peters ------------------- Name: Brian K. Peters Title: Director -4- FIRST AMERICAN NATIONAL BANK, as Lender By: ___________________________ Name: Title: -5- EX-10.IX 4 0004.txt SIXTH AMENDMENT TO CREDIT AGREEMENT Exhibit 10(ix) SIXTH AMENDMENT TO CREDIT AGREEMENT ----------------------------------- THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (this "Sixth Amendment") entered into this 13th day of April, 2000, among NATIONAL DATA CORPORATION, as Borrower, the banks and other financial institutions listed on the signature pages hereof, as Lenders, BANK ONE, N.A. (formerly The First National Bank of Chicago), as Administrative Agent for such Lenders, and WACHOVIA BANK, N.A., as Documentation Agent for such Lenders. W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Lenders, the Administrative Agent, and the Documentation Agent are parties to a certain Credit Agreement dated as of December 19, 1997, as amended by a certain First Amendment to Credit Agreement dated as of April 10, 1998, by a certain Second Amendment to Credit Agreement dated as October 14, 1998, by a certain Third Amendment to Credit Agreement dated as of February 26, 1999, by a certain Fourth Amendment to Credit Agreement dated as of July 7, 1999, and by a certain Fifth Amendment to Credit Agreement dated as of September 29, 1999 (as so amended, the "Credit Agreement"); WHEREAS, the parties hereto desire to amend the Credit Agreement in certain respects as more particularly set forth in this Sixth Amendment; NOW, THEREFORE, in consideration of the premises and for Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Defined Terms. Except as otherwise expressly defined herein, all ------------- capitalized terms used in this Sixth Amendment that are used in the Credit Agreement shall have the same meanings herein as are specified for such capitalized terms in the Credit Agreement. 2. Amendment to Section 1.01 ("Definitions"). Section 1.01 of the Credit ----------------------------------------- Agreement is hereby amended by deleting the definition of "Income Available for Fixed Charges" and substituting in lieu thereof the following definition: "Income Available for Fixed Charges" means, at any date of ---------------------------------- determination for any period, without duplication, Consolidated Net Income plus the sum of the following items (to the extent deducted in calculating ---- such Consolidated Net Income): (i) Consolidated Interest Expense, (ii) all payment obligations for such period under all Operating Leases and rental agreements, (iii) taxes on income, and (iv) for any period that includes all or a portion of the nine month period ended February 29, 2000, (x) non- cash restructuring charges taken during such nine month period, or such portion thereof, as the case may be, in an aggregate amount not to exceed $24,000,000, (y) cash and non-cash charges for discontinued operations taken during such nine month period, or such portion thereof, as the case may be, in an aggregate amount not to exceed $32,000,000, and (z) charges resulting from a write-off of accounts receivable taken during such nine month period, or such portion thereof, as the case may be, in an aggregate amount not to exceed $8,000,0000, in each case for the items described in the foregoing clauses (i) through (iv) as determined with respect to the Borrower and its Consolidated Subsidiaries for such period on a consolidated basis and in accordance with GAAP. 3. Representations and Warranties. The Borrower represents and warrants to the ------------------------------ Lenders as follows: (a) All representations and warranties set forth in the Credit Agreement and the other Loan Documents are true and correct on and as of the date of this Sixth Amendment except for changes expressly permitted therein and except to the extent that such representations and warranties relate solely to an earlier date; and (b) After giving effect to this Sixth Amendment, no Default or Event of Default has occurred and is continuing. 4. Effect of Sixth Amendment. On and after the date this Sixth Amendment ------------------------- becomes effective as provided herein (i) each and every reference in the Credit Agreement to "hereof," "hereunder," "herein," "hereby" and each other similar reference, and each and every reference to "this Agreement" and each other similar reference, shall refer to the Credit Agreement as amended hereby, and as the same may be further amended, restated or supplemented from time to time, and (ii) each and every reference in the Loan Documents to the Credit Agreement shall be deemed to refer to and mean the Credit Agreement as amended by this Sixth Amendment, and as the same may be further amended, supplemented or restated from time to time. The Borrower confirms and agrees that (i) except as expressly amended herein, the Credit Agreement remains in full force and effect in accordance with its terms, and (ii) all other Loan Documents remain in full force and effect in accordance with their respective terms. 5. Ratification. The Borrower hereby restates, ratifies and reaffirms each and ------------ every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents effective as of the date hereof. To induce the Lenders to enter into this Sixth Amendment and to continue to make advances pursuant to the Credit Agreement, the Borrower acknowledges and agrees that, as of the date hereof and after giving effect to the terms hereof, there exists no right of offset, defense, counterclaim, claim or objection in favor of the Borrower arising out of or with respect to any of the obligations arising under the Credit Agreement or the other Loan Documents. 6. Counterparts. This Sixth Amendment may be executed in any number of ------------ counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. 7. Amendment Fees. In consideration of the agreements of the Lenders contained -------------- in this Sixth Amendment, the Borrower agrees to pay to the Administrative Agent, for the account -2- of each Lender that delivers an executed counterpart of this Sixth Amendment prior to 12:00 noon, Chicago time, on April 13, 2000, an amendment fee (the "Amendment Fee") in an amount equal to 0.10% of the total amount of such Lender's Commitment as in effect on such date. 8. Condition to Effectiveness of Sixth Amendment; Effective Date. This Sixth ------------------------------------------------------------- Amendment shall not become effective or have any force or effect until (i) counterparts of this Sixth Amendment have been executed on behalf of the Borrower and those Lenders constituting the Required Lenders under the terms of the Credit Agreement, and all such executed counterparts shall have been delivered to the Administrative Agent, and (ii) all Amendment Fees payable by the Borrower pursuant to paragraph 7 of this Sixth Amendment have been received by the Administrative Agent. Upon becoming effective as aforesaid, this Sixth Amendment shall be deemed to have an effective date of February 29, 2000, for all purposes under the Credit Agreement. 9. Miscellaneous. This Sixth Amendment shall be construed in accordance with ------------- and governed by the laws of the State of Georgia, without regard to the effect of conflicts of laws. This Sixth Amendment shall be binding on, and shall inure to the benefit of and be enforceable by, the respective successors and permitted assigns of the parties hereto. -3- IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment to be executed by their duly authorized officers or representatives as of the date first above written. NATIONAL DATA CORPORATION By: /s/ Suellyn P. Tornay --------------------- Name: Suellyn P. Tornay Title: VP Legal BANK ONE, N.A. (formerly The First National Bank of Chicago), as Administrative Agent and Lender By: /s/ Jennifer Schmoll -------------------- Name: Jennifer Schmoll Title: Customer Service Officer WACHOVIA BANK, N.A., as Documentation Agent and Lender By: /s/ Aly Schattner Heimovics --------------------------- Name: Aly Schattner Heimovics Title: Assistant Vice President SUNTRUST BANK (formerly SunTrust Bank, Atlanta), as Lender By: /s/ Brian K. Peters ------------------- Name: Brian K. Peters Title: Managing Director -4- FIRST AMERICAN NATIONAL BANK, as Lender By: /s/ Ryan Murphy --------------- Name: Ryan Murphy Title: Sr VP -5- EX-21 5 0005.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant The Registrant had the following subsidiaries at May 31, 2000, each of which was wholly owned by the Registrant, except as noted below: Jurisdiction of Name Incorporation - -------------------------------------------------------------------------------- National Data Payment Systems, Inc. New York Modular Data, Inc. Delaware NDC Federal Systems, Inc. Delaware NDC Health Information Services, Ltd. United Kingdom National Data Corporation of Canada, Ltd. Canada NDC Check Services, Inc. Illinois Zadall Systems Group, Inc. Texas NDPS Comerica Alliance, LLC (Note 1) Delaware Global Payment Systems LLC (Note 2) Georgia Global Payment Holding Company Delaware GPS Holding Limited Partnership Georgia Global Payment Systems of Canada, Ltd. Canada Health Communication Services (Bermuda) Ltd. Bermuda Merchant Services U.S.A., Inc. North Carolina MKA Software (Holdings) Ltd. United Kingdom Hadley Hutt Computing Limited United Kingdom Chemtec Systems Limited United Kingdom NDC Holdings (UK) Ltd. Georgia Source Informatics, Inc. Delaware NDC Health Information Services (Arizona) Inc. Delaware SI PMSI Ltd. Delaware Physerv Solutions, Inc. Delaware EE&C Financial Services, Inc. New York Computerized Medical Communications, Inc. Illinois Revenue Production Management, Inc. Illinois C-Care, Inc. New Jersey H.O.P.E. Enterprises Group, Inc. New Jersey Professional Medical Recovery Service, Inc. New Jersey CheckRite Recovery Services, Inc. Georgia CheckRite of Phoenix (Note 3) Colorado NDPS Holdings, Inc. Delaware NatDat Corp Delaware National Data Intellectual Property Corporation Delaware The Computer Place Arizona NDC Gaming Services, Inc. Illinois NDC Pharma Services, Ltd. UK Note 1. NDPS Comerica Alliance, LLC is 51% owned by the Registrant. Note 2. Global Payment Systems LLC is 92.5% owned by the Registrant. Note 3. CheckRite of Phoenix is 51% owned by the Registrant. EX-23 6 0006.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Registrant's previously filed Registration Statements, File Numbers 2-81717, 2-86961, 2-92193, 33-25635, 33- 43005, 33-44858, 33-58622, 33-58624, 33-59717, 33-55057, 333-05449, 333-05451, 333-05427, 333-35991, 333-41553, 333-44803, 333-44823 and 333-67497. /s/ Arthur Andersen LLP Atlanta, Georgia August 25, 2000 EX-27 7 0007.txt FDS
5 1,000 12-MOS MAY-31-2000 JUN-01-1999 MAY-31-2000 4,555 0 108,201 8,547 8,558 171,349 204,670 106,740 703,576 181,012 152,495 0 0 4,244 325,892 703,576 0 685,706 0 339,217 270,894 11,217 12,655 54,434 22,550 31,884 (72,049) 0 0 (40,165) (1.21) (1.21)
EX-99.1 8 0008.txt SAFE HARBOR COMPLIANCE STATEMENT EXHIBIT 99.1 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS We intend to qualify both our written and oral forward-looking statements for protection under Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, and any other similar safe harbor provisions. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on our written or oral forward-looking statements. We undertake no obligation to update or revise this safe harbor compliance statement for forward-looking statements to reflect future developments. In addition, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. We have provided the following risk factor disclosure in connection with our continuing effort to qualify our written and oral forward-looking statements for the protection of any safe harbor provision. Important factors currently known to our management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: Risk Factors ------------ INTENSE COMPETITION COULD DAMAGE OUR SALES AND PROFITABILITY If we are unable to compete successfully with providers of systems and services similar to ours, we may lose significant revenue. We compete not only with independent providers of similar systems and services, but also with unrelated businesses' internal divisions that provide similar services. The markets in which we offer our applications systems and services are highly competitive with respect to functionality of products and services, price, quality and innovation. Competition in the health care information services and electronic commerce markets affects our ability to attract new customers and keep existing ones, hire quality employees, and charge prices for our products and services that will maximize our profitability. Some of our competitors have greater access to capital, marketing and technological resources, and we cannot guarantee that we will be able to compete successfully with them. WE MAY LOSE CUSTOMERS OR REVENUE IF THE CURRENT TREND OF CONSOLIDATION IN THE BANKING AND HEALTH CARE INDUSTRIES CONTINUES There has been and continues to be significant consolidation in the banking and health care industries, which may reduce the number of customers for our products and services and may reduce the price we are able to charge those customers. We market our credit, charge and debit card transaction services through several marketing channels, including banks. As a result of consolidation, a bank that markets our financial services may be acquired by a bank that competes with us directly or by a bank that has a relationship with one or more of our competitors, eliminating the need for our services. In addition, the consolidation of health care providers and other parts of the health care industry may reduce the number of our potential customers for health care information services. Finally, the increased purchasing power of larger consolidated organizations in both industries could lead to reductions in the amounts these organizations are willing to pay for our services. We cannot predict the overall impact of consolidation in the banking and health care industries, and it could have a material adverse effect on the Company's business, financial condition and results of operations. OUR PROFITABILITY MAY SUFFER IF WE ARE UNABLE TO CONTINUE OUR EXPANSION IN NEW AND EXISTING MARKETS Our future growth and profitability depends, in part, upon our continued expansion within the electronic transaction processing and health care information services markets in which we currently operate, the further expansion of these markets, the emergence of other markets for electronic transaction processing and health care information services and our ability to penetrate these markets. As part of our strategy to expand into new and existing markets, we seek acquisition opportunities and alliance relationships with other businesses that will allow us to increase our market penetration, technological capabilities, product offerings and distribution capabilities. We cannot predict whether we will be able successfully to identify suitable acquisition candidates in the future, or whether any acquisition will provide us with the ability to expand into new markets. Expansion of the health care information services and electronic transaction processing markets is dependent upon the continued automation of traditional paper-based processing systems and demand for new decision support applications. Our ability to penetrate these markets depends upon our ability to apply our existing technology, or to develop new technology, to meet the particular service needs of each new or expanded market. We cannot guarantee that markets for our services will continue to expand and develop, that we will be successful in our efforts to meet the demands of these markets, or that we will have adequate financial, marketing and technological resources to penetrate new markets. WE MAY INCUR ADDITIONAL COSTS OR LIABILITY AND LOSE REVENUE AS THE RESULT OF GOVERNMENT REGULATION OR INVESTIGATION Because we provide health care information services, future federal and state health care legislation may restrict our existing operations, impose additional requirements on us, or limit our expansion. We may not be able to increase prices to cover the costs of complying with changes in government regulations. Governments have recently focused significant attention on health care reform; however, we cannot predict if any new legislation will be adopted. -2- In addition, federal and state agencies have been conducting investigations purportedly related to referral and billing practices of hospitals, laboratories and similar institutions. The Office of the Inspector General and the Department of Justice have initiated hospital laboratory billing review projects in certain states and are expected to extend such projects to additional states, including states in which we operate. Expansion of these projects increases the likelihood of governmental investigations of hospitals, laboratories and other institutions with which we do business. Although we currently monitor our billing practices and arrangements with health care institutions to ensure compliance with prevailing industry practices and applicable law, we cannot guarantee that governmental investigators will not take positions that are inconsistent with our practices. The Department of Health and Human Services has proposed regulations under Health Insurance Portability and Accountability Act of 1996 regarding the maintenance and transmission of health information. These regulations establish certain standards for electronic record keeping. We cannot predict whether these regulations will be adopted in their present or a different form, if at all. We may need to modify our current computer software and record-keeping practices to comply with these regulations, if they are adopted. These modifications may require substantial capital investment, and could have a significant effect on our operations, financial condition, or business. In order to remain competitive and satisfy the requirements and needs of our clients, we must remain informed of and adapt to new regulations governing the transmission, use and processing of personal information in electronic commerce and over the Internet. While our business does not encompass the solicitation or collection of personal information from the general public, our card processing, check guarantee, network, merchant accounting and network services all involve the handling, transmission, verification and processing of personal information of the customers of our clients. As electronic commerce and the Internet continue to evolve, we expect that federal, state and foreign governments will adopt laws and regulations covering issues such as user privacy, taxation of goods and services provided through e-commerce and over the Internet, pricing, content and quality of products and services. The federal government has already enacted broad legislation relating to user privacy in the Gramm-Leach-Bliley Act of 2000, and regulations interpreting that Act are in the process of being adopted. Further legislation and regulation could limit the market for e-commerce, and therefore the market for our services. Although many of these regulations may not apply directly to our business, we expect that laws regulating the solicitation, collection or processing of personal or consumer information could indirectly affect our business. In order for us to remain competitive and profitable, we must stay abreast of the developments in this area in order to ensure that we are in compliance with any such regulations, and in order to assure our clients of that the use of our services will not jeopardize their compliance with the same regulations. These efforts may require the expenditure of significant sums in research and development and investments in new technology and processes, and will require significant attention from senior management. WE MAY INCUR LIABILITY AND COSTS EXCEEDING OUR RESERVES FOR CREDIT CARD CHARGES DISPUTED BY HOLDERS OF CREDIT AND DEBIT CARDS In certain circumstances, we may be responsible for paying charges disputed by holders of credit or debit cards where we have provided the service that processed the credit or debit -3- transaction. Generally, our direct merchant customers have liability for these charges; however, in the case of merchant fraud, or insolvency or bankruptcy of the merchant, we may be liable for the disputed charges. Based on our historical loss experience, we have established reserves, which we believe to be adequate, for estimated losses on these types of transactions, but we cannot guarantee the adequacy of these reserves. Any losses in excess of reserves could have a material adverse effect on our financial condition and results of operations. RECENT AND FUTURE ACQUISITIONS MAY NOT BE PROFITABLE We are currently devoting significant management resources and other resources toward the integration of our recent acquisitions. We may not be able to successfully integrate these acquisitions (or future acquisitions), and as a result these recent acquisitions, and any future acquisitions, may negatively impact our operating results, particularly during the fiscal quarters immediately following the completion of the acquisition while integration is occurring. Even if integration of acquired businesses occurs successfully, recent and future acquisitions may not achieve levels of revenue growth, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected. WE MAY NEED ADDITIONAL CAPITAL TO CONTINUE OUR GROWTH AND EXPANSION We may incur indebtedness in the future, including through borrowings under a credit facility, if a credit facility is available, to finance acquisitions. As a result, we may be subject to risks associated with debt financing, including increased interest rate expense, insufficient cash flow to meet required payments on our debt and inability to refinance or repay the debt as it comes due. OUR ANTI-TAKEOVER PROVISIONS MAY LIMIT STOCKHOLDER VALUE Certain provisions of our Certificate of Incorporation and By-laws, our shareholder protection rights agreement, and Delaware law may delay, defer or prevent a takeover attempt that a stockholder might consider in its best interest. A stockholder may not receive as much in exchange for his or her shares as they could without these provisions. The following is a description of the provisions that may reduce the market prices for our shares of common stock. Our Certificate of incorporation and our By-laws separate our Board of Directors into three classes of directors, with each class as nearly equal in number as the total number of directors permits. Each class serves for three- year terms, and each class' term expires in different successive years. In addition, our Certificate of Incorporation authorizes the Board of Directors to issue preferred stock in one or more classes or series and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any action on the part of the stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. -4- Our stockholder rights plan entitles our common stockholders to purchase preferred stock upon the happening of certain events. These rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors unless the offer contains certain conditions. In addition, Section 203 of the Delaware General Corporation Law prohibits certain persons from engaging in business combinations, which may also have the effect of delaying, deterring or preventing a change of control. WE MAY SPEND SIGNIFICANT RESOURCES DEVELOPING AND PROMOTING NEW PRODUCTS THAT MAY NOT BE PROFITABLE The market for our products and services is characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing customer needs. We cannot ensure that we will be successful in developing and marketing new products and services or that our products and services will adequately meet the quickly changing demands of our customers. In addition, in order to meet our customers' demands, we are continually involved in a number of development projects, including our effort to update our core mainframe-based products for the health care information services markets. Because we cannot predict the time and cost required in reaching certain research, development and engineering objectives, product development initiatives could cost significantly in excess of our estimates, and project development schedules could require extensions. In either of these events, our profitability and overall results of operations could be adversely affected. We believe that the future success of our business will depend in large part upon our ability to maintain and enhance our current product and service offerings and to continually develop and introduce new products and services that will keep pace with technological advances and satisfy evolving customer requirements. Further, we cannot ensure that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products and services. An inability to develop and introduce new products and services in a timely manner, or an unsuccessful new or updated product could materially adversely affect our financial condition and results of operations. WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE The market price of our common stock may experience significant volatility from time to time. Such volatility may be affected by factors such as our quarterly operating results or changes in the economy, financial markets or the health care information and transaction processing industries, specifically, or the health care and electronic commerce industries in general. In recent years, the stock market has experienced extreme price and volume fluctuations which has sometimes affected the market price of the securities issued by a particular company which may be unrelated to the operational performance of the company. This type of market effect could strike our common stock price as well. In addition, we may be subject to securities class action litigation if the market price of our stock experiences significant volatility. Our management's attention and resources may be diverted from normal operations if we would become subject to any securities class action, which may have a material adverse effect on our business. -5- -----END PRIVACY-ENHANCED MESSAGE-----