-----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, D9kuk+JeVford7Gn6M4FSWtggLcpRmlnSMKJEEtVZ0cf2TAPeqiiODKfb0yccLCp oIdVvO0egWkzVdv6ktsqWg== 0000931763-99-002483.txt : 19990826 0000931763-99-002483.hdr.sgml : 19990826 ACCESSION NUMBER: 0000931763-99-002483 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990825 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL DATA CORP CENTRAL INDEX KEY: 0000070033 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [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: 99699519 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 NATIONAL DATA CORPORATION 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, 1999 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) 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 $1,357,926,513 based upon the last reported sale price on The New York Stock Exchange on August 16, 1999 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 16, 1999 was 33,890,156 shares. DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K -------- --------- Portions of the Company's Definitive Proxy Statement relating to the 1999 Annual Meeting of Stockholders to be held on October 28, 1999 Part III
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NATIONAL DATA CORPORATION 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS ----------------- PART I. - ------- Item 1. BUSINESS............................................................. 3 Item 2. PROPERTIES........................................................... 17 Item 3. LEGAL PROCEEDINGS.................................................... 17 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................... 17 EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 18 PART II - ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................... 20 Item 6. SELECTED FINANCIAL DATA.............................................. 20 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 20 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................................... 20 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 20 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................... 20 Part III - -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................... 21 Item 11. EXECUTIVE COMPENSATION............................................... 21 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................... 21 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 21 PART IV - ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................................. 22 SIGNATURES..................................................................... 28 APPENDIX A..................................................................... 30
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 or National Data Corporation ("NDC" or the "Company") from time to time, the words "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements concerning the Company's business operations, economic performance and financial condition, including in particular, the Company's business strategy and means to implement the strategy, the Company's objectives, the amount of future capital expenditures, the likelihood of the Company's success in developing and introducing new products and expanding its business, and the timing of the introduction of new and modified products or services. For those statements, the Company claims the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond the control of the Company and reflect future business decisions that are subject to change. As a result of a variety of factors actual results could differ materially from those anticipated in the Company's forward-looking statements, including the following factors: (a) those set forth in Exhibit 99.1 to this Annual Report on Form 10-K, which are incorporated herein by this reference, and elsewhere herein; and (b) those set forth from time to time in the Company's press releases and reports and other filings made with the Securities and Exchange Commission. The Company cautions that such factors are not exclusive. Consequently, all of the forward-looking statements made herein are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions of such forward-looking statements that may be made to reflect events or circumstances after the date hereof, or thereof, as the case may be, or to reflect the occurrence of unanticipated events. 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 units. The Company serves a diverse customer base comprised of approximately 160,000 health care providers, 1,200 hospitals, 1,000 health care payers, 3,600 payer plans, 1,250,000 points of service in more than 750,000 merchant locations, thousands of corporations and more than 700 financial institutions, as well as numerous federal and state government agencies. The Company markets its services directly to retailers and health care providers, payers, pharmaceutical manufacturers and others, and indirectly through business alliances with a wide range of banks, insurance companies and distributors. The Company is one of the world's largest independent providers of health care information and electronic commerce services. NDC's Health Information Services unit 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, billing services, business office management services, data warehousing/analysis and other information based services. The primary markets include pharmacists, dentists, physicians, hospitals, health maintenance organizations, payers, managed care companies, pharmaceutical manufacturers and distributors. Typically, these services utilize the Internet and other forms of transport and processing capability. Management believes that NDC's Health Information Services business unit is the broadest collector, processor and distributor of information to more segments of the health care industry than any other single health information services provider. For fiscal 1999, approximately 58% of the Company's total revenue was derived from the Company's health care information services and systems segment. The Company's electronic commerce business unit ("NDC eCommerce") offers a complete range of services to assist customers with the movement of electronic payment and financial information. These services primarily include merchant and cardholder processing, credit and debit transaction processing, check guarantee and verification, electronic authorization and capture, terminal management services, portfolio risk management, purchase card services and financial electronic data interchange ("EDI"). The primary markets include global and domestic financial institutions, corporations, alliance partners, federal and state governmental agencies, universities, hospitality, automotive, restaurants, retail businesses and health care providers. The Company's eCommerce unit represented approximately 42% of the Company's total revenue for fiscal 1999. 3 The Company's products and services offer a wide range of value-added information with greater convenience to purchasers and providers of goods and services. These products and services reduce processing costs, settlement delays and losses from fraudulent transactions. NDC's advanced high speed computer and telecommunications network enables the Company to electronically process, capture and transmit a high volume of point-of-service transactions 24 hours a day, seven days a week. While the transition from paper-based to electronic transaction processing continues, the earliest and most significant penetration has occurred in the areas of credit card authorization and settlement and pharmacy transaction processing. NDC believes that the rapid transition to electronic transaction processing in these areas demonstrates the potential for automation of other market segments, requiring timely information, which are still dominated by paper-based processing, such as additional health care applications, check and cash transactions and the transfer of information between businesses. This will continue to be assisted by the Company's proactive role in utilizing the Internet -- from Web enabled store fronts to secure handling of Internet payments. The Company's business strategy is to be an end-to-end solutions provider of value-added services and systems in the markets it serves. NDC believes that both the health care and electronic commerce markets present attractive opportunities for continued growth. In pursuing its strategy, the Company seeks both to increase its penetration of existing markets and to continue to identify and create new markets for its services. The Company will also continue to enhance existing products and develop, as well as acquire, new systems and services; such as services relating to credit card issuing services, financial electronic data interchange and health care information management services. To support its business strategy, the Company has pursued strategic acquisition opportunities and alliances with other companies to complement internal developments. These have permitted NDC to increase its market penetration, technological capabilities, product offerings and/or distribution capabilities. In fiscal year 1999, the Company completed one acquisition to expand its presence in the Health Information Services operation in the United Kingdom. In fiscal year 1998, six acquisitions were completed which gave NDC expanded capabilities and customer bases in the informational services, pharmacy systems, physician, and electronic commerce markets. These transactions were accounted for on a purchase basis. The most significant of these acquisitions was on December 15, 1997, when the Company acquired two healthcare 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"). In addition, on December 19, 1997, the Company merged with PHSS in a transaction accounted for on a pooling-of-interests basis in order to expand geographic presence and market share in physician and hospital management services. 4 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. 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 rapidly due to the need of providers, employers, health care payers and manufacturers 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 companies 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 the electronic transmission and capture of data for on-line eligibility verification and reimbursement for services, as well as for information management services. The application of technology to improve the flow of information to address the quality of patient care is expanding as well. The use of the Internet for the transmission and capture of data for health claims and transaction processing, information gathering and dissemination will help market expansion in the future. 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 dentists, 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 availability of 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 and outsourcing capabilities, as well as new information management services. The market includes, among others, providers, hospitals, managed care companies, payers, and pharmaceutical manufacturers. 5 Management believes that its value-added EDI network is the world's most advanced. This network helps streamline work flow and improve 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 more end-to-end products and services, across more segments of the health care community, than any other 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, sales force management and billing; and full or partial outsourcing services. 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 Web- enabled a number of its existing products 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 electronic transaction processing services to the electronic commerce market. Both the Consumer-to-Business and Business-to- Business segments of electronic commerce demand a growing array of processing and support services. These services include deployment of terminals, transaction authorization, data capture, merchant accounting and settlement for credit and debit cards, check verification and guarantee services, financial electronic data interchange and electronic cash management. Most retail credit card transactions are no longer processed through paper-based systems and are instead electronically authorized and settled. The Company believes that the number of electronic transactions will continue to grow and that an increasing percentage of these transactions will be processed via the Internet due to convenience. The Internet will be a major factor in accelerating the conversion of paper to electronic pulse. This will result in greater opportunities for growth for the Company. The Internet is an important component in the Company's strategy for expansion of services and increases the number of distribution channels to reach 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" which are creating broader transactions markets. The Company provides what it believes is the industry's first end-to-end merchant store front solution, which includes the ability for the customer to build its own "virtual" retail store site quickly by using "click and build" software. eCommerce services provide merchants with Internet service and web hosting capabilities, as well as secure credit and debit card processing. Additional new Internet products include on-line banking solutions and Internet-based tax payment services. 6 Utilization of debit cards as a general payment mechanism for goods and services continues to increase at a higher rate than credit card growth. The Company is also experiencing growth in the check verification/guarantee areas. We are striving to handle all types of non-cash payments. The continued rapid expansion of the Internet also provides potential growth opportunities for electronic payment applications. In addition, the Company believes the proliferation of affinity or co-branded cards that provide consumers with added benefits should contribute to increased use of credit and debit cards and the growth of the electronic commerce market. Business-to-Business EDI 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 EDI replace the paper ordering, invoicing and payment processing with electronic transactions. NDC eCommerce is a market leader in Business-to- Business EDI and purchase card acceptance among suppliers by providing full EDI data capability. Other service providers similar to the Company provide high volume electronic transaction processing and support services directly to banking 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 the increased technological capabilities required for the rapid and efficient creation, processing, handling, storage and retrieval of information. These technological capabilities have become increasingly complex, requiring significant capital commitments to develop, maintain and update the systems necessary to provide these technologically 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 acquisitions of new merchant accounts from banks that previously serviced those accounts. In addition, many small information processing organizations are consolidating with larger service providers. In addition to services that enable merchants to accept credit and debit cards, the market continues to expand to include increasing levels of check verification and guarantee services. Demand for these services has been growing in recent years as merchants seek to reduce losses related to bad checks and use check acceptance to increase sales. The Company provides a full range of value-added solutions to manage all aspects of its customers' electronic payment and other processing needs. These services provide banks with credit card authorization, merchant accounting and marketing support; merchants with Internet storefront development, Web hosting and processing; specialized retailers with on-line and off line payment processing; and corporations with purchasing card and cash management services. 7 Business Strategy The Company's business strategy centers on providing end-to-end solutions, value-added information processing services in the markets it serves. 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, or alliance with, companies that have compatible products, services 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 in each segment. For more financial information, see the Management's Discussion and Analysis of Financial Condition and Results of Operations and note 11 to the Consolidated Financial Statements on page A-41. NDC Health Information Services NDC Health Information Services provides a large variety of electronic information products and services to numerous segments of the Healthcare industry. The Company's products include electronic claims processing, claims adjudication and payment systems, funding capabilities, billing services, accounts receivable resolution, business office management services, practice management systems and clinical database information. The Company provides these products and services to pharmacies, pharmaceutical manufacturers, dentists, physicians, hospitals, integrated delivery systems, managed care organizations, payers, government health care agencies, distributors, clinics, nursing homes and internet portals. These solutions 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. Our health information network moves vast amounts of data throughout the healthcare community, providing value-added content all along the way. 8 The Company provides these services and products through their 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 our network and data management capabilities to take advantage of the Internet and other changes. Revenue for the Company's Health Information Services consists of recurring transaction processing, monthly maintenance and support 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. In addition, the Company realizes revenue based on a percentage of the net collections related to the management of hospital and physician group business offices. EDI NDC Health Information Services provides various EDI and transaction processing services to participants in the healthcare market. The Company provides the network connectivity and EDI 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, dentists, HMO's and preferred provider organizations. These services include transaction submission, eligibility verification, patient-specific benefit coverage, transaction data capture and editing, claim adjudication, remittance processing, credit / debit card authorization, check guarantee services and retrospective and prospective drug utilization review. These services allow customers to exchange patient treatment and payment electronically, receive reimbursement quickly, process claims electronically, and streamline internal processes. Practice Management Systems The Company's practice management systems are designed to provide the health care market with application solutions 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, check, credit / debit card processing capabilities and other associated functions, such as inventory reporting and ordering. The Company's physician and dental practice management systems are designed to significantly improve the efficiency of office management and provide the following value-added services: . patient scheduling and recall, . billing, claim submission and collection, . patient record accounting, . eligibility verification, 9 . coordination of multiple payers and payment plans, . insurance transaction information and . electronic processing. The Company's pharmacy practice management systems provide solutions for chain and independent pharmacies, hospitals, mail order, HMO's, clinics and nursing homes. These 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 allowing customers to order refill prescriptions via telephone and enable physicians to electronically transmit prescriptions directly to pharmacies utilizing NDC's pharmacy management systems. Information Management The Company is a leading provider of proprietary health care information and consulting services, primarily to the pharmaceutical and retail pharmacy markets. This group gathers data from pharmacies, pharmacy chains and health care providers. The information management services enable their customers to better understand individual prescriber, payer, consumer, pharmacy benefit manager and retail pharmacy behavior in order to compete more effectively in the market. This information is maintained in its proprietary database, which is one of the industry's largest banks of prescription, prescriber, pharmacy and managed care data. This encyclopedic, automated information warehouse is the vital core upon which most 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 intelligence for its client companies. The Internet is serving as a highly efficient means of gathering business information and delivering business solutions more quickly, accurately and cost-effectively. The Company provides its services through a broad array of information services, 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 enters into significant, long-term relationships with its customers, providing integrated decision support services to executives in the sales, marketing, market research and information technology areas. Management Services The Company provides business office services designed to increase profitability in hospital and physician group business offices. To assist with managed care contract administration, the Company offers systems that provide consistent interpretation of contract terms and improved revenue recovery rates. Consultant audit services identify lost revenue, improve billing accuracy and speed reimbursement. The Company also can provide comprehensive outsourcing services ranging from accounts receivable management 10 to financial, administrative and strategic support, data management and information services. Internet Products and Services During fiscal years 1998 and 1999, the Company accelerated its investment in development and announced a new range of Internet enabled products and services. 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: . physician services (including data warehousing, practice analysis, resource utilization and others); . sales and marketing services (including performance management, resource allocation and others); . research services (outcome studies and pricing analysis); and . patient services. 11 NDC eCommerce NDC eCommerce is a world-wide provider of a wide range of value-added end-to- end electronic commerce and payment processing solutions to the retail, hospitality, automotive, health care, university, cable providers, cellular telephone providers and government markets. 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, Internet based on-line banking 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 Company's distribution channels include banks, alliances and associations as well as value-added reseller and independent reseller relationships serving a large and diverse merchant community of thousands of corporations, hundreds of financial institutions, and numerous universities, state and federal agencies. Merchant Processing Services These services provide a single source solution for delivering merchant payment services. These services consist of: . Credit/Debit card transaction processing; . Electronic Authorization/Capture (which incorporates the capabilities of the Company's authorization system, combined with enhanced software) enables an entire data transmission to be electronically captured and transmitted to provide faster clearing through the banking system; . An advanced merchant accounting system allowing maximum flexibility to record activity and fund merchants; . Exception processing, including sales draft retrieval and chargeback resolution; . Clearing/settlement; . Fraud monitoring; . Customized, value-added applications for retailers, restaurants, lodging and direct marketers; and . Check Verification and Guarantee (Check guarantee differs from check verification in that the Company not only verifies the transaction but also guarantees payment. Fees for the Company's check verification services are based on a per transaction rate, while fees for its check guarantee services are based on a percentage, or discount, of the face value of each check guaranteed by the Company). 12 Internet Merchant Services These services offer secure and reliable payment processing solutions for electronic commerce on the Internet. NDC provides an end-to-end merchant storefront Internet solution. Merchants using the Company's Internet product can build their own "virtual" retail site quickly by using "click and build" software. Merchants receive Internet service and web hosting capabilities, as well as a secure gateway to forward transaction information for clearing. Through a secure, multi-currency, on-line payment gateway, customers can view and purchase goods and services in their local currency. Internet Banking and Financial Services NDC's Internet banking solution enables financial institutions to offer home banking services to their retail and commercial customers to maximize customer relationships, generate fee income and attract new customers. These products and services include, among others: detailed account access and reporting, income and expenditure tracking, cash management, credit card reporting, as well as the capability to link to insurance, imaging, investment and mortgage services. Internet Tax Filing and Payment Services This service allows financial institutions and government agencies to offer corporate taxpayers a secure and convenient way to pay taxes electronically. Security on the system is handled through both encryption and multi-level password access. The web site is the portal for receiving secure web forms with appropriate tax information and delivering the secure web transaction for payment. It allows businesses to easily comply with state and federal tax regulations while maintaining control of the timing for tax payments. Terminal Management Services The Company provides total terminal management and support which includes: programming/deployment, training, maintenance, warehousing, reporting, inventory control, and equipment replacement. Portfolio Risk Management The Company provides services to allow financial institutions to monitor credit risk to enhance the profitability of their portfolios by providing services such as: . Credit Underwriting; . Credit Scoring; . Fraud Control; . Account Processing; and . Collections. Business-to-Business Services These products include purchasing card, multinational cash management, financial EDI, electronic funds transfer, and Internet services. The NDC cash 13 management system is specifically designed for use by large multi-national corporations in a multi-currency, multi-bank environment. The products and services provide multi-currency/multi-format financial, management and operational data to corporate and government institutions worldwide. Organizations use these services to collect, consolidate and report financial, administrative and operating data from hundreds of thousands of locations. Sales and Marketing The Company's electronic transaction processing services are offered to the health care markets directly through Company personnel and through alliances with other organizations. The Company's practice management systems are marketed primarily through alliances with other companies, value-added re-sellers, as well as the Company's personnel. During 1998, the Company launched a branding program, to organize its healthcare business under a single identity. During 1999, the Company formed its eCommerce line of business by consolidating its Integrated Payment Systems and Global Payment Systems business units to provide seamless delivery of its expanding product line to its customers. The Company markets its electronic commerce products and services through financial institutions, bank alliance programs, its own sales personnel and also through independent contractors and value-added resellers. 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; Newark, New Jersey; and St. Louis, Missouri with others in Pennsylvania, Virginia, Idaho, Illinois, Michigan, Utah, Canada 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 the best available technology that is suitable for each particular task. Given this approach, NDC utilizes (i) Tandem fault-tolerant computers for high volume, fast response transaction processing; (ii) client-server technology for end-user data base applications; (iii) the latest Unisys and IBM mainframe systems and the OS/2200/MVS operating system 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. 14 The Company's communications network is made up of several discrete networks; each designed for a different purpose. NDC maintains three primary networks: a dial-up, short transaction network called FASTNET; a private 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. Competition The most significant competitive factors related to the Company's services are quality, value-added features, functionality, price and reliability of service. Potential competition in the healthcare EDI and transaction processing market arises from companies like NDC Health Information Services that are similarly specialized, and also from companies involved in other, more highly developed sectors of the EDI transaction processing market. Such companies could focus more attention on the healthcare EDI transaction processing market as it develops. The emergence of the Internet as a distribution channel is providing a competitive shift in the marketplace. Factors influencing competition in the healthcare EDI market and transaction processing market include (1) compatibility with the provider's software and inclusion in practice management software products, (2) in the case of the pharmacy market, relationships with major pharmacy chains, and (3) relationships with third-party payors and managed care organizations. The Company believes that the breadth, price and quality of its services are the most significant factors in developing and maintaining relationships with its customers. Potential competition in the electronic commerce market arises not only from companies like NDC eCommerce that are similarly specialized, but also from companies that internally perform processing or other related services offered by the Company. In addition, the Company believes that recently enacted changes in telecommunications and other laws and developments regarding the Internet and other technologies related to electronic commerce may result in competition from entities with access to significant capital and management resources. The Company creates a differentiated competitive position in its product areas by offering a variety of value-added solutions to its customers. These enhanced services involve 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, is a positive factor pertaining to the competitive position of the Company. 15 Research and Development During fiscal 1999, 1998 and 1997, the Company expensed approximately $3.9 million, $10.6 million (plus a non-recurring charge of $67.0 million described below) and $13.2 million, respectively, on activities relating to the development and improvement of new and existing products, services and techniques. Research and development costs for fiscal 1998 includes $67.0 million determined by an independent third party valuation representing in- process research and development activities acquired through the Source acquisition. These costs were not capitalizable and were appropriately charged to expense under generally accepted accounting principles (see Note 4 to the Consolidated Financial Statements on Page A- 28 of this report). Employees As of May 31, 1999 the Company and its subsidiaries had approximately 6,000 employees. 16 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 $3.4 million mortgage on this facility which the Company assumed. In addition to the above facilities, the Company leases or rents a total of 124 other facilities. Of these 124, 25 are regional operating centers and 99 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. In recent years the Company has significantly upgraded and expanded 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 14 of the Notes to the Consolidated Financial Statements on page A- 45 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 17 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 June 1992; 60 President, Chief Executive Officer and Chief Operating Officer of the Company since May 1992; director of John H. Harland Co. and Protective Life Corporation. Mr. Yellowlees has been a director of the Company since April 1985. Robert R. Brown President, Information Solutions Group since July 1999; 55 General Manager, Information Solutions Group from December 1997 to June 1999; President and Chief Operating Officer, Walsh America from January 1995 to December 1997; Senior Vice President, Information Services and Chief Information Officer FoxMeyer Corporation from 1992 to January 1995 Thomas M. Dunn Chief Operating Officer, NDC eCommerce since March 1999; 42 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. Paul R. Garcia Chief Executive Officer, NDC eCommerce since July 1999; 46 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 Services 47 since August 1998; Executive Vice President of First Data Corporation from 1992 to 1998.
18 Kevin C. Shea Chief Financial Officer of the Company since May 1998; 49 Executive Vice President, Corporate Strategy & Business Development from June 1996 to May 1998; General Manager, Integrated Payment Systems, from September 1992 to May 1996 and Executive Vice President, National Data Payment Systems, Inc. from December 1990 through August 1992. David H. Shenk Controller and Chief Accounting Officer of the Company 51 since January 1998; Corporate Controller, Rollins, Inc., 1992-1997 Suellyn P. Tornay Acting General Counsel since April 1999; various 38 management positions in the Legal department since January 1987.
19 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 Footnote 2 on page 25 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-17 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-17 of this report. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Financial statements and supplementary information appears on pages A-18 to A-48 of this report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- None. 20 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 1999 Annual Meeting of Stockholders to be held on October 28, 1999. Certain information relating to executive officers of the Company appears at pages 16 to 17 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 1999 Annual Meeting of Stockholders to be held on October 28, 1999. 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 1999 Annual Meeting of Stockholders to be held on October 28, 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Neil Williams, a Director of the Company, is a partner of Alston & Bird LLP (attorneys and counsel for the Company). The Company paid Alston & Bird LLP approximately $726,186, $830,700 and $1,371,600 in fiscal 1999, 1998 and 1997, respectively for legal services rendered in connection with numerous matters. 21 PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a)(1) 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 for each of the three fiscal years ended May 31, 1999. Consolidated Balance Sheets at May 31, 1999 and 1998. Consolidated Statements of Changes in Shareholders' Equity for each of the three fiscal years ended May 31, 1999. Consolidated Statements of Cash Flows for each of the three fiscal years ended May 31, 1999. Notes to Consolidated Financial Statements. Report of Independent Public Accountants (a)(2) 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.) (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 22 (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) 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.) (v) 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.) (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.) 23 (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. (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. (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. 24 Executive Compensation Plans and Arrangements (viii) 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.) (ix) 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.) (x) 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). (xi) 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.) (xii) 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). (xiii) 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). (xiv) 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). (xv) 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). (xvi) 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). (xvii) 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). (xviii) 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). 25 (xix) 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). (xx) 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). (xxi) 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). (xxii) 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). (xxiii) 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). (xxiv) 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). (xxv) 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). (xxvi) Employment Agreement dated December 10, 1997 between Robert Brown and Source Informatics, Inc. (xxvii) Amendment dated May 31, 1999 to the Employment Agreement effective June 1, 1997 between Robert A. Yellowlees and the Registrant. (xxviii) 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). (xxix) Amendment to the 1984 Non-Employee Director Stock Option Plan effective October 22, 1998. 26 (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (27) Financial Data Schedule (for SEC use only). (99.1) Private Securities Litigation Reform Act Of 1995 Safe Harbor Compliance Statement For Forward-Looking Statements. (b) None. (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. 27 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/ Kevin C. Shea --------------------- Kevin C. Shea Chief Financial Officer (Principal Financial Officer) By: /s/ David H. Shenk ---------------------- David H. Shenk Controller (Chief Accounting Officer) Date: August 23, 1999 28 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 16, 1999 - ------------------------ Chief Executive Officer Robert A. Yellowlees /s/ Edward L. Barlow Director August 16, 1999 - -------------------- Edward L. Barlow /s/ J. Veronica Biggins Director August 16, 1999 - ----------------------- J. Veronica Biggins /s/ James B. Edwards Director August 16, 1999 - ---------------------- James B. Edwards /s/ Neil Williams Director August 16, 1999 - ------------------ Neil Williams
29 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, 1999............................................................................... A-18 Consolidated Statements of Cash Flows for each of the three years ended May 31, 1999..................................................................................... A-19 Consolidated Balance Sheets at May 31, 1999 and 1998.................................................. A-20 Consolidated Statements of Changes in Shareholders' Equity for each of the three years ended May 31, 1999............................................................... A-21 Notes to Consolidated Financial Statements............................................................ A-22 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 Consent of Independent Public Accountants.......................................................... A-53
Selected Consolidated Financial Data (In thousands, except per share data)
1999 1998 1997 1996 1995 ------------------------------------------------------------------------------- Revenue: Health Information Services $455,594 $ 357,498 $267,488 $ 210,164 $175,529 eCommerce 329,312 291,546 257,679 180,924 158,378 ------------------------------------------------------------------------------- Total $784,906 $ 649,044 $525,167 $ 391,088 $333,907 Operating Income (Loss) $133,006 ($25,896) $ 60,852 ($14,830) $ 29,645 Net Income (Loss) $ 71,437 ($61,326) $ 29,398 ($11,845) $ 18,642 Diluted Earnings (Loss) Per $ 2.02 ($1.90) $ .91 ($.40) $ .67 Share Dividends Per Share $ .30 $ .30 $ .30 $ .30 $ .30 Total Assets $764,928 $ 731,215 $626,322 $ 442,351 $347,663 Long-Term Obligations $190,177 $ 180,541 $165,388 $ 23,329 $ 44,932 Total Shareholders' Equity $409,094 $ 347,935 $323,249 $ 283,735 $174,715
The Company incurred 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 $94.3 million, $70.4 million and $32.9 million in fiscal 1998, 1997 and 1996, respectively. Net income excluding these charges was $49.9 million or $1.48 per share, $39.8 million or $1.23 per share, and $21.0 million or $0.67 per share in fiscal 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 High Low Per Share - ------------------------------------------------------------------------------------------ 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 Fiscal Year 1998 First Quarter $46.50 $36.31 $.075 Second Quarter 44.25 33.75 .075 Third Quarter 44.63 32.13 .075 Fourth Quarter 46.00 35.50 .075
The number of shareholders of record as of August 10, 1999 was 4,022. 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. Results of Operations General National Data Corporation ("NDC" or "the Company") is a leading provider of high volume information services and systems to the health care and electronic commerce markets. The Company operates in two principal business segments: NDC Health Information Services and NDC eCommerce. NDC Health Information Services provides a large variety of electronic information products and services to numerous segments of the health care industry. The Company's products include electronic claims processing, claims adjudication and payment systems, funding capabilities, billing services, accounts receivable resolution, business office management services, practice management systems and clinical database information. The Company provides these products and services to pharmacies, pharmaceutical manufacturers, dentists, physicians, hospitals, integrated delivery systems, managed care organizations, payers, government health care agencies, distributors, clinics, nursing homes and internet portals. These solutions assist the Company's clients 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. Our health information network moves vast amounts of data throughout the healthcare community, providing value-added content all along the way. NDC eCommerce is a worldwide provider of a wide range of value-added end- to-end electronic commerce and payment processing solutions to the retail, hospitality, automotive, health care, university, cable providers, cellular telephone providers and government markets. 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, Internet-based on-line banking 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 The following tables are a summary of the Company's results of operations as reported and excluding the effects of non-recurring charges (In millions, except per share data):
1999 vs. 1998 1998 vs. 1997 1999 1998 1997 Change Change - ----------------------------------------------------------------------------------------------- As Reported Revenue $ 784.9 $649.0 $ 525.2 $ 135.9 21% $ 123.8 24% Operating Income (Loss) 133.0 (25.9) 60.9 158.9 * (86.8) * Net Income (Loss) 71.4 (61.3) 29.4 132.7 * (90.7) * Diluted Earnings (Loss) Per Share 2.02 (1.90) 0.91 3.92 * (2.81) * Excluding Non-recurring Charges Revenue $ 784.9 $649.0 $ 525.2 $ 135.9 21% $ 123.8 24% Operating Income 133.0 94.3 70.4 38.7 41% 23.9 34% Net Income 71.4 49.9 39.8 21.5 43% 10.1 25% Diluted Earnings Per Share 2.02 1.48 1.23 0.54 36% 0.25 20%
* - percentage change deemed not meaningful The Company incurred non-recurring charges of $120.2 million and $9.5 million in fiscal 1998 and 1997, respectively. After-tax, these charges were $111.2 million or $3.38 per share and $10.4 million or $0.32 per share in fiscal 1998 and 1997, respectively. In general, these charges were incurred in connection with mergers and related restatements that occurred during each of the fiscal years presented. The components of the charges include merger transaction costs, asset impairment losses, and 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. Restructuring activities reflect charges for severance and other related costs associated with plans to reduce staffing in areas of redundant operations and activities. For more detailed discussion of the non-recurring charges, refer to Note 12 to the Consolidated Financial Statements. The remainder of the results of operations discussion will exclude the impacts of non-recurring charges, as the Company believes that this will provide for more meaningful comparisons. A-4 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 $455.6 58% $357.5 55% 27% NDC eCommerce 329.3 42% 291.5 45% 13% ---------------------------------------------------------------------- Total Revenue $784.9 100% $649.0 100% 21% ====================================================================== Depreciation and Amortization: NDC Health Information Services $ 33.8 59% $ 27.3 56% 24% NDC eCommerce 20.8 37% 19.2 40% 8% All Other and Corporate 2.1 4% 1.9 4% 11% ---------------------------------------------------------------------- Total Depreciation and Amortization $ 56.7 100% $ 48.4 100% 17% ======================================================================
The Company's earnings before interest, taxes, depreciation and amortization (EBITDA) is defined as operating income plus depreciation and amortization. This statistic and its results as a percentage of revenue may not be comparable to similarly titled measures reported by other companies. However, management believes this statistic is a relevant measurement and provides a comparable cash earnings measure, excluding the impact of the amortization of acquired intangibles, potential timing differences associated with capital expenditures and the related depreciation charges and non-recurring charges. (In millions and excluding non-recurring charges)
1999 1998 Change ------------------------- ------------------------- ------------ EBITDA: NDC Health Information Services $ 98.9 52% $ 69.5 49% 42% NDC eCommerce 100.6 53% 83.8 59% 20% All Other and Corporate (9.8) (5%) (10.6) (8%) (8%) -------------------------------------------------------------------------- Total EBITDA $189.7 100% $142.7 100% 33% ========================================================================== Income before Income Taxes (IBIT): NDC Health Information Services $ 64.4 55% $ 40.1 50% 60% NDC eCommerce 74.8 65% 60.9 76% 23% All Other and Corporate (23.0) (20%) (20.5) (26%) 12% -------------------------------------------------------------------------- Total IBIT $116.2 100% $ 80.5 100% 44% ==========================================================================
A-5 Consolidated Total revenue for fiscal 1999 was $784.9 million, an increase of $135.9 million (21%) 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 $71.8 million (22%) in fiscal 1999 from fiscal 1998. The increase was primarily a result of increased operating costs associated with the 21% revenue growth. Total cost of service, as a percentage of revenue, increased from 50% in fiscal 1998 to 51% in fiscal 1999 due to increases in depreciation and amortization from increased capital expenditures for network and database infrastructure made during the period to support future revenue and profitability growth. Sales, general and administrative expenses ("SG&A") increased $25.3 million (11%) from the same period last 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 32% for fiscal 1999 from 35% for fiscal 1998. SG&A 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 41% from $94.3 million in fiscal 1998 to $133.0 million in fiscal 1999. As a percentage of revenue, the Company's operating income margin increased by 17% to 16.9% in fiscal 1999 from 14.5% in fiscal 1998, excluding non-recurring charges. These improvements reflect improved margins in operations gained through improved efficiencies. EBITDA for fiscal 1999 increased by $47.0 million or 33% to $189.7 million due to the 21% revenue increase and significant productivity improvements which led to the Company's margin improvements. The EBITDA margin percentage was 24.2% in fiscal 1999, compared to 22.0% in fiscal 1998. IBIT for fiscal 1999 improved to $116.2 million from $80.5 million in fiscal 1998, a 44% increase. Total other expense increased $3.0 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. NDC Health Information Services NDC Health Information Services revenue growth (27%) in fiscal 1999 was a result of increases from internally developed products and services, primarily electronic transaction processing, physician practice management and business management services provided to hospitals and physicians, 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 acquisitions of two healthcare information A-6 management businesses, Source Informatics Inc. ("Source") and a subsidiary of Pharmaceutical Marketing Services, Inc. ("PMSI"). EBITDA for fiscal 1999 was $98.9 million compared to $69.5 million in fiscal 1998. This 42% growth in EBITDA was due to the 27% increase in revenue and substantial productivity improvements as measured by the EBITDA margin percentage that improved from 19.4% in fiscal 1998 to 21.7% 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 continue to increase because revenues are growing at a faster rate than these expenses, including synergies realized from the integration of acquisitions. IBIT in fiscal 1999 grew by 60% to $64.4 million from $40.1 million in fiscal 1998. NDC eCommerce The NDC eCommerce revenue increase (13%) reflects the impact of growth of the industry, programs directed at new vertical industry offerings and new distribution channels (including the Internet) 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 $100.6 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 28.7% in fiscal 1998 to 30.5% 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% from $20.5 million in fiscal 1998 to $23.0 million in fiscal 1999 due primarily to support operations growth (21% revenue increase) and various compliance activities, partially offset by continued productivity improvement. All Other and Corporate expense percentage improved by 9% from 3.2% of total revenue in fiscal 1998 to 2.9% in fiscal 1999 due to strong productivity improvements. A-7 Fiscal Years 1998 and 1997 The following tables provide comparisons of the Company's results of operations for fiscal years 1998 and 1997 and exclude non-recurring charges: (In millions and excluding non-recurring charges)
1998 1997 Change ------------------------- ------------------------- ------------ Revenue: NDC Health Information Services $357.5 55% $267.5 51% 34% NDC eCommerce 291.5 45% 257.7 49% 13% -------------------------------------------------------------------------- Total Revenue $649.0 100% $525.2 100% 24% ========================================================================== Depreciation and Amortization: NDC Health Information Services $ 27.3 56% $ 18.0 45% 52% NDC eCommerce 19.2 40% 20.5 51% (6%) All Other and Corporate 1.9 4% 1.8 4% 6% -------------------------------------------------------------------------- Total Depreciation and Amortization $ 48.4 100% $ 40.3 100% 20% ========================================================================== EBITDA: NDC Health Information Services $ 69.5 49% $ 54.3 49% 28% NDC eCommerce 83.8 59% 68.0 61% 23% All Other and Corporate (10.6) (8%) (11.6) (10%) (9%) -------------------------------------------------------------------------- Total EBITDA $142.7 100% $110.7 100% 29% ========================================================================== IBIT: NDC Health Information Services $ 40.1 50% $ 35.1 56% 14% NDC eCommerce 60.9 76% 45.2 72% 35% All Other and Corporate (20.5) (26%) (17.6) (28%) 16% -------------------------------------------------------------------------- Total IBIT $ 80.5 100% $ 62.7 100% 28% ==========================================================================
Consolidated Total revenue for fiscal 1998 was $649.0 million, an increase of $123.8 million (24%) from fiscal 1997 due to increases in customers, transaction volumes and increased added value to our customers in both our business segments and the full year effect of acquisitions. Cost of service increased $61.1 million (23%) in fiscal 1998 from fiscal 1997. The increases were primarily a result of increased operating costs associated with the 24% revenue growth. Total cost of service, as a percentage of revenue remained constant at 50% for both fiscal 1998 and 1997. The Company continues to leverage its computer operations, telecommunication infrastructure, and investments in new market opportunities. A-8 SG&A expenses increased $38.8 million (20%) from the same period last year. This increase was primarily due to the 24% revenue growth and expenses associated with continuing investments in product development, distribution channel expansion and the development of the NDC Health Information Services branding program for future revenue growth. However, as a percentage of revenue, these expenses decreased to 35% for fiscal 1998 from 36% for fiscal 1997. SG&A expenses decreased as a percentage of revenue since revenues are growing at a faster rate than these expenses, including synergies realized from the integration of acquisitions. Operating income, excluding non-recurring charges, increased from $70.4 million in fiscal 1997 to $94.3 million (34%) in fiscal 1998. As a percentage of revenue, the Company's operating income margin increased 8% to 14.5% in fiscal 1998 from 13.4% in fiscal 1997, excluding non-recurring charges. These improvements reflect improved margins in operations and profitability through execution of strategies to reposition the base business and investments in new market opportunities. EBITDA for fiscal 1998 increased by $32.0 million or 29% to $142.7 million due to the 24% revenue increase and productivity improvements. EBITDA margin percentage was 22.0% in fiscal 1998, compared to 21.1% in fiscal 1997. IBIT for fiscal 1998 improved to $80.5 million from $62.7 million in fiscal 1997, a 28% increase. Total other expense increased $6.2 million for fiscal 1998 compared to 1997. This increase was primarily the result of lower interest earnings due to lower average funds available for investment and increased interest expense. The interest expense increase reflects the full-year impact of the interest expense on the $143.8 million in convertible debt issued in fiscal 1997 (see Note 9 to the Consolidated Financial Statements) and borrowings on the Company's line of credit during fiscal 1998 to finance acquisition activities. NDC Health Information Services NDC Health Information Services revenue growth (34%) in fiscal 1998 was a result of increases from existing products and internally developed new products and services. In addition, revenue growth resulted from the impact of the third quarter fiscal 1998 acquisitions of two healthcare information management businesses, Source and PMSI. EBITDA for fiscal 1998 was $69.5 million compared to $54.3 million in fiscal 1997. This 28% growth in EBITDA was due to the 34% increase in revenue and was partially offset by deterioration in EBITDA margin percentage, which was 19.4% in fiscal 1998, compared to 20.3% in fiscal 1997. This deterioration was the result of added expenditures and investments for future revenue and profitability growth, as well as the costs associated with the PHSS pooling. IBIT in fiscal 1998 grew by 14% to $40.1 million from $35.1 million in fiscal 1997. A-9 NDC eCommerce The NDC eCommerce revenue increase (13%) reflects the impact of growth of the industry, new programs and new distribution channels. This growth included 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 1998 was $83.8 million compared to $68.0 million in fiscal 1997. This 23% growth in EBITDA was due to the 13% increase in revenue and productivity improvements as measured by the EBITDA margin percentage that improved from 26.4% in fiscal 1997 to 28.7% in fiscal 1998. The Company improved its EBITDA margin percentage through improved efficiencies in its computer operations and telecommunications infrastructure areas. This margin percentage continues to improve because revenues are growing at a faster rate than these operating expenses are. IBIT in fiscal 1998 grew by 35% to $60.9 million from $45.2 million in fiscal 1997. All Other and Corporate All Other and Corporate is comprised mostly of corporate operations. This expense grew by 16% from $17.6 million in fiscal 1997 to $20.5 million in fiscal 1998 due primarily to the 24% revenue increase partially offset by productivity improvements. The All Other and Corporate expense percentage improved from 3.4% of total revenue in fiscal 1997 to 3.2% in fiscal 1998 due to productivity improvements. Liquidity and Capital Resources Cash flow generated from operations provides the Company with a significant source of liquidity to meet its needs. Net cash provided by operating activities increased 134% to $114.6 million for fiscal 1999, from $49.0 million in fiscal 1998. Cash provided by operations before changes in working capital was $154.7 million for fiscal 1999, an increase of $58.3 million (60%) compared to the prior year. This difference is primarily driven by the increase in earnings, depreciation and amortization, and changes in deferred taxes. Cash was required in fiscal 1999 to fund net changes in working capital of $40.0 million, compared to $47.4 million for fiscal 1998. The changes in working capital resulted primarily from increases in accounts receivable due to revenue growth, the timing and payments on accounts payable and accrued liabilities and income taxes. The changes due to accounts payable and accrued liabilities primarily relate to the timing of payments on accounts payable and income tax liabilities, and an increase in deferred revenue resulting from increased revenue growth. As a result of tax law changes (relating to the ability to utilize net operating loss carryforwards) enacted after May 31, 1999 but applicable to fiscal year 1999, the company is expecting a net income tax refund of approximately $8.3 million for fiscal 1999 compared to the net refund of $0.6 million that the Company recorded for fiscal 1998. A-10 For fiscal year 1999, cash used in investing activities decreased to $44.5 million, compared to $85.9 million in fiscal year 1998. This was primarily due to reduced acquisitions ($8.1 million in fiscal 1999 versus $63.1 million in fiscal 1998). The Company continues to invest in capital expenditures related to growth in the business and acceleration of certain strategic initiatives. These capital expenditures were $37.6 million in fiscal year 1999 compared to $22.8 million in fiscal year 1998. Including the effects of our capital leasing program, our capital expenditures commitments increased by 73.2% to $57.5 million in fiscal year 1999 compared to $33.2 million in fiscal 1998. In fiscal 1999, the Company completed one acquisition for an aggregate cash consideration of approximately $8.1 million, net of cash acquired. During fiscal 1998, the Company completed six acquisitions for an aggregate cash purchase price of approximately $63.1 million, net of cash acquired, with additional funding provided by the issuance of Common Stock valued at approximately $92.7 million. The Company has financed its acquisition program through cash flows from operations, equity, borrowings on its Line of Credit and debt offerings. Net cash used by financing activities increased to $69.1 million for fiscal 1999 from $21.2 million provided by financing activities in the prior year. The Company repaid $40.0 million on its Line of Credit from cash earnings. In addition, the Company made net principal payments under capital lease arrangements and notes payable of $13.7 million and $10.2 million in fiscal 1999 and 1998, respectively. Dividends of $10.1 million and $9.0 million were paid during fiscal 1999 and 1998, respectively. The Company has a committed, unsecured $125.0 million revolving line of credit that expires in December 2002. At May 31, 1999, there was $35.0 million outstanding under the Line of Credit. The Company also has a $15.0 million uncommitted line of credit to fund working capital requirements, under which there were no amounts outstanding at May 31, 1999. Management believes that its current level of cash and borrowing capacity, along with future cash flows from operations, are sufficient to meet the needs of its existing operations and its planned requirements for the foreseeable future. The Company regularly evaluates cash requirements for current operations, commitments, development activities and strategic acquisitions. The Company may elect to raise additional funds for these purposes, either through the issuance of additional debt or equity or otherwise, as appropriate. Market Risk The Company is not exposed to material market risk from changes in interest rates, foreign currency rates and/or Company equity prices. The Company has a line of credit which has a variable interest rate based on the London Interbank Offered Rates ("LIBOR"). 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. A-11 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. 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. Year 2000 Readiness Introduction The Year 2000 issue is the result of the potential for computer programs to improperly interpret dates in the year 2000 and beyond. Certain of the Company's computer systems used for product or internal use that have time/date- sensitive software and hardware may misinterpret dates resulting in a system failure or miscalculation. The Company presently believes that, with modification to existing computer systems as scheduled, the Year 2000 issue should not pose significant operational problems for the Company's products and internal systems, as so modified and converted. The Company has a corporate Program Office to define, evaluate and conduct audits of the Company and its progress toward Year 2000 readiness. The Company also has a Year 2000 Senior Advisory Board comprised of members of senior management and a Year 2000 Task Force comprised of representatives from various departments from each of the Company's operating units. The Task Force is charged with evaluating the Company's Year 2000 efforts, managing implementation teams, and regularly reporting results to the corporate Program Office. The corporate Program Office monitors the progress of the operating units in their implementation plans to resolve Year 2000 issues, tracks dependencies and provides reports to the Senior Advisory Board. The Senior Advisory Board is charged with evaluating the progress reported by the corporate Program Office and addressing any significant issues as they arise. State of Readiness The corporate Program Office has established an implementation plan to address the Year 2000 issue with respect to its information technology systems, hardware and software products and non-information technology products. The implementation plan phases are stated and defined as follows: Phase I - Inventory/Assessment. The Company listed and classified software, -------------------- hardware, networks, products, services, facilities, environment, third party relationships and any A-12 additional items that could be affected by the Year 2000 issue. For each item on the inventory, the Company assessed the likelihood of meeting the target dates to be corrected for Year 2000 data processing and ready for testing. This phase also included developing plans to manage each item on the inventory. Certain of the Company's products/services utilize third party software and/or hardware products in conjunction with proprietary software. In these cases, due diligence is being performed on the third party products and the Company has made or is in the process of making clients aware of upgrades/replacements that may be required if the third party products are not compliant. The Company has completed this phase for all systems. Phase II - Remediation. Determine and implement methodology for correcting Year ----------- 2000 issues via coding, upgrades, replacements, etc. and deliver to testing. The Company's major systems in the core operational networks were substantially remediated by June 30, 1999. These networks include communications and transaction processing, database management for healthcare applications, electronic commerce including credit, debit, and check, and NDC Health Information Services' pharmacy transaction submission, eligibility verification, data capture and editing. Remediation of systems in NDC Health Information Services' EDI services was substantially completed by June 30, 1999, with a limited number of systems requiring extended migration, installation or conversion activity beyond this date. Phase III - Internal Testing. Perform testing based upon developed plans as a ---------------- result of the remediation phase, upgrades and/or testing of indicated Year 2000 ready third-party applications or services. At the completion of this phase, the Company's computer systems are deemed to be Year 2000 ready subject to implementation. The Company's Phase III is substantially completed for its core operational networks. The Company's NDC Health Information Services' EDI systems are substantially complete. Final testing efforts are planned with the majority slated for completion by August 31, 1999. Phase IV - External Testing. Perform end-to-end connection point testing with ---------------- third parties that the Company relies upon for certain operating elements via interfaces and also service providers as required. The Company targets this phase to be completed by September 30, 1999 for all key systems. The Company anticipates that continued testing with third parties may be required past the September date based on their availability. Testing is being performed as required and is dependent on third parties. The Company continues to actively pursue these dependencies to schedule required testing. Phase V - Implementation and Proactive Management. Transition Year 2000 ready --------------------------------------- computer systems into a production/live environment. The Company estimates completion of this phase by October 31, 1999. As testing is successfully completed, systems are implemented into a production/live environment. Management believes that its key systems will be Year 2000 ready by October 31, 1999. A-13 The following status chart indicates the approximate percentage of work completed for the mission-critical systems of the following material business units by phase as of July 31, 1999:
Phase I Phase II Phase III Phase IV Phase V ------------ ------------ ------------ ------------ ------------ PRODUCT LINE - ------------------------------ Target Date 2/28/99 6/30/99 8/31/99 9/30/99 10/31/99 - ------------------------------ ------- ------- ------- ------- -------- Health Information Services EDI Services 100% 97% 90% 83% 92% Information Solutions 100% 100% 100% 90% 85% eCommerce 100% 99% 95% 90% 92% Corporate Information Systems 100% 100% 100% 100% 100%
Costs to Address As it relates to internal computer systems, the Company is incurring internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare its systems for the Year 2000. Given the nature of the Company's ongoing system development activities throughout its businesses, it is difficult to quantify, with specificity, all of the costs and capital expenditures being incurred to address this issue. A significant portion of these costs is not likely to be incremental costs to the Company, but will represent the redeployment of existing information technology resources. The Company's employees have performed the majority of the work completed thus far on the implementation plans. The costs incurred to date, excluding capital expenditures, are approximately $20 million. The Company's estimated costs to complete its Year 2000 compliance program are estimated to be approximately $5 million in fiscal year 2000. The capital expenditures incurred to date are approximately $12 million and estimated capital expenditures to complete are estimated to be an additional $1 million. These capital expenditures amounts include only those initiatives undertaken specifically to resolve Year 2000 issues. However, some Year 2000 issues were successfully corrected by other capital projects that addressed many of the Company's initiatives such as consolidation of information, productivity improvements and leveraging fixed costs. The total cost estimate for the implementation plan may be revised because the plan is constantly evaluated and revised as a result of many factors. These factors include, but are not limited to, the results of any phase of the implementation plan, customer requirements, or recommendations by contractors retained by the Company. These cost estimates also do not include the cost of executing the contingency planning and proactive maintenance as the Year 2000 approaches. Currently, the Company is expecting this cost to be an additional $3-$5 million. The Company does not expect that the opportunity costs of executing the implementation plan will have a material effect on the financial condition of the Company or its results of operations. A-14 Risks The Year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties upon which the Company relies. Accordingly, the Company is requesting assurances from certain software vendors from which it has acquired, or from which it may acquire software, that the software will correctly process all date information at all times. In addition, the Company is querying certain of its customers and suppliers as to their progress in identifying and addressing problems that their computer systems will face in correctly processing date information as the Year 2000 approaches and is reached. The Company is heavily reliant upon customers and other third parties in the health care, banking and credit card industries, in terms of electronic interfaces. Failure to appropriately address the Year 2000 issue by major customers or suppliers or a material percentage of the smaller customers could have a material adverse effect on the financial condition and results of operations of the Company. Testing is being performed as required and is dependent on third parties. The Company continues to actively pursue these dependencies to schedule required testing. In order for the testing phase of the Year 2000 plan to be completed, the Company is reliant upon its customers and other third-party connection points to prepare their systems for testing. The Company could be affected if a significant number of customers delay testing or conversions until the end of 1999. The Company has been active in advising customers and business partners of their obligation and the Company continues to evaluate the impact of those customers who have not yet coordinated with the Company for upgrades, certification/verification and testing. The customers with the greatest revenue impact have been identified and their testing/certification process has been analyzed. Testing has been completed and/or scheduled for substantially all key systems. If coordination of a preset testing time is not possible, the revenue impact for the accommodation of last minute testing is being evaluated. The goal is to ensure that products with significant revenues are fully ready, tested and implemented before October 31, 1999, so that the Company's overall revenue is not materially impacted. The Company's business is also heavily reliant upon external suppliers to provide certain operating elements of its business. Some of these providers include telecommunication services, computer systems, banks and utility companies. Due diligence continues to be performed on suppliers to the Company as described in Phases III, IV and V. Inquiries are made regarding suppliers' Year 2000 efforts and contingency plans are developed as necessary. However, the Company exerts no control over the efforts of these companies to become Year 2000 compliant. The services provided by these parties are critical to the operations of the Company and the Company is heavily reliant upon these parties to successfully address the Year 2000 issue. Therefore, if any of these parties fail to provide the Company with services, the Company's ability to conduct business could be materially impacted. The result of such impact may have a material adverse effect on the financial condition and results of operations of the Company. A-15 Contingency Plans The corporate Program Office is working with each business unit to develop contingency plans based on corporate Program Office guidelines. There are two types of plans. All of the Company's major business units have hardware/software business continuity plans in case a supplier of hardware/software products or internally developed systems used in the business does not have a Year 2000 version in time for implementation and testing. A second type of contingency plan focuses on emergency recovery plans to support the date change event. Each business unit contingency plan calls for obtaining goods or services from alternative sources, utilizing alternative methods to perform functions, and establishing command centers and communication procedures to manage the actual rollover to the Year 2000. The Company's units have developed staffing support plans to ensure the appropriate on-site staff are in place to implement any emergency recovery plan and address any issues that may arise. It is expected that these plans will be updated throughout 1999, as the Company completes testing with third parties and gains a better understanding of external third party risks. The Company's Year 2000 readiness activities are being regularly monitored and evaluated. Contingency and proactive maintenance plans will address key third party dependencies, facilities, utilities and staffing. On-site audits and walk throughs are being performed to evaluate the progress of the operating units toward meeting their goals. The results of these audits and walk throughs are compared to the implementation plan and presented to the Senior Advisory Board. Summary The Company is working to ensure that its systems are Year 2000 ready this year through the steps taken and planned to be taken, as described above. The Company presently believes that, with modification to existing computer systems as scheduled, the Year 2000 issue should not pose significant operational problems for the Company's products and internal systems, as so modified and converted. There are no assurances that the Company will identify all date- handling problems in its business systems or those of its customers and suppliers in advance of their occurrence or that the Company will be able to successfully remedy all Year 2000 readiness issues that are discovered. To the extent that the Company is unable to resolve its Year 2000 issues prior to January 1, 2000, operating results could be adversely affected. In addition, the Company could be adversely affected if other entities (i.e. vendors or customers) not affiliated with the Company do not appropriately address their own Year 2000 issues. A-16 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. This document may contain forward-looking statements concerning the Company's operations, current and future performance and financial condition. These statements include statements regarding the intent, belief, or current expectations of the Company and members of its management team and involve risks and uncertainties such as continued and growing product demand, market and customer acceptance, the effect of economic conditions and competition on the Company, pricing, development difficulties involving new and existing products and services, any failure to comply with healthcare laws, regulations, changes in government laws and regulations, the ability to consummate and integrate acquisitions, the impact of the Year 2000 issue directly affecting the Company, third party providers and customers or governmental units, including Medicare/ Medicaid customers and other risks detailed in Exhibit 99.1 to the Company's Annual Report on 10-K for the fiscal year ended May 31, 1999 and other Company filings with the Securities and Exchange Commission. As a result of these factors, actual results could differ materially from those anticipated in the forward-looking statements. The Company undertakes no obligation to revise any of these statements to reflect future circumstances or the occurrence of unanticipated events. A-17 CONSOLIDATED STATEMENTS OF INCOME (LOSS) NATIONAL DATA CORPORATION AND SUBSIDIARIES
(in thousands except per share data) - ---------------------------------------------------------------------------------------------------- Year Ended May 31, 1999 1998 1997 ------------ ------------- ----------- Revenue $ 784,906 $ 649,044 $ 525,167 - ---------------------------------------------------------------------------------------------------- Operating expenses: Cost of service 397,211 325,397 264,253 Sales, general and administrative 254,689 229,380 190,559 Non-recurring charges - 120,163 9,503 - ---------------------------------------------------------------------------------------------------- 651,900 674,940 464,315 - ---------------------------------------------------------------------------------------------------- Operating income (loss) 133,006 (25,896) 60,852 - ---------------------------------------------------------------------------------------------------- Other income (expense): Interest and other income 2,390 1,685 2,686 Interest and other expense (15,430) (12,870) (8,614) Minority interest in earnings (3,809) (2,626) (1,694) - ---------------------------------------------------------------------------------------------------- (16,849) (13,811) (7,622) - ---------------------------------------------------------------------------------------------------- Income before income taxes 116,157 (39,707) 53,230 Provision for income taxes 44,720 21,619 23,832 - ---------------------------------------------------------------------------------------------------- Net income (loss) $ 71,437 $ (61,326) $ 29,398 =========================================== Earnings (loss) per common and common equivalent share: Basic $ 2.12 $ (1.90) $ 0.96 ------------------------------------------- Diluted $ 2.02 $ (1.90) $ 0.91 ===========================================
The accompanying notes are an integral part of these Consolidated Financial Statements. A-18 CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL DATA CORPORATION AND SUBSIDIARIES (In thousands) - --------------------------------------------------------------------------------
Year Ended May 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss) $ 71,437 $ (61,326) $ 29,398 Adjustments to reconcile net income (loss) to cash provided by operating activities: Non-recurring charges - 110,340 6,578 Depreciation and amortization 30,241 23,890 25,800 Amortization of acquired intangibles and goodwill 26,472 24,469 14,514 Deferred income taxes 14,554 (9,353) 517 Minority interest in earnings 3,809 2,626 1,694 Provision for bad debts 5,300 4,353 1,540 Other, net 2,878 1,446 570 Changes in current assets and liabilities which provided (used) cash, net of the effects of acquisitions: Accounts receivable, net (33,109) (26,967) (16,916) Merchant processing working capital 1,488 (2,386) 3,913 Inventory (2,598) (2,597) (300) Prepaid expenses and other assets (1,604) (2,200) (3,192) Accounts payable and accrued liabilities (3,281) (8,525) (12,516) Deferred income 2,679 (2,248) (781) Income taxes (3,641) (2,491) 7,829 -------------------------------------- Net cash provided by operating activities 114,625 49,031 58,648 -------------------------------------- Cash flows from investing activities: Capital expenditures (37,570) (22,816) (19,009) Business acquisitions, net of cash acquired (8,055) (63,113) (161,299) Other, net 1,125 - 25 -------------------------------------- Net cash used in investing activities (44,500) (85,929) (180,283) -------------------------------------- Cash flows from financing activities: Net borrowings (repayments) under lines of credit (40,000) 42,417 8,303 Net principal payments under capital lease arrangements and notes payable (13,684) (10,196) (25,542) Net proceeds from the issuance of long-term debt - - 139,682 Net proceeds (purchases) of stock activities (1,198) 3,163 6,110 Distributions to minority interests (4,080) (5,118) (2,068) Dividends paid (10,109) (9,036) (9,143) -------------------------------------- Net cash (used) provided in financing activities (69,071) 21,230 117,342 -------------------------------------- Increase (decrease) in cash and cash equivalents 1,054 (15,668) (4,293) Cash and cash equivalents, beginning of period 3,241 18,909 23,888 -------------------------------------- Cash and cash equivalents, end of period $ 4,295 $ 3,241 $ 19,595 ======================================
The accompanying notes are an integral part of these Consolidated Financial Statements. A-19 CONSOLIDATED BALANCE SHEETS NATIONAL DATA CORPORATION AND SUBSIDIARIES (In thousands, except share and per share data) - --------------------------------------------------------------------------------
May 31, May 31, 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 4,295 $ 3,241 Billed accounts receivable 163,193 135,223 Unbilled accounts receivable 22,305 18,835 Allowance for doubtful accounts (10,728) (7,394) ----------- ----------- Accounts receivable, net 174,770 146,664 ----------- ----------- Income tax receivable 8,348 635 Inventory 7,927 5,253 Deferred income taxes 1,191 - Prepaid expenses and other current assets 16,297 16,333 ----------- ----------- Total current assets 212,828 172,126 ----------- ----------- Property and equipment, net 105,904 74,234 Intangible assets, net 424,324 458,223 Deferred income taxes 13,963 20,145 Other 7,909 6,487 ----------- ----------- Total Assets $ 764,928 $ 731,215 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 35,000 $ 75,000 Current portion of long-term debt 6,245 1,621 Obligations under capital leases 13,113 11,053 Accounts payable and accrued liabilities 71,821 73,115 Deferred income taxes - 92 Deferred income 30,258 25,216 ----------- ----------- Total current liabilities 156,437 186,097 ----------- ----------- Long-term debt 152,690 155,477 Obligations under capital leases 18,129 12,390 Other long-term liabilities 9,846 10,313 ----------- ----------- Total liabilities 337,102 364,277 ----------- ----------- Minority interest in equity of subsidiaries 18,732 19,003 Commitments and contingencies Shareholders' equity: Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issue - - Common stock, par value $.125 per share; 100,000,000 shares authorized, 33,953,031 and 33,791,534 shares issued, respectively. 4,244 4,224 Capital in excess of par value 345,639 344,019 Treasury stock, at cost, 175,442 and 159,200 shares, respectively (5,857) (5,980) Retained earnings 70,865 9,537 Deferred compensation (3,215) (1,854) Cumulative translation adjustment (2,582) (2,011) ----------- ----------- Total shareholders' equity 409,094 347,935 ----------- ----------- Total Liabilities and Shareholders' Equity $ 764,928 $ 731,215 =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. A-20
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY NATIONAL DATA CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) Common Stock Accumulated ----------------- Capital in Deferred Other Number Excess of Treasury Retained Compen- Comprehensive Total of Shares Amount Par Value Stock Earnings sation Income Equity ---------------------------------------------------------------------------------- Balance at May 31, 1996 29,697 $3,712 $212,557 $ - $59,872 ($142) ($753) $275,246 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income Net income 29,398 29,398 Foreign currency translation adjustment 26 26 ------------ Total Comprehensive income 29,424 ------------ Cash dividends ($.30 per share) (9,143) (9,143) Stock issued under employee stock plans 407 51 4,644 4,695 Stock issued under non-employee stock plans 14 2 201 203 Stock issued under restricted stock plans 34 4 1,188 (1,229) (37) Tax benefit from exercise of stock options 1,955 1,955 Stock issued for acquisitions 593 74 17,756 17,830 Stock issued in exchange for shareholders not 57 7 2,616 2,623 Amortization of deferred compensation 453 453 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at May 31, 1997 30,802 3,850 240,917 - 80,127 (918) (727) 323,249 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income Net loss (61,326) (61,326) Foreign currency translation adjustment (1,284) (1,284) ------------ Total Comprehensive income (62,610) ------------ Cash dividends ($.30 per share) (9,036) (9,036) PHSS conformity adjustment (228) (228) Treasury shares purchased (6,383) (6,383) Stock issued under employee stock plans 256 32 6,102 403 6,537 Stock issued under non-employee stock plans 27 3 375 378 Stock issued under restricted stock plans 44 6 1,732 (1,738) - Tax benefit from exercise of stock options 2,478 2,478 Stock issued for acquisitions 2,663 333 92,415 92,748 Amortization of deferred compensation 802 802 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at May 31, 1998 33,792 4,224 344,019 (5,980) 9,537 (1,854) (2,011) 347,935 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income Net income 71,437 71,437 Foreign currency translation adjustment (571) (571) ------------ Total Comprehensive income 70,866 ------------ Cash dividends ($.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 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements. A-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Nature of operations - The Company is primarily a provider of information - -------------------- processing services and systems to the health care and electronic commerce markets. In addition, the Company provides business management services to hospitals and physicians. 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 including the retroactive effect of all mergers which have been accounted for under the pooling-of-interests method of accounting. For fiscal 1997, the consolidated financial statements reflect Physician Support Systems, Inc.'s ("PHSS") financial position at June 30 and the results of its operations and cash flows for the years then ended. Consequently, PHSS' results of operations for the month of June 1997 have been included in both fiscal 1998 and 1997. Significant intercompany transactions have been eliminated in consolidation. Certain reclassifications have been made to the fiscal 1998 and 1997 consolidated financial statements to conform to the fiscal 1999 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. 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. Portions of the Company's revenues are earned as a percentage of amounts collected on behalf of its customers from patients and third-party payers. For customers where the amount and timing of collection of their accounts receivable can be reasonably estimated, the Company estimates the fees that it will invoice those customers upon collection of their accounts receivable and recognizes such revenues when substantially all services to be performed by the Company have been completed. 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, A-22 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. 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 12). In management's opinion, the long-lived assets, including property and equipment and intangible assets, are appropriately valued at May 31, 1999 and 1998. 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 8). 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, 1999 and 1998 (see Note 9). 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 A-23 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 (In thousands):
May 31, 1999 May 31, 1998 May 31, 1997 ------------------------------ ------------------ ---------------- Per Per Per --- --- --- Income Shares Shares Shares Share Shares Share ------ ------ ------ ------ ----- ------ ------ Basic EPS: Net income (loss) $71,437 33,725 $2.12 32,200 ($1.90) 30,571 $0.96 ------ ------- ------ Effect of Dilutive Securities: Stock Options --- 1,346 --- 1,691 ------------------ ------ ------ 71,437 35,071 32,200 32,262 Convertible debt 4,778 2,752 --- --- --------------------------------------------------------------------------- Diluted EPS: Income (loss) available to common stockholders plus assumed conversions $76,215 37,823 $2.02 32,200 ($1.90) 32,262 $0.91 ---------------------------------------------------------------------------
Basic and diluted earnings per share for the twelve months ended May 31, 1998 are the same, as the effect of any potentially dilutive securities and convertible debt is antidilutive due to the loss generated by the non-recurring charges. Net income (loss) available to common stockholders for basic and diluted earnings per share is the same for 1998 and 1997 as there is no adjustment for the impact of convertible securities since it is antidilutive. Recent accounting pronouncements The Company adopted Statement of Financial - -------------------------------- Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in fiscal year 1999. The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. The adoption of SFAS 131 did not have any effect on National Data Corporation's primary financial statements, but did affect the disclosure of segment information contained elsewhere herein (see Note 11). A-24 Note 2 - Business Acquisitions During fiscal 1999, 1998, and 1997, the Company completed the following acquisitions:
Date Ownership Business Acquired Percentage - --------------------------------------------------------------------------------------------------- 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% 1997 - ---- PHSS - Medical Intercept Systems Group * September 1996 100% Equifax Healthcare EDI Services, Inc. October 1996 100% PHSS - MARS Group * December 1996 100% Health Communication Services, Inc. January 1997 100% Electronic Data Systems Corporation's multi-client bank card processing business January 1997 100% Comerica Bank merchant portfolio January 1997 51% PHSS - Physician Accounts Management & Billing, Inc. * January 1997 100% PHSS - Physerv Solutions, Inc. * February 1997 100% Merchant Services U.S.A., Inc. March 1997 100% HealthTec April 1997 100%
* Acquired by PHSS prior to its merger with the Company on December 19, 1997. 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 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. A-25 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 12). 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. The aggregate price paid for the 1997 acquisitions was $185.7 million, consisting of cash of $161.7 million, common stock of $17.8 million and notes of $6.2 million. The net value of the tangible assets acquired was approximately $0.8 million, creating an excess of cost over tangible assets of $184.9 million. The intangible assets are being amortized over periods ranging from 5 to 25 years. A-26 The following unaudited pro forma information for the fiscal 1999 and 1998 purchase acquisitions discussed above has been prepared as if these acquisitions had occurred on June 1, 1997. The information is based on historical results of the separate companies and may not necessarily be indicative of the results that would have been achieved or of results that may occur in the future. The pro forma information includes the expense for amortization of goodwill and other intangible assets resulting from these transactions and interest expense related to financing costs but does not reflect any synergies or operating cost reductions that may be achieved from the combined operations. In addition, the unaudited pro forma information excludes the impact of non-recurring charges. (In thousands, except per share data) 1999 1998 - ---------------------------------------------------------------------- Revenue $786,957 $720,289 Net income 71,211 50,032 Diluted earnings per share 2.01 1.42 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. In accordance with the pooling-of-interests method, the consolidated financial statements of the Company include the financial statements of PHSS for all periods presented. PHSS was engaged in the business of providing business management services to hospitals and physicians. In this merger, each share of PHSS common stock 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. Prior to its 1998 merger with the Company, PHSS consummated three transactions accounted for as a pooling-of-interests, as follows: On June 28, 1996, PHSS merged with Synergistic Systems, Inc. ("SSI") by exchanging 944,992 shares of PHSS' common stock for all the outstanding shares of SSI's common stock. On August 31, 1996, PHSS merged with EE&C Financial Services ("EE&C") by exchanging 1,026,852 shares of PHSS' for all the outstanding shares of EE&C's common stock. In addition, PHSS repaid all outstanding indebtedness of EE&C in an aggregate amount of $2.6 million by issuing an additional 131,148 shares of PHSS' common stock. On December 31, 1996, PHSS merged with Revenue Production Management, Inc. ("RPM") by exchanging 315,048 shares of PHSS' common stock for all the outstanding shares of RPM's common stock. In accordance with the pooling-of-interests method of accounting, the consolidated financial statements of these entities were reflected in the financial statements of PHSS. A-27 Note 3 - Property and Equipment As of May 31, 1999 and 1998, property and equipment consisted of the following: (In thousands) 1999 1998 - ------------------------------------------------------------------------- Land $ 1,602 $ 402 Buildings 12,352 7,474 Property under capital leases 46,4447 29,134 Equipment 69,608 62,959 Software 49,991 32,405 Leasehold improvements 16,855 16,354 Furniture and fixtures 12,753 11,550 Work in progress 12,359 14,327 14,327 12359 ---------- --------- 223,935 172,637 Less: accumulated depreciation and amortization 118,031 98,403 ---------- --------- $ 105,904 $ 74,234 ========== ========= Note 4 - Software Costs The following table sets forth information regarding the Company's costs associated with software development for the years ended May 31, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------- Total costs associated with software development $14,021 $15,576 $18,015 In-process research and development charge (see Note 12) - 67,000 - Less: capitalization of internally developed software 10,096 5,013 4,805 --------------------------- Net research and development costs $ 3,925 $77,563 $13,210 =========================== 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. A-28 Total unamortized capitalized software costs (purchased and internally developed) were approximately $33,719,000 and $15,882,000 as of May 31, 1999 and 1998, respectively. Total software amortization expense was approximately $7,261,000, $5,792,000 and $4,928,000 in fiscal 1999, 1998 and 1997, respectively. Note 5 - Intangible Assets As of May 31, 1999 and 1998, intangible assets consisted of the following: (In thousands) 1999 1998 - ----------------------------------------------------------------- Customer base $169,797 $168,257 Trademarks 28,273 28,273 Goodwill and other intangibles 347,854 356,983 -------- -------- 545,924 553,513 Less: accumulated amortization 121,600 95,290 -------- -------- $424,324 $458,223 ======== ======== Note 6 - Accounts Payable and Accrued Liabilities As of May 31, 1999 and 1998, accounts payable and accrued liabilities consisted of the following: (In thousands) 1998 1998 - ---------------------------------------------------------------- Trade accounts payable $ 18,671 $ 12,384 Accrued compensation and benefits 18,920 18,295 Accured merger related expenses 961 5,655 Accrued pensions 3,283 4,031 Merchant processing payable 1,794 306 Other accrued liabilities 28,192 32,444 -------- -------- $ 71,821 $ 73,115 ======== ======== A-29 Note 7 - 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, 1999 and a statement of funded status at May 31, for each year: Changes in benefit obligations (In thousands) 1999 1998 - -------------------------------------------------------------------- Balance at beginning of year $31,610 $25,444 Service cost 386 2,146 Interest cost 2,266 2,106 Benefits paid (872) (734) Actuarial (gain) loss (2,524) 2,648 ------- ------- Balance at end of year $30,866 $31,610 ------- ------- Changes in plan assets (In thousands) 1999 1998 - -------------------------------------------------------------------- Balance at beginning of year $25,841 $21,582 Actual return on plan assets 2,457 4,244 Employer contributions 956 749 Benefits paid (872) (734) ------- ------- Balance at end of year $28,382 $25,841 ======= ======= A-30 The accrued pension costs recognized in the Consolidated Balance Sheets were as follows:
(In thousands) 1999 1998 - ------------------------------------------------------------------------- Funded status ($2,484) ($5,769) Unrecognized net loss 291 2,670 Unrecognized prior service cost 289 378 Unrecognized net asset at June 1, 1985, being amortized over 17 years (676) (912) ------- ------- Accrued pension cost ($2,580) ($3,633) ======= =======
Net pension expense(income) included the following components for the fiscal years ending May 31: (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Service cost-benefits earned during the period $386 $2,146 $1,672 Interest cost on projected benefit obligation 2,266 2,106 1,855 Expected return on plan assets (2,602) (2,168) (1,857) Net amortization and deferral (147) (147) (79) ------- ------- ------- Net pension expense ($97) $1,937 $1,591 ======= ======= ======= Significant assumptions used in determining net pension expense and related obligations were as follows: 1999 1998 -------------------------------- Discount rate 7.50% 7.25% Rate of increase in compensation levels 4.33% 4.33% Expected long-term rate of return on assets 10.00% 10.00% In 1999, the Company adopted Financial Accounting Standards Board No. 132 (SFAS 132), "Employers' Disclosures About Pensions and Other Postretirement Benefits." The 1998 and 1997 amounts shown in the tables above have been restated in accordance with the disclosures required by SFAS 132. 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 1999, 1998 and 1997. A-31 On June 1, 1997, the Company adopted a 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 $1,011,000 and $904,000 in 1999 and 1998, respectively. The projected benefit obligation for the plan was $4,811,000 and $3,875,000 as of May 31, 1999 and 1998, 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 $3,235,000 in 1999, $2,127,000 in 1998, and $1,348,000 in 1997. A-32 Note 8 - Income Taxes The provision for income taxes includes: (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------------- Current tax expense: Federal $ 26,764 $ 27,888 $21,946 State 3,402 3,084 1,369 -------- -------- ------- 30,166 30,972 23,315 -------- -------- ------- Deferred (prepaid) tax expense: Federal 14,048 (8,615) 399 State 506 (738) 118 --------- -------- ------- 14,554 (9,353) 517 --------- -------- -------- Total $ 44,720 $ 21,619 $23,832 ========= ======== ======== The Company's effective tax rates differ from federal statutory rates as follows: 1999 1998 1997 ------------------------------------- Federal statutory rate 35.0% (35.0%) 35.0% State income taxes, net of federal income tax benefit 2.2% 4.0% 1.8% Non-deductible amortization and write-off of intangible assets 1.9% 77.4% 6.3% Tax credits (0.5%) (1.0%) (0.7%) Merger costs - 12.2% 1.4% Other (0.1%) (3.2%) 1.0% -------- -------- -------- Total 38.5% 54.4% 44.8% ======== ======== ======= A-33 Deferred income taxes as of May 31, 1999 and 1998 reflect the impact of temporary differences between the amounts of assets and liabilities for financial accounting and income tax purposes. As of May 31, 1999 and 1998, principal components of deferred tax items were as follows: (In thousands) 1999 1998 - ----------------------------------------------------------------------- Deferred tax assets: Net operating loss and credit carryforwards $17,413 $11,737 Accrued expenses 5,247 5,741 Acquired intangibles 3,396 7,252 Accrued non-recurring charges 5,932 8,836 Employee benefit plans 1,286 1,076 Valuation allowance (1,687) (2,362) Other (854) (349) ------ ------- 30,733 31,931 Deferred tax liabilities: Property and equipment 10,745 6,287 Prepaid expenses 668 539 Unbilled accounts receivable 4,166 4,476 Other - 576 ------ ------- 15,579 11,878 ------ ------- Net deferred tax asset 15,154 20,053 Current deferred tax asset (liability) 1,191 (92) ------- ------- Non-current deferred tax asset $13,963 $20,145 - ---------------------------------------------------------------------- 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 are 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 2011. A-34 Note 9 Long-Term Debt As of May 31, 1999 and 1998, long-term debt consisted of the following:
(In thousands) 1999 1998 - ------------------------------------------------------------------------------------------ Mortgage payable due in monthly installments until May 15, 2005 with interest at 6.87% $ 3,362 $ - Convertible notes (matures on November 1, 2003) 143,750 143,750 Promissory notes issued in consideration for acquisitions: Electronic Data Systems Corporation 6,000 6,000 Hadley Hutt Computing Ltd. 7% due October 1998 - 1,301 Hadley Hutt Computing Ltd. 6.97% due June 2003 227 227 Spring Anesthesia Group, Inc. 7.6% due August 2003 5,500 5,500 Other notes payable 96 320 -------- --------- 158,935 157,098 Less: current maturities 6,245 1,621 -------- ---------- Long-term debt $152,690 $ 155,477
On November 6, 1996, the Company issued convertible notes ("the Notes"), providing $139,682,000 in proceeds, net of $4,068,000 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, $143,750,000 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. The note payable to Electronic Data Systems Corporation was issued in connection with the Company's acquisition of its multiclient bank card processing business (See Note 2). The note accrues interest monthly at a rate equal to 7.32% per annum. The principal balance and accrued interest are payable in full on June 30, 1999. 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 $2,388,000. A-35 Note 10 - Shareholders' Equity Stock Option Plans - On October 23, 1997, the Company adopted a new employee - ------------------ stock option plan, the 1997 Stock Option Plan ("the 1997 Plan"), that provides for the granting of options to certain officers and key employees to purchase the Company's common stock. A total of 1,228,000 authorized but unissued shares of common stock are reserved under the 1997 Plan. Options may be issued at, below, or above the fair market value of the common stock at the time of grant. No options have been granted below the fair market value since the 1997 Plan's inception. Options granted become exercisable in various annual increments and terminate over a period not to exceed 10 years. The Company has an employee stock option plan, the 1987 Stock Option Plan ("the 1987 Plan"), that provides 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 the 1987 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 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, 1999, 1,145,647 shares have been issued under this plan, with 204,353 shares reserved for future issuance. A-36 The Company's 1983 Restricted Stock Plan ("the Restricted Plan") authorizes 750,000 shares of the Company's common stock to be awarded to key employees. Shares 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. There were 83,138, 44,111 and 34,132 shares of the Company's common stock awarded under the Restricted Plan during fiscal years 1999, 1998 and 1997, respectively. These awards have restriction periods of one to four years. As of May 31, 1999, 110,887 shares remained in escrow. There were 324,503 shares reserved for future issuance under this plan. The Company expensed $1,390,000, $649,000 and $327,000 for the years ended May 31, 1999, 1998 and 1997, respectively, in connection with the Restricted Plan. Transactions under the Stock Option Plans are summarized as follows:
1987 Plan Non-Employee Directors Plan --------------------------------------------------------------------------------------- Weighted Average Weighted Average Shares Under Option Price Per Shares Under Option Price Per Option Share Option Share --------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Outstanding at May 31, 1996 2,688,165 $15.54 233,500 $13.41 Granted 214,050 36.11 25,000 41.00 Exercised (220,807) 15.48 (13,500) 15.03 Expired or terminated (211,576) 17.26 - - - -------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------- Exercisable at May 31, 1999 1,155,924 13.90 156,500 17.99 - -------------------------------------------------------------------------------------------------------------------- Available for future grants - 186,500 - - ---------------------------------------------------------------------------------------
A-37
1997 Plan PHSS Plans ---------------------------------------------------------------------------------- Shares Under Weighted Average Weighted Average Option Option Price Per Shares Under Option Price Per Share Option Share ---------------------------------------------------------------------------------- Outstanding at May 31, 1996 - $ - 92,325 $34.52 Granted - - 262,486 35.44 Exercised - - - - Expired or terminated - - (43,494) 40.34 - ---------------------------------------------------------------------------------------------------------------- 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 - - 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 - ---------------------------------------------------------------------------------------------------------------- Exercisable at May 31, 1999 14,205 36.56 161,059 41.57 - ----------------------------------------------------------------------------------------------------------------- Available for future grants 334,450 - - -----------------------------------------------------------------------------------------------------------------
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 of Weighted Weighted Exercise Price of Average Average of Average Average Range Shares Price Contractual Life Shares Price Contractual Life - ----------------------------------------------------------------------------------------------------------------- $6.17 - $9.17 390,047 $6.62 3.0 years 90,000 $7.95 2.6 years $9.67 - $14.33 532,881 10.51 4.6 years 30,000 10.83 4.5 years $15.25 - $22.54 440,925 21.14 6.0 years 22,500 21.92 0.4 years $24.48 - $34.38 336,841 28.94 6.4 years 41,000 29.40 8.2 years $35.99 - $53.27 216,756 38.08 7.9 years 40,000 38.97 7.9 years $56.15 - $78.47 19,875 64.01 3.4 years - - - 1997 Plan PHSS Plans ------------------------------------------------------------------------------------------------ Number Weighted Weighted Number Weighted Weighted Exercise Price of Average Average of Average Average Range Shares Price Contractual Life Shares Price Contractual Life - ----------------------------------------------------------------------------------------------------------------- $15.25 - $22.54 - $ - 17,754 $18.70 7.9 years $23.28 - $32.63 443,900 32.61 9.2 years 26,535 24.76 7.6 years $35.20 - $50.00 449,650 38.62 9.5 years 135,040 45.98 7.4 years
A-38 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) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Net income (loss): As reported $71,437 $(61,326) $29,398 Pro forma 68,250 (63,796) 27,741 Basic earnings (loss) per share: As reported 2.12 (1.90) 0.96 Pro forma 2.02 (1.98) 0.91 Diluted earnings (loss) per share: 2.02 (1.90) 0.91 As reported Pro forma 1.95 (1.98) 0.87
A-39 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:
1999 1998 1997 --------- --------- --------- 1987 Plan Risk-free interest rates - 6.3% 6.6% Expected dividend yields - 0.8% 0.8% Expected lives - 7 years 7 years Non-employee Directors Plan Risk-free interest rates 4.5% 4.2% 6.5% Expected dividend yields 0.9% 0.6% 0.7% Expected lives 10 years 10 years 10 years 1997 Plan Risk-free interest rates 4.7% 5.8% - Expected dividend yields 0.9% 0.9% - Expected lives 7 years 7 years - PHSS Plans Risk-free interest rates - 6.0% 6.7% Expected dividend yields - 0.8% 1.1% Expected lives - 7 years 7 years Employee Stock Purchase Plan Risk-free interest rates 4.4% 5.5% 5.7% Expected dividend yields 1.0% 0.8% 0.7% Expected lives 1 year 1 year 1 year
The expected volatility assumption is 40% for all plans and all years presented. A-40 Note 11 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. 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. 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) formula and results as a percentage of revenue may not be comparable to similarly titled measures reported by other companies. However, management believes this statistic is a relevant measurement and provides a comparable operating income/cash earnings measure, excluding the impact of the amortization of acquired intangibles, potential timing differences associated with capital expenditures and the related depreciation charges. A-41
Health Year Ended May 31, 1999 Information Non-Recurring All Other and (in thousands) Services ECommerce Charges Corporate Totals - ---------------------------------------------------------------------------------------------------------------------------- Revenues $455,594 $360,895 $ - $ - $816,489 Intercompany - (31,583) - - (31,583) Revenues from external customers $455,594 $329,312 $ - $ - $784,906 Depreciation and Amortization 33,788 20,765 - 2,160 56,713 EBITDA 98,882 100,670 - (9,833) 189,719 Income (loss) before income tax 64,339 74,808 - (22,990) 116,157 Segment assets 446,973 259,272 - 58,683 764,928 Health Year Ended May 31, 1999 Information Non-Recurring All Other and (in thousands) Services ECommerce Charges Corporate Totals - -------------------------------------------------------------------------------------------------------------------------- Revenues $357,498 $318,766 $ - $676,264 Intercompany - (27,220) (27,220) Revenues from external customers $357,498 $291,546 $ - $ - $649,044 Depreciation and Amortization 27,289 19,211 - 1,951 48,451 EBITDA 69,565 83,795 - (10,642) 142,718 Income (loss) before income tax 40,092 60,905 (120,163) (20,541) (39,707) Segment assets 434,169 254,799 - 42,247 731,215 Health Year Ended May 31, 1999 Information Non-Recurring All Other and (in thousands) Services ECommerce Charges Corporate Totals - --------------------------------------------------------------------------------------------------------------------------- Revenues $267,488 $281,274 $ - $ - $548,762 Intercompany - (23,595) - - (23,595) Revenues from external customers $267,488 $257,679 $ - $ - $525,167 Depreciation and Amortization 18,014 20,548 - 1,780 40,342 EBITDA 54,259 68,032 - (11,594) 110,697 Income (loss) before income tax 35,146 45,165 (9,503) (17,578) 53,230 Segment assets 343,569 239,216 - 43,537 626,322
Information concerning principal geographic location is as follows: A-42
(in thousands) United States Rest of World Total - ------------------------------------------------------------------------------------------ Revenues 1999 $761,100 $23,806 $784,906 1998 628,971 20,073 649,044 1997 510,631 14,536 525,167 Long-lived assets 1999 $506,597 $23,631 $530,228 1998 $511,743 20,714 532,457 1997 451,139 15,305 466,444
Note 12 Non-recurring Charges Non-recurring charges include the following components for the fiscal years ending May 31:
(In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------- Asset impairment $ -- $ 32,353 $ 6,578 In-process research & development -- 67,000 -- Merger related expenses -- 20,810 2,925 --------------------------------------------- Total -- $120,163 $ 9,503 ===============================================
In connection with the December 1997 mergers with PHSS and Source, 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 intangible assets and capitalized software. 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 A-43 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, 1999, $1.0 million remains accrued under the 1998 non-recurring charges, expending $3.9 million, primarily for severance costs, during the fiscal year. The remaining accrual is primarily for future severance costs. As of May 31, 1998, $9.0 million had been expended toward the 1998 restructuring activities and merger transaction cost accruals, leaving $4.9 million accrued primarily for future severance costs. In connection with PHSS' fiscal 1997 mergers with EE&C and RPM and operating inefficiencies at PHSS' subsidiary, Spring Anesthesia Group, Inc. ("Spring"), a total charge of $9.5 million was incurred. Included in this charge was $2.2 million for the merger transaction costs (cash items), $6.6 million for Spring intangible impaired assets (primarily customer contracts and goodwill) and $0.7 million to exit Spring processing facilities (cash item). The Spring operating inefficiencies and PHSS' efforts to improve operating conditions were unsuccessful. As a result, it was determined an impairment loss should be recognized under SFAS 121. As of May 31, 1998, all amounts accrued for the cash items under the 1997 non- recurring charges have been expended. As of May 31, 1997, $2.1 million had been expended toward the 1997 merger transaction cost accruals, leaving $0.1 million. Note 13 - 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, 1999, 1998 and 1997 the Company incurred expenses of approximately $3,022,000, $6,804,000 and $10,706,000 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, 1999, 1998 and 1997 the Company incurred expenses of approximately $2,831,000, $2,325,000 and $1,063,000, respectively, related to these services. Legal services provided by related parties were $1,278,000, $3,243,000, and $3,397,000 for the years ended May 31, 1999, 1998 and 1997, respectively. A-44 Note 14 - 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 1999, 1998 and 1997 was approximately $22,466,000, $19,372,000 and $14,524,000, respectively. Future minimum lease payments for all noncancelable leases at May 31, 1999 were as follows:
Operating (In thousands) Capital Leases Leases -------------- -------------- 2000 $ 15,223 $15,752 2001 11,456 11,628 2002 5,531 8,627 2003 2,463 5,996 2004 538 3,391 Thereafter - 3,743 --------------------------------------- Total future minimum lease payments 35,211 $49,137 Less: amount representing interest 3,969 ========== -------------- Present value of net minimum lease payments 31,242 Less: current portion 13,113 --------------- Long-term obligations under capital leases at May 31, 1999 $18,129 ================
Note 15 - 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. In fiscal 1998, the Company entered into a $125,000,000 committed line of credit primarily to fund the Company's acquisition requirements and a $15,000,000 uncommitted 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, 1999 and 1998, there was $35,000,000 and $75,000,000, respectively, outstanding under the committed line of credit and the Company was in compliance with all restrictive covenants. The committed line of credit expires in 2002. A-45 The Company processes credit card transactions for direct merchant locations. The Company's merchant customers have liability for charges disputed by cardholders. 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 $8,521,000, $8,844,000 and $8,061,000 were recorded for fiscal 1999, 1998 and 1997, 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, 1999 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. A-46 Note 16 - Supplemental Cash Flow Information Supplemental cash flow disclosures and non-cash investing and financing activities for the years ended May 31, 1999, 1998 and 1997 are as follows:
(In thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Income taxes paid, net of refunds $34,256 $32,023 $19,103 Interest paid 14,140 11,424 9,743 Supplemental non-cash investing and financing activities: Capital leases entered into in exchange for property and equipment 19,901 10,426 2,195 Mortgage assumed with purchase of office building 3,362 - -
In fiscal 1999, 1998 and 1997, 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) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Fair value of assets acquired $10,473 $209,128 $206,008 Notes and deferred payments - (1,528) (6,195) Stock issued - (92,748) (17,830) Cash acquired - (1,982) (419) Liabilities assumed (2,418) (49,757) (20,265) ------------------------------------------------- Cash paid for acquisitions $8,055 $ 63,113 $161,299 ===================================================
Note 17 - Quarterly Consolidated Financial Information (Unaudited) (In thousands, except per share data) Quarter Ended
August 31 November 30 Februrary 28 May 31 --------------- --------------- --------------- ------------ Fiscal Year 1999 $191,682 $191,522 $195,735 $205,967 Revenue Operating income 30,906 29,700 34,830 37,570 Net income 16,323 15,737 18,686 20,691 Basic earnings per share .48 .47 .55 .61 Diluted earnings per share .47 .45 .52 .58 Fiscal Year 1998 Revenue $147,904 $144,325 $171,541 $185,274 Operating income (loss) 21,799 14,870 (92,271) 29,706 Net income (loss) 11,590 7,062 (96,227) 16,249 Basic earnings (loss) per share .38 .23 (2.89) .48 Diluted earnings (loss) per share .36 .22 (2.89) .47
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, 1999 and 1998 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, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1999, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Atlanta, Georgia July 15, 1999 A-48 NATIONAL DATA CORPORATION CONSOLIDATED SCHEDULE II VALUATION & QUALIFYING ACCOUNTS - -------------------------------------------------------------------------------- (In Thousands)
Column A Column B Column C Column D Column E 1 2 Balance at Charged to Uncollectible Balance at Beginning Cost and Acquired Accounts End Description of Period Expenses Balances Write-off of Period Trade Receivable Allowances: May 31, 1997 3,629 5,216 1,764 5,706 $4,903 May 31, 1998 4,903 8,006 619 6,134 $7,394 May 31, 1999 7,394 8,381 - 5,047 $10,728
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE We have audited in accordance with generally accepted auditing standards, 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 15, 1999. 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 30 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 15, 1999 A-50 NATIONAL DATA CORPORATION FORM 10-K INDEX TO EXHIBITS Exhibit Numbers Description 10 (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. 10 (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. 10 (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. 10 (xxvi) Employment Agreement dated December 10, 1997 between Robert Brown and Source Informatics, Inc. 10 (xxvii) Amendment dated May 31, 1999 to the Employment Agreement effective June 1, 1997 between Robert A. Yellowlees and the Registrant. 10 (xxix) Amendment to the 1984 Non-employee Director Stock Option Plan effective October 22, 1998. (21) Subsidiaries of the Registrant. (23) Consent of Independent Public Accountants (27) Financial Data Schedule (for SEC use only) (99.1) Private Securities Litigation Reform Act Of 1995 Safe Harbor Compliance Statement For Forward-Looking Statements A-51 EX-10.V 2 SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 10-(v) SECOND AMENDMENT TO CREDIT AGREEMENT ------------------------------------ THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment") dated as of October 14, 1998, among NATIONAL DATA CORPORATION, as Borrower, the banks and other financial institutions listed on the signature pages hereof, as Lenders, 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 (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 Second 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 Second 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 (x) during Borrower's 1999 Fiscal Year exceeds $30,000,000, or (y) during any other Fiscal Year 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. Amendment to Section 6.05 ("Loans or Advances"). Section 6.05 of the ----------------------------------------------- Credit Agreement is hereby amended by (1) deleting the words "and/or" at the end of clause (vi), (2) deleting the semicolon at the end of clause (vii) and the proviso that ------- follows, and (3) adding a new clause (viii) and proviso at the end of Section ------- 6.05, as follows: (viii) loans or advances by the Borrower and its Subsidiaries to their respective customers in an aggregate amount not to exceed $5,000,000; provided that after giving effect to the making of any loans, advances and deposits permitted by clauses (i) through (viii) of this Section, no Default shall be in existence (which has not been specifically waived in writing pursuant to Section 9.06). 4. 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 Second 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 Second Amendment, no Default or Event of Default has occurred and is continuing. 5. Effect of Second Amendment. On and after the date this Second -------------------------- 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 Second 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. 6. 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 Second 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. 7. Counterparts. This Second Amendment may be executed in any number of ------------ counterparts and by the different parties hereto in separate counterparts, each of which 2 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. 8. Condition to Effectiveness of Second Amendment. This Second Amendment ---------------------------------------------- shall not become effective or have any force or effect until counterparts of this Second 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. 9. Miscellaneous. This Second 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 Second 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 Second Amendment to be executed by their duly authorized officers or representatives as of the date first above written. NATIONAL DATA CORPORATION By: /s/ E. Michael Ingram ----------------------------------- Name: E. Michael Ingram Title: Secretary & General Counsel THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and Lender By: /s/ Kristen H. Hertel ----------------------------------- Name: Kristen H. Hertel Title: Vice President WACHOVIA BANK, N.A., as Documentation Agent and Lender By: /s/ Alyson Schattner ----------------------------------- Name: Alyson Schattner Title: Assistant Vice President 4 SUNTRUST BANK, ATLANTA, as Lender By: /s/ Brian K. Peters ------------------------------ Name: Brian K. Peters Title: Director By: /s/ Rebecca Leffler ------------------------------ Name: Rebecca Leffler Title: Banking Officer FIRST AMERICAN NATIONAL BANK as Lender By: /s/ Michael W. Metcalf ------------------------------ Name: Michael W. Metcalf Title: Vice President 5 EX-10.VI 3 THIRD AMENDMENT TO CREDIT AGREEMENT Exhibit 10-(vi) THIRD AMENDMENT TO CREDIT AGREEMENT ----------------------------------- THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment") dated as of February 26, 1999, among NATIONAL DATA CORPORATION, as Borrower, the banks and other financial institutions listed on the signature pages hereof, as Lenders, 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 and a certain Second Amendment to Credit Agreement dated as of October 14, 1998 (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 Third 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 Third 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. Amendments to Section 1.01 ("Definitions"). Each of the defined terms ------------------------------------------ "Eurodollar Base Rate" and "Eurodollar Interest Period" and the definitions accompanying such terms as set forth in Section 1.01 of the Credit Agreement are hereby amended by deleting such defined terms and accompanying definitions in their entirety and substituting in lieu thereof the following defined terms and accompanying definitions. "Eurodollar Base Rate" means, with respect to any Eurodollar Advance: -------------------- (a) for any one, two, three or six month Eurodollar Interest Period applicable to such Eurodollar Advance, the rate determined by the Agent to be the rate at which First Chicago offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Loan and having a 1 maturity approximately equal to such Eurodollar Interest Period; or (b) for any fourteen (14) day Eurodollar Interest Period applicable to such Eurodollar Advance, the rate determined by the Agent to be the rate at which First Chicago offers to place deposits in U.S. dollars with first- class banks in the interbank market two Business Days prior to the first day of such Eurodollar Interest Period, for delivery on the first day of such Eurodollar Interest Period in the approximate amount of First Chicago's relevant Eurodollar Loan and having a maturity approximately equal to such Eurodollar Interest Period. "Eurodollar Interest Period"means, with respect to a Eurodollar -------------------------- Advance, a period of one, two, three or six months and, in addition with respect to a Eurodollar Syndicated Advance, a period of fourteen (14) days, in each case commencing on a Business Day selected by the Borrower pursuant to this Agreement. Each Eurodollar Interest Period of one, two, three or six months shall end on the day that corresponds numerically to such date one, two, three or six months thereafter; provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day that is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day; provided, however, that if, with respect to a Eurodollar Interest Period of one, two, three or six months, said next succeeding Business Day falls in a new calendar month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. 3. Amendment to Section 2.03 ("Syndicated Advances"). ------------------------------------------------ (a) Section 2.03 of the Credit Agreement is hereby amended by deleting the first sentence of subsection (f) of said Section 2.03 in its entirety and substituting in lieu thereof the following sentence: (f) The Borrower shall select the Type of Syndicated Advance and, in the case of each Eurodollar Syndicated Advance, the Interest Period applicable to each such Eurodollar Syndicated Advance from time to time. The Borrower shall give the Administrative Agent irrevocable notice (a "Syndicated Borrowing Notice") not later than (x) 10:00 a.m. (Chicago time) at least one Business Day before the Borrowing Date for each Floating Rate Advance, (y) 9:00 a.m. (Chicago time) two Business Days before the Borrowing Date for each Eurodollar Syndicated Advance having a Eurodollar Interest Period of fourteen (14) days, and (z) 10:00 a.m. (Chicago time) three Business Days before the Borrowing Date for each Eurodollar Syndicated Advance having a Eurodollar Interest Period of one, two, three or six months, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Syndicated Advance, 2 (ii) the aggregate amount of such Syndicated Advance, (iii) the Type of Syndicated Advance selected, and (iv) in the case of each Eurodollar Syndicated Advance, the Interest Period applicable thereto. (b) Section 2.03 of the Credit Agreement is hereby further amended by deleting the fourth sentence of subsection (g) of said Section 2.03 in its entirety and substituting in lieu thereof the following sentence: (g) The Borrower shall give the Administrative Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Syndicated Advance or continuation of a Eurodollar Syndicated Advance not later than (x) 10:00 a.m. (Chicago time) at least one Business Day, in the case of a conversion into a Floating Rate Advance, (y) 9:00 a.m. (Chicago time) two Business Days, in the case of a conversion into or continuation of a Eurodollar Syndicated Advance having a Eurodollar Interest Period of fourteen (14) days, or (z) 10:00 a.m. (Chicago time) three Business Days, in the case of a conversion into or continuation of a Eurodollar Syndicated Advance having a Eurodollar Interest Period of one, two, three or six months, in each case prior to the date of the requested conversion or continuation, specifying: (i) the requested date which shall be a Business Day, of such conversion or continuation; (ii) the aggregate amount and Type of Syndicated Advance(s) which is [are] to be converted or continued; and (iii) the amount and Type(s) of Syndicated Advance(s) into which such Syndicated Advance is to be converted or continued and, in the case of a conversion into or continuation of a Eurodollar Syndicated Advance, the duration of the Interest Period applicable thereto. 4. 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 Third 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 Third Amendment, no Default or Event of Default has occurred and is continuing. 3 5. Effect of Third Amendment. On and after the date this Third 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 Third 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. 6. 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 Third 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. 7. Counterparts. This Third 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. 8. Condition to Effectiveness of Third Amendment. This Third Amendment shall --------------------------------------------- not become effective or have any force or effect until counterparts of this Third 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. 9. Miscellaneous. This Third 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 Third 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. 4 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed by their duly authorized officers or representatives as of the date first above written. NATIONAL DATA CORPORATION By: /s/ E. Michael Ingram ----------------------- Name: E. Michael Ingram Title: Secretary & General Counsel THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and Lender By: /s/ David T. Mundel --------------------- Name: David T. Mundel Title: Vice President WACHOVIA BANK, N.A., as Documentation Agent and Lender By: /s/ Alyson Schattner --------------------- Name: Alyson Schattner Title: Assistant Vice President 5 SUNTRUST BANK, ATLANTA, as Lender By: /s/ Brian K. Peters --------------------- Name: Brian K. Peters Title: Director By: /s/ Nathan Bickford --------------------- Name: Nathan Bickford FIRST AMERICAN NATIONAL BANK as Lender By: /s/ Michael W. Metcalf --------------------- Name: Michael W. Metcalf Title: Vice President 6 EX-10.VII 4 FOURTH AMENDMENT TO CREDIT AGREEMENT Exhibit 10-(vii) FOURTH AMENDMENT TO CREDIT AGREEMENT ------------------------------------ THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment") dated as of July 7, 1999, among NATIONAL DATA CORPORATION, as Borrower, the banks and other financial institutions listed on the signature pages hereof, as Lenders, 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, a certain Second Amendment to Credit Agreement dated as of October 14, 1998, and a certain Third Amendment to Credit Agreement dated as of February 26, 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 Fourth 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 Fourth 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. Amendments to Section 6.06 ("Investments; Acquisitions"). Section 6.06(a) -------------------------------------------------------- of the Credit Agreement is hereby amended by (x) deleting the word "and" at the end of clause (vi) thereof, (y) deleting the period at the end of clause (vii) thereof and substituting in lieu thereof "and", and (z) adding a new clause (viii) at the end of Section 6.06(a) as follows: (iii) Investment in the capital stock of Medscape, Inc. acquired for a total consideration of $20,000,000. 3. Representatives 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 Fourth 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 Fourth Amendment, no Default or Event of Default has occurred and is continuing. 4. Effect of Fourth Amendment. On and after the date this Fourth 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 Fourth 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 Fourth 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 Fourth 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 Fourth Amendment. This Fourth Amendment shall ---------------------------------------------- not become effective or have any force or effect until counterparts of this Fourth 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. 8. Miscellaneous. This Fourth 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 Fourth 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. 2 IN WITNESS WHEREOF, the parties hereto have caused this Fourth 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: Vice President/ Acting General Counsel THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and Lender By: /s/ Kristen H. Hertel ------------------------------- Name: Kristen H. Hertel Title: Vice President WACHOVIA BANK, N.A., as Documentation Agent and Lender By: /s/ Alyson Schattner ------------------------------- Name: Alyson Schattner Title: Assistant Vice President 3 SUNTRUST BANK, ATLANTA, as Lender By: /s/ Brian K. Peters ---------------------------- Name: Brian K. Peters Title: Director FIRST AMERICAN NATIONAL BANK as Lender By:____________________________ 4 EX-10.XXVI 5 EMPLOYMENT AGREEMENT Exhibit 10 (xxvi) EMPLOYEMENT AGREEMENT --------------------- THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 10th day of December 1997, by and among Source Informatics, Inc., a corporation organized and existing under the laws of the State of Delaware ("Source"), Robert Brown, an individual who at the time of execution of this Agreement is a resident of the State of Arizona ("Employee"), and National Data Corporation, a corporation organized and existing under the laws of the State of Delaware ("NDC"). WITNESSETH: ----------- WHEREAS, pursuant to that certain Agreement and Plan of Merger dated August 20, 1997 (the "Merger Agreement"), by and among NDC, Dunkirk, Inc. ("Sub"), and Source, pursuant to which Sub will merge (the "Merger") with and into Source with Source surviving the Merger and becoming a wholly-owned subsidiary of NDC; WHEREAS, Employee is the President of Source Informatics and NDC considers his continuing services pursuant to the terms hereof and his entering into and compliance with the terms of this Agreement to be essential to Source's operations following the Merger; WHEREAS, the Employee is executing this Agreement as an inducement to NDC to complete the Merger, and NDC has made it a necessary and material condition to closing the Merger that the Employee enter into this Agreement; WHEREAS, Source desires to employ Employee, and Employee desires to accept such employment, upon the terms and conditions set forth herein; WHEREAS, Employee possesses and will possess information relating to Source, customers, properties, products and interests of Source, and which he has acquired and will acquire by virtue of his employment by Source and the use of which by Employee in competition with Source or in violation of this Agreement may materially and adversely affect the value of the investment being made by NDC under the Merger Agreement; and WHEREAS, the obligations of Employee hereunder are reasonably necessary for the protection of the goodwill of Source and Source's interest in the aforementioned information, business prospects, customers, properties and interests. NOW, THEREFORE, by virtue and in consideration of the foregoing and the mutual covenants and agreements contained in this Agreement, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, Source and Employee covenant and agree as follows: 1. Employment. Source hereby employs Employee, and Employee hereby ---------- accepts such employment and agrees to perform his duties and responsibilities hereunder, in accordance with the terms and conditions hereinafter set forth. 2. Employment Term. Employee's employment shall commence on the date --------------- hereof and, subject to the conditions herein, shall continue for a term of three (3) years or until earlier terminated in accordance with Section 6 hereof. 3. Duties and Responsibilities. --------------------------- (a) Position. During his employment hereunder, Employee shall serve -------- as the Senior Executive of Source, or any successor corporation or named line of business and shall perform all duties consistent with such position and accept all responsibilities consistent with such position as may be assigned to him by Source, and shall cooperate fully with Source's management and board of directors. (b) Discharge of Duties. During his employment hereunder, Employee ------------------- agrees faithfully and diligently to discharge and carry out his duties and responsibilities under this Agreement, shall use his best efforts to implement the plans, programs and objectives of his direct line management and the guiding policies established by Source's board of directors, its executive officers, or NDC and shall devote his full and exclusive business time, attention, energy and skill thereto and to the business of Source, to the promotion of Source's interests and to the fulfillment of Employee's obligations under this Agreement. The foregoing shall not be construed as preventing Employee from making investments in other companies or enterprises provided that Employee agrees not to become engaged in any other activity which may interfere with his ability to discharge his duties and responsibilities hereunder. Employee further agrees not to work either on a part-time or independent contracting basis for any other business or enterprise during his employment hereunder without the prior written consent of the board of directors of Source. (c) Employee's Representations and Covenants. Employee represents and ---------------------------------------- covenants to Source that he is not subject or a party to any employment agreement, non-competition covenant, non-disclosure agreement or any similar agreement, covenant, understanding or restriction which would prohibit Employee from executing this Agreement and performing his duties and responsibilities hereunder, or would in any manner, directly or indirectly, limit or affect the duties and responsibilities which may now or in the future be assigned to Employee hereunder. 2 (d) Authority. Employee specifically acknowledges and agrees that he --------- shall not have the right or authority to assume or create any obligation, duty, liability or responsibility, express or implied, on behalf of or in the name of Source, or to bind Source or any of its affiliates in any matter whatsoever, except as may be specifically authorized by his direct line management, Source's board of directors and the bylaws of Source. 4. Compensation. ------------ (a) Annual Salary. Subject to the terms of this Agreement, as ------------- compensation for all services rendered by Employee hereunder, from and after the date hereof, Source shall pay Employee an annual gross salary of $275,000.00. Such salary shall be paid bi-weekly or semi-monthly, so long as Employee shall be employed by Source under this Agreement. Employee's salary will be reviewed at intervals consistent with NDC's salary review practices. (b) Reimbursements. In addition to the compensation set forth in -------------- subparagraph (a) above, Source shall promptly reimburse Employee for all reasonable expenses incurred by him in the performance of his duties under this Agreement and vouched to the reasonable satisfaction of the appropriate officers of Source, pursuant to Source's procedures or practices. (c) Bonus Opportunity. In addition to the annual salary described ----------------- above, Employee will have an annual bonus opportunity of $150,000.00. Payment of such bonus will be based upon Employee's performance against defined objectives, and shall be subject to the usual provisions of Source's and NDC's overall annual bonus programs. Employee's initial bonus opportunity shall be for the performance period ending June 30, 1998. Thereafter, Employee's bonus opportunity shall be based upon NDC's fiscal year. 5. Employee Benefits, Stock Options and Perquisites. ------------------------------------------------ (a) Employee shall be entitled to participate in any and all employee benefit programs maintained by Source, including vacation, holiday and sick leave benefits, and life and disability insurance programs in accordance with the terms and conditions of such employee benefit programs, to the extent prescribed for the position then held by Employee as set forth in such programs or in the resolution of Source's board of directors establishing such programs, and subject to the terms and conditions set forth therein. (b) Employee shall also be eligible for periodic grants of stock options under NDC's 1997 Stock Option Plan or any successor plan based upon senior 3 management's assessment of Employee's potential to contribute to the future success of the Company. NDC agrees to recommend to the compensation committee of its board of directors an initial stock option award with a grant value of approximately $1,100,000.00. (c) Employee shall be credited with the number of years of service that Employee has been employed by Source or any of its Subsidiaries or their respective predecessors, prior to and including the term of this Agreement, for purposes of vesting, eligibility and calculation of benefits for all of Source's or NDC's employee benefit plans including the 401K plans of both Source and NDC; provided, however, that no credit for prior service shall be granted for benefits calculation purposes under any Source or NDC employee benefit plan governed by ERISA except the 401K plans as noted above. 6. Termination; Effect of Termination. ---------------------------------- (a) Termination. Anything in this Agreement to the contrary ----------- notwithstanding, this Agreement, the employment of Employee pursuant hereto and Employee's compensation hereunder (except as specifically provided in this Section 6) shall terminate upon the first to occur of the following events: (i) The death of Employee; (ii) The date on which Source shall give written notice to Employee of termination of his employment hereunder by reason of his physical or mental incapacity. Employee shall be deemed to be physically or mentally incapacitated for purposes of this section if by reason of any physical or mental incapacity he has been unable, or it is reasonably expected that he will be unable, for a period of at least one hundred eighty (180) substantially continuous calendar days, to perform his regular duties and responsibilities hereunder in a reasonably satisfactory manner. In the event of any disagreement between Employee, or his legal representative, and Source as to whether Employee is physically or mentally incapacitated such as to permit Source to terminate his employment pursuant to this paragraph (ii), the question of such incapacity shall be submitted to an impartial and reputable physician for determination, selected by mutual agreement of Employee, or his legal representative, and Source or, failing such agreement, selected by two physicians (one of which shall be selected by Source and the other by Employee, or his legal representative), and such determination of the question of such incapacity by such physicians shall be final and binding on Employee and Source. Source shall pay the reasonable fees and expenses of such physicians; (iii) The date on which Source shall give written notice to Employee for termination for "cause" which notice shall reasonably describe the cause for which Employee's employment is being terminated. If, however, the cause specified in such notice is such that there is a reasonable prospect that it can be cured with diligent effort 4 within ninety (90) consecutive calendar days, Employee shall have ninety (90) consecutive calendar days to cure such cause and Employee's employment shall continue in effect during such time so long as Employee makes diligent efforts during such time to cure such cause. If such cause shall be cured by Employee during such time, this Agreement shall not terminate as a result of the notice which has been given with respect to such cause. Cure of any cause with or without notice from Employee shall not relieve Employee from any obligations to Source under this Agreement or otherwise and shall not effect Source's rights upon the recurrence of the same, or the occurrence of any other cause. If such cause shall not be cured within such time, this Agreement shall terminate upon the expiration of such time. For purposes of this Agreement, "cause" shall mean: (A) Commission by Employee of a willful or grossly negligent act which materially adversely affects Source, its subsidiaries or divisions, NDC or its subsidiaries, or (B) Conviction of Employee (or plea of nolo contendere) for --------------- any criminal act (other than an offense under road traffic legislation for which a non-custodial penalty is imposed), or any fraud upon Source, its subsidiaries or divisions, NDC or its subsidiaries, or (C) Habitual use of alcohol or other performance- influencing drugs or substances, or (D) Any material violation by Employee of his obligations under this Agreement. (iv) Two (2) calendar days following the date on which Source shall give written notice to Employee of termination of his employment hereunder; or (v) With respect to termination by the Employee, the date on which Employee shall give written notice to Source of termination for "cause" which notice shall reasonably describe the cause for which employment is being terminated. For purposes of this Agreement, "cause" shall mean the Company (i) significantly reduces the position or responsibilities of Employee described in Clause 3 hereof or the compensation or other remuneration of Employee specified in Clauses 4 and 5 herein above, (ii) requires the Employee to change his regular work location to another work location more than fifty (50) miles from Employee's residence as set forth on page 12 of this agreement, (iii) materially modifies any of the other terms and conditions relating to Employee's employment with the Company, or (iv) any other material violation by Source of its obligations under this Agreement. If, however, the cause specified in such notice is such that there is a reasonable prospect that it can be cured with diligent effort within ninety (90) consecutive calendar days, Source shall have ninety (90) consecutive calendar days to cure such cause and Employee's employment shall continue in effect during such time so long as Source makes diligent efforts during such time to cure such cause. If such cause shall be cured by Source during such time, this Agreement shall not 5 terminate as a result of the notice which has been given with respect to such cause. Cure of any cause with or without notice from the Employee shall not relieve Source from any obligations to the Employee under this Agreement or otherwise and shall not effect the Employee's rights upon the recurrence of the same, or the occurrence of any other cause. If such cause shall not be cured within such time, this Agreement shall terminate upon the expiration of such time. (b) Termination Compensation. Upon termination of this Agreement pursuant ------------------------ to Section 6(a) hereof, Employee shall be entitled to receive the unpaid compensation accrued to Employee for performance rendered under this Agreement as of the date of termination. Further, in the event of termination of this Agreement pursuant to Section 6(a)(iv) or 6(a)(v), the following provisions shall apply: (i) If such termination is within the first twenty-four (24) months after the effective date of this Agreement, the Company shall (w) continue to pay to Employee all amounts due to be paid to the Employee as salary during the twenty-four (24) months immediately following the date of termination as if Employee were still an employee of the Company; (x) pay to Employee, within sixty (60) days after the effective date of termination, an amount equal to the aggregate amount of performance bonuses awarded to Employee during the two (2) full fiscal years immediately preceding the effective date of termination (2); (y) continue to provide to Employee medical, disability and life insurance benefits, subject to normal employee contributions, for twenty-four (24) months following the date of termination as if Employee were still an employee of the Company and (z) provide outplacement services, with a nationally-recognized outplacement firm, to Employee for a period not to exceed twenty-four (24) months following the date of termination; (ii) If such termination is later than twenty-four (24) months after the effective date of this Agreement, the Company shall (w), continue to pay to Employee all amounts due to be paid to the Employee as salary (but not performance bonuses) during the twelve (12) months immediately following the date of termination as if Employee were still an employee of the Company; (x) pay to Employee, within sixty (60) days after the effective date of termination, an amount equal to the aggregate amount of performance bonuses awarded to Employee during the two (2) full fiscal years immediately preceding the effective date of termination divided by two (2); (y) continue to provide to 6 Employee medical, disability and life insurance benefits, subject to normal employee contributions, for twelve (12) months following the date of termination as if Employee were still an employee of the Company and (z) provide outplacement services to Employee, with a nationally-recognized outplacement firm, for a period not to exceed twelve (12) months following the date of termination. (iii) Further, in the event of such termination Company shall accelerate vesting of stock options awarded under the National Data Corporation 1997 Employee Stock Option Plan which would have vested within two (2) years after the date of termination of Employee's employment hereunder; and (iv) In the event Employee commences new full-time regular employment, (x) any payments remaining unpaid under paragraphs (i) and (ii) immediately above shall be reduced by fifty (50%) percent and (y) medical, disability and life insurance benefits provided under paragraphs (i) and (ii) immediately above shall be discontinued. 7. Confidentiality. All Confidential Information and Trade Secrets (as --------------- such terms are defined below), and all physical embodiments thereof learned, received or developed by Employee are confidential to and are and will remain the sole and exclusive property of Source and NDC and Employee hereby expressly assigns any and all of his right, title and interest in and to the Confidential Information and Trade Secrets to Source and NDC. Employee will hold such Confidential Information and Trade Secrets in trust and strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Confidential Information or Trade Secrets or any physical embodiments thereof and may in no event take any action causing or fail to take the action necessary in order to prevent, any Confidential Information or Trade Secrets known by Employee to lose its character or cease to qualify as Confidential Information or Trade Secrets. Upon request by Source or NDC, Employee will promptly deliver to Source or NDC all property belonging to Source or NDC, including, without limitation, all Confidential Information and Trade Secrets (and all embodiments thereof) then in Employee's custody, control or possession. Employee covenants and agrees that, during his employment hereunder and for a period of three (3) years immediately following the termination of said employment, he shall not disclose any Confidential Information or Trade Secret, other than as necessary in connection with the performance of his duties as an Employee of Source or NDC, to any person or entity and he shall not make use of any such Confidential Information or Trade Secret, directly or indirectly, for himself or others, without the prior written 7 consent of Source or NDC. Employee acknowledges that this Agreement is not intended to, and does not, waive or alter any protection available to Source or NDC under any applicable federal or state statute or common law regarding the use and/or disclosure of "trade secrets" as that term is defined under such law. As used herein, "Confidential Information" means confidential data and confidential information relating to the business of Source and NDC (which does not rise to the status of a Trade Secret) which is or has been disclosed to Employee or of which Employee became aware as a consequence of or through his employment by Source or NDC or through consulting for Source or NDC and which has value to Source or NDC and is not generally known to its competitors. Confidential Information shall not include any data or information that (w) has been voluntarily disclosed to the public by Source or NDC, (x) has been independently developed and disclosed to the public by others (y) otherwise enters the public domain through lawful means, or (z) is lawfully and rightfully disclosed to Employee following the date hereof by another party. As used herein, "Trade Secrets" means business or technical information of Source and NDC, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that: (A) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Trade Secrets shall specifically include, without limitation, information relating to the design, manufacture, application, know-how, research and development relating to Source's or NDC's present, past or prospective products and/or computer programs. 8. Noncompetition and Nonsolicitation. During his employment hereunder, ---------------------------------- and for a period of 12 months thereafter (six months if terminated by Source without cause), Employee agrees that he will not do any of the following without Source's prior written consent: (a) Directly or indirectly, own; manage; control; participate in the management, operation or control of; or be employed by or consult with in a capacity similar to that in which he is employed by Source; any person or entity (except as an employee of Source or any of its affiliated companies) which is engaged in the Business, including, without limitation, Cognizant Corporation, PCS Health Systems, ZS Inc., HPR, Health Products Research, Inc. HCIA and HBO & Co., Inc. For purposes of this Agreement, "Business" means (I) the current business of Source, including, without limitation, the development, use or exploitation of pharmaceutical prescription databases for one or more of the following activities: (i) management of sales forces; (ii) measurement of sales force performance or product performance; and (iii) creation of physician profiles for targeting purposes and (II) the business of Source as it exists on the 8 expiration or earlier termination of this Agreement. The restrictions and prohibitions of this paragraph shall be applicable to Employee only in the Area. For purposes of this Agreement, the "Area" is the geographic territory set forth in Attachment A hereto. Nothing herein will preclude Employee, however, from being a shareholder of 1% or less of a public company. (b) Directly or indirectly solicit any Customer for the purpose of selling or providing pharmaceutical data warehousing, collection or analysis products or services if, at the time of said solicitation, Source is still engaged in the sale, manufacture or design of that type of good or service. For purposes of this Agreement, "Customer" means any person or entity (1) who has been a customer of Source or NDC at any time during the 12 months preceding the termination of Employee's employment hereunder and (2) with whom Employee had contact on Source's behalf during the 12 months preceding the termination of Employee's employment hereunder; (c) Influence or attempt to influence any employee or any person who has been an employee of Source at any time within 12 months preceding such action to terminate his or her employment for the purpose of working for a competitive Business; or (d) Request or cause or attempt to cause any supplier of Source to alter, cancel or terminate any business relationship with Source. 9. Rights to Materials. All records, files, memoranda, reports, price lists, ------------------- customer lists, drawings, plans, sketches, documents, and the like (together with all copies thereof) relating to Source or NDC, which Employee shall use or prepare or come in contact with in the course of, or as a result of, his employment shall, as between the parties hereto, remain the sole property of Source or NDC respectively. Upon the termination of his employment or upon the prior demand of Source or NDC, Employee shall immediately return all such materials and shall not thereafter cause removal thereof from the premises of Source or NDC. 10. Inventions, Discoveries and Improvements. All inventions, discoveries and ---------------------------------------- improvements, whether patentable or unpatentable, made, devised or discovered by Employee, whether by himself or jointly with others, during his employment, which relate or pertain in any way to the business of Source or NDC, shall inure to the benefit of Source or NDC and become and remain its sole and exclusive property. Employee agrees to execute an assignment to Source or NDC or its nominee of his entire right, title and interest in and to such inventions, discoveries and improvements, and to execute any other instruments and documents that may be requested by Source or NDC for the 9 purpose of applying for and obtaining patents with respect thereto in the United States and in all foreign countries. Employee further agrees, whether or not in the employ of Source or NDC, to cooperate to the extent and in the manner reasonably requested by Source or NDC in the prosecution or defense of any patent claims or any litigation or other proceedings involving any such inventions, discoveries, or improvements. 11. Works Made for Hire. Source and Employee acknowledge that in the course of ------------------- Employee's employment by Source or NDC, Employee may from time to time create for Source or NDC copyrightable works. Such works may consist of manuals, pamphlets, instructional materials, computer programs, films, tapes or other copyrightable material, or portions thereof, and may be created within or without Source's or NDC's facilities and before, during or after normal Source or NDC hours. All such works related to or useful in the business of Source or NDC are specifically intended to be works made for hire by Employee shall cooperate with Source or NDC in the protection of Source's or NDC's copyrights therein and, to the extent deemed desirable by Source or NDC, the registration of such copyrights. 12. Withholding. Notwithstanding any term or provision of this Agreement, all ----------- amounts payable by Source hereunder shall be subject to withholding of such sums related to taxes, garnishments or other legal obligations as Source may reasonably determine it should withhold pursuant to applicable law, regulation, decree or judgment. 13. Litigation Expenses. In the event of a lawsuit by either party to enforce ------------------- the provisions of this Agreement, the prevailing party shall be entitled to receive reasonable costs, expenses and attorney's fees from the other party. 14. Contents of Agreement; Manuals and Assignments. ---------------------------------------------- (a) Entire Agreement; Amendment. This Agreement supersedes and voids all --------------------------- prior agreements and sets forth the entire understanding among the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by Employee, Source and NDC and executed on Source's and NDC's behalf by a duly authorized officer. (b) Policy. Employee acknowledges that, from time to time, Source may ------ establish, maintain and distribute employee manuals or handbooks or personnel policy manuals, and officers or other representatives of Source may make written or oral statements relating to personnel policies and procedures. Such manuals, handbooks and statements are intended only for general guidance. No policies, procedures or statements of any nature by or on behalf of Source (whether written or oral, and whether or not contained in any employee manual or handbook or personnel policy manual), and no acts 10 or practices of any nature, shall be construed to modify this Agreement or to create express or implied obligations of any nature to Employee. (c) Assignment. All of the terms and provisions of this Agreement shall be ---------- binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Employee hereunder are of a personal nature and shall not be assignable or delegatable in whole or in part by Employee. 15. Survival. Notwithstanding the expiration or termination of this Agreement -------- for any reason whatsoever, Employee's obligations under Sections 7, 8, 9, 10, 11 and 12 hereof shall survive such expiration or termination and shall remain in full force and effect to the extent required to give full effect to the covenants and agreements contained in such sections, and the provisions for equitable relief against Employee hereof shall continue in force. 16. Miscellaneous. ------------- (a) Waiver; Delay. No remedy conferred upon Source, NDC or Employee by ------------- this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by Source, NDC or Employee in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by Source, NDC or Employee from time to time and as often as may be deemed expedient or necessary by Source, NDC or Employee in its sole discretion. (b) General Severability. The invalidity or unenforceability of any -------------------- particular provision of this Agreement shall not affect the other provisions of this Agreement and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. (c) General Entitlement to Equitable Relief. The Employee acknowledges and --------------------------------------- agrees that if a violation of any covenant contained in Sections 7, 8, 9, 10 or 11 occurs or is threatened, such violation or threatened violation will cause irreparable injury to Source, that Source's remedy at law for any such violation or threatened violation or any other breach of Employee's covenants and agreements under this Agreement will be inadequate, and that Source shall be entitled to appropriate equitable relief with respect thereto. The Employee further acknowledges and agrees, 11 however, that Source shall have the right to seek a remedy at law as well as or in lieu of equitable relief in the event of any such violation, threatened violation or breach. (d) Headings. The headings and captions used in this Agreement are -------- for convenience or reference only, and shall in no way define, limit, expand or otherwise affect the meaning or construction of any provision of this Agreement. (e) Notice. Any notice required or permitted to be given pursuant to ------ this Agreement shall be deemed sufficiently given when delivered in person or when deposited in the United States mail, registered or certified mail, postage prepaid, addressed as follows: If to Source, to: Source Informatics, Inc. 2394 E. Camelback Road Phoenix, Arizona 85016 Attn: President If to Employee, to: Robert Brown 2394 E. Camelback Road Phoenix, Arizona 85016 If to NDC, to: National Data Corporation National Data Plaza Atlanta, Georgia 30329 Attn: Office of Corporate Secretary Any party may by written notice change the address to which notices to such party are to be mailed. (f) Counterparts. This agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement. (g) Governing Law. This Agreement shall be governed by and ------------- interpreted under the laws of Arizona without giving effect to any conflict of laws provisions. 17. Guarantee. NDC hereby, irrevocably and unconditionally, guarantees --------- the prompt performance of all obligations of Source to the Employee hereunder. 12 IN WITNESS WHEREOF, Employee and Source have executed and delivered this Agreement on the date first above written. SOURCE: SOURCE INFORMATICS INC. By: /s/ E. Michael Ingram ------------------------------------- Title:__________________________________ EMPLOYEE: /s/ Robert R. Brown ---------------------------------------- (SEAL) NDC: NATIONAL DATA CORPORATION By: /s/ E. Michael Ingram ------------------------------------- Title:__________________________________ 13 ATTACHMENT A ------------ For purposes of this Agreement, the "Restricted Territory" consists of the following States and/or territories: Alabama, Alaska, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming. 14 EX-10.XXVII 6 AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10 (xxvii) AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, National Data Corporation ("NDC") and Robert A. Yellowlees ("Employee") are parties to an Employment Agreement dated as of June 1, 1997, as amended, (the "Agreement"); and WHEREAS, the parties now desire to further amend certain of the terms of the Agreement; NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto acknowledge that the Agreement is hereby amended as follows: "Section 2. Term - ---------------- The employment of Employee hereunder shall continue pursuant to the term of this Agreement effective as of June 1, 1997, and, unless sooner terminated pursuant to Section 5 of this Agreement with the consequences of termination set forth in such Section 5 and unless extended as provided below, shall continue through May 31, 2001. The employment of Employee hereunder may be further extended thereafter upon the mutual agreement of Employee and the Company to so extend on or before the date one year prior to the expiration of any such term." Except as modified hereby, the terms and conditions of the Agreement shall remain in full force and effect; provided, however, that if any term or condition of the Agreement conflicts with or is inconsistent with any term or condition of this Amendment, such terms and conditions hereof shall prevail and be controlling. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers duly authorized as of the 31 day of May, 1999. NATIONAL DATA CORPORATION EMPLOYEE By: /s/ Kevin C. Shea /s/ Robert A. Yellowlees ---------------------- ----------------------------- Robert A. Yellowlees Title: Chief Financial Officer Title: Chairman & Ceo ------------------------ ----------------------- Date: Date: 5/31/99 __________________________ ------------------------ EX-10.XXIX 7 AMENDMENT TO THE 1984 NON-EMPLOYEE Exhibit 10 (xxix) National Data Corporation 1984 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AMENDMENT EFFECTIVE OCTOBER 22, 1998 WHEREAS, the stockholders of National Data Corporation (the "Company") approved an amendment to the Company's 1984 Non-Employee Director Stock Option Plan (the "Plan") at the Company's annual meeting of stockholders held on October 22, 1998. The Plan is hereby amended as follows: Paragraph 4. Shares Subject to Plan is amended by adding a new sentence at ---------------------- the end of such paragraph as follows: "Effective upon approval of the Amendments to the Plan by the Company's stockholders at the 1998 annual meeting, the number of shares that may be issued thereunder is hereby increased to 545,000 shares." Paragraph 5(g) Nonassignability of Option Rights shall be replaced in its --------------------------------- entirety by the following language: "(g) Assignability of Option Rights. No option shall be assignable or ------------------------------ transferable by the Grantee except by will, the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in Title I of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 or to any of the following permitted transferees, upon such reasonable terms and conditions as the Board of Directors or a committee of the Board administering this Plan may establish: (1) one or more of the following family members of the Grantee: any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relatives, (2) a trust, partnership or other entity established and existing for the sole benefit of, or under the sole control of, one or more of the above family members of the Grantee, or (3) any other transferee specifically approved by the Board of Directors or a committee of the Board administering this Plan after taking into account any state or federal tax, securities or other laws applicable to transferable options. During the lifetime of the Grantee, the option shall be exercisable only by the Grantee or a permitted transferee pursuant to this section." Paragraph 7(b) Termination is amended by adding a new sentence at the end of ----------- such paragraph as follows: "Effective upon approval of the Amendments to the Plan by the Company's stockholders at the 1998 annual meeting, the termination date of the 1984 Non-Employee Director Stock Option Plan is extended from September 6, 1999 to September 6, 2004." IN WITNESS WHEREOF, the undersigned has executed this amendment effective as of October 22, 1998. NATIONAL DATA CORPORATION By: /s/ E. Michael Ingram --------------------------- E. Michael Ingram Senior Vice President, General Counsel & Secretary -2- EX-21 8 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant The Registrant had the following subsidiaries at May 31, 1999, 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 Walsh International Domestic Finance, Ltd. Delaware Physician Support Systems, 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 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. A-52 EX-23 9 CONSENT OF ARTHUR ANDERSEN 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 23, 1999 A-53 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR MAY-31-1999 JUN-01-1998 MAY-31-1999 4,295 0 185,498 10,728 7,927 212,828 223,934 118,030 764,928 156,437 149,476 0 0 4,244 404,850 764,928 0 784,906 0 397,211 254,689 5,300 15,430 116,157 44,720 71,437 0 0 0 71,437 2.12 2.02
EX-99.1 11 SAFE HARBOR COMPLIANCE STATEMENT EXHIBIT 99.1 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. National Data Corporation ("NDC" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward- looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of NDC. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements (the "Safe Harbor Statement") to reflect future developments. In addition, NDC undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. NDC provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: YEAR 2000 COMPLIANCE The Year 2000 issue is the result of the potential for computer programs to improperly interpret dates in the year 2000 and beyond. Certain of the Company's computer systems used for product or internal use that have time/date- sensitive software and hardware may misinterpret dates resulting in a system failure or miscalculation. The Year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties upon which the Company relies. Accordingly, the Company is requesting assurances from certain software vendors from which it has acquired, or from which it may acquire software, that the software will correctly process all date information at all times. In addition, the Company is querying certain of its customers and suppliers as to their progress in identifying and addressing problems that their computer systems will face in correctly processing date information as the Year 2000 approaches and is reached. The Company is heavily reliant upon customers and other third parties in the health care, banking and credit card industries, in terms of electronic interfaces. Failure to appropriately address the Year 2000 issue by major customers or suppliers or a material percentage of the smaller customers could have a material adverse effect on the financial condition and results of operations of the Company. Testing is being performed as required and is dependent on third parties. The Company continues to actively pursue these dependencies to schedule required testing. At this time, the Company does not expect any material research and development activities to be delayed due to the Year 2000 compliance efforts. However, if certain initiatives are delayed, the result could have an adverse effect to the Company. In order for the testing phase of the Year 2000 plan to be completed, the Company is reliant upon its customers and other third party connection points to prepare their systems for testing. The Company could be affected if a significant number of customers delay testing or conversions until the end of 1999. The Company has been active in advising customers and business partners of their obligation and the Company continues to evaluate the impact of those customers who have not yet coordinated with the Company for upgrades, certification/verification and testing. The customers with the greatest revenue impact have been identified and their testing/certification process is being analyzed. Testing has been completed and/or scheduled for substantially all key systems. If coordination of a preset testing time is not possible, the revenue impact for the accommodation of last minute testing is being evaluated. The goal is to ensure that products with significant revenues are fully ready, tested and implemented before October 31, 1999, so that the Company's overall revenue is not materially impacted. The Company's business is also heavily reliant upon external suppliers to provide certain operating elements of its business. Some of these providers include telecommunication services, computer systems, banks and utility companies. Due diligence continues to be performed on suppliers to the Company as described in Phases III, IV and V. Inquiries are made regarding suppliers' Year 2000 efforts and contingency plans are developed as necessary. However, the Company exerts no control over the efforts of these companies to become Year 2000 compliant. The services provided by these parties are critical to the operations of the Company and the Company is heavily reliant upon these parties to successfully address the Year 2000 issue. Therefore, if any of these parties fail to provide the Company with services, the Company's ability to conduct business could be materially impacted. The result of such impact may have a material adverse effect on the financial condition and results of operations of the Company. COMPETITION AND CONSOLIDATION The markets for the applications systems and services offered by NDC are highly competitive. Competition in the health care information services and electronic commerce markets affects NDC's ability to gain new customers and the prices it can charge. The key competitive factors for NDC are functionality of products and services, quality and price. Some of NDC's competitors have access to significant capital and management, marketing and technological resources that are equal to or greater than those of NDC, and there can be no assurance that NDC will continue to be able to compete successfully with them. In addition, NDC competes with businesses that internally perform data processing or other services offered by NDC. In addition, there has been and continues to be significant consolidation in the banking and health care industries. The Company markets its credit, charge and debit card transaction services through several marketing channels, including banks. As a result of consolidation, banks that market the Company's financial services may be acquired by banks that compete with the Company or by banks that have a relationship with one or more of the Company's competitors, thereby potentially depriving the Company of a distribution channel. The consolidation of health care providers and other parts of the industry may reduce the number of potential customers for the Company's health care related services and the increased purchasing power of these larger consolidated organizations could lead to reductions in the amounts paid for such services. The overall impact of such consolidation in the electronic commerce and health care industries is difficult to predict and could have a material adverse effect on the Company's business, financial condition and results of operations. MARKETS AND APPLICATIONS NDC's future growth and profitability will depend, in part, upon the further expansion of the health care information services and electronic commerce markets, the emergence of other markets for electronic transaction processing services and NDC's ability to penetrate such markets. Further expansion of these markets is dependent upon the continued growth in demand, the continued automation of traditional paper-based processing systems and demand for new decision support applications. NDC's ability to penetrate such markets will depend, in turn, upon its ability to apply its existing technology, or to develop new technology, to meet the particular service needs of each new market. There can be no assurance that markets for NDC's services will continue to expand and develop or that NDC will be successful in its efforts, or have adequate financial, marketing and technological resources to penetrate new markets. HEALTH INFORMATION SERVICES Federal and state governments have recently focused significant attention on health care reform. It is not possible to predict which, if any, proposal that has been or will be considered will be adopted. There can be no assurance that the health care regulatory environment will not change so as to restrict the existing operations of, impose additional requirements on or limit the expansion of NDC. Costs of compliance with changes in government regulations may not be subject to recovery by NDC through price increases. Significant media and public attention has recently been focused on the health care industry due to ongoing federal and state investigations purportedly related to certain referral and billing practices. The Office of the Inspector General and the Department of Justice have initiated hospital laboratory billing review projects in certain states and are expected to extend such projects to additional states, including states in which NDC operates. These projects increase the likelihood of governmental investigations of hospitals, laboratories and other institutions for which NDC perform services. Although NDC currently monitors billing practices and arrangements to ensure compliance with prevailing industry practices under applicable laws, such laws are complex and constantly evolving and there can be no assurance that governmental investigators will not take positions that are inconsistent with industry practices, including NDC's practices. MEDICAL RECORD INFORMATION The Department of Health and Human Services ("DHHS") has proposed regulations under Health Insurance Portability and Accountability Act of 1996 ("HIPAA") regarding the maintenance and transmission of health information. These regulations establish certain standards for electronic record-keeping. The Company cannot tell whether these regulations will be adopted in their present or a different form, or at all. However, if these regulations are adopted, they may require modifications to the Company's current computer software and record- keeping practices. These changes may involve substantial capital investment, and could have a significant effect on the Company's operations, financial condition, or business. ELECTRONIC COMMERCE BUSINESS NDC's direct merchant customers have liability for charges disputed by cardholders. However, in the case of merchant fraud, or insolvency or bankruptcy of the merchant, NDC may be liable for any of such charges disputed by cardholders. NDC requires cash deposits and other types of collateral by certain merchants to minimize any such contingent liability. Based on its historical loss experience, NDC has established reserves, which management believes are adequate, for estimated losses on transactions processed. There can be no assurance, however, that such reserves for losses will be adequate. Any such losses in excess of reserves could have a material adverse effect on the financial condition and results of operations of NDC. ACQUISITION RISKS NDC completed six acquisitions in fiscal 1998 and one in fiscal 1999 and intends to seek additional acquisition opportunities and alliance relationships with other businesses that will allow it to increase its market penetration, technological capabilities, product offerings and distribution capabilities. There can be no assurance that NDC will be able successfully to identify suitable acquisition candidates, complete acquisitions or expand into new markets. As a result of the acquisitions of each of Source Informatics Inc. ("Source"), PMSI Database Holdings Inc. ("PMSI Database") and Physician Support Systems, Inc. ("PHSS"), NDC is currently devoting significant management and other resources toward the assimilation of these businesses with NDC, particularly PHSS. There can be no assurance that NDC will be able to successfully integrate the operations of acquired businesses into NDC's operations. In addition, there can also be no assurance that future acquisitions will not have an adverse effect upon NDC's operating results, particularly in the fiscal quarters immediately following the completion of such acquisitions while the operations of the acquired business are being integrated into NDC's operations. Once integrated, acquired operations may not achieve levels of revenue growth, profitability or productivity comparable with those achieved by NDC's existing operations, or otherwise perform as expected. Specifically, with regard to the acquisition of Source, certain products currently under development may never reach technological feasibility, which could have a material adverse effect upon NDC's operating results. NDC may incur indebtedness in the future, including through borrowings under a credit facility, if a credit facility is available, to finance acquisitions. As a result, NDC expects to be subject to risks associated with debt financing, including the risk that interest rates may increase, the risk that NDC's cash flow will be insufficient to meet required payments on its debt and the risk that NDC may be unable to refinance or repay the debt as it comes due. In addition, NDC competes for acquisition and expansion opportunities with companies that have substantially greater resources. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW, CERTAIN CHARTER AND BY-LAW PROVISIONS AND STOCKHOLDER RIGHTS PLAN Certain provisions of NDC's Certificate of Incorporation and By-laws could delay, defer or prevent a takeover attempt that a stockholder might consider in its best interest. These provisions may adversely affect prevailing market prices for NDC Common Stock. These provisions, among other things, classify NDC's Board of Directors into three classes as nearly equal in number as the total number of directors permits, each of which serve for different three-year terms, and authorize the Board of Directors to issue preferred stock in one or more classes or series and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any action on the part of the stockholders. The rights of the holders of NDC Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of NDC. NDC has no current plans to issue shares of preferred stock. NDC also maintains a stockholder rights plan which entitles the stockholders of NDC, upon the happening of certain events, to purchase preferred stock of NDC. These NDC Rights (hereinafter defined) may have certain anti- takeover effects because the rights will cause substantial dilution to a person or group that attempts to acquire NDC on terms not approved by the Board of Directors of NDC unless the offer is conditioned on a substantial number of NDC Rights being acquired. In addition, Section 203 of the Delaware General Corporation Law (the "DGCL") prohibits certain persons from engaging in business combinations with NDC, which may also have the effect of delaying, deterring or preventing a change of control of NDC. NEW PRODUCT INTRODUCTIONS The market for NDC's products and services is characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing customer needs. There can be no assurance that NDC will be successful in developing and marketing these new products and services or that NDC's current or new products and services will adequately meet the quickly changing demands of their customers. In addition, in order to meet its customers' demands, NDC is continually involved in a number of development projects, including NDC Health Information Services' efforts to update its core mainframe-based products. Because it is generally not possible to predict the time required and costs involved in reaching certain research, development and engineering objectives, estimated product development schedules could require extensions. NDC believes that the future success of its NDC Health Information Services will depend in large part on its ability to maintain and enhance its current product and service offerings and to continually develop and introduce new products and services that will keep pace with technological advances and satisfy evolving customer requirements. Further, there can be no assurance that NDC will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products and services. If NDC is unable to develop and introduce new products and services in a timely manner, or if a new or updated product does not achieve market acceptance, NDC's financial condition and results of operations could be materially adversely affected. -----END PRIVACY-ENHANCED MESSAGE-----