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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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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
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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
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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
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NATIONAL DATA CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I.
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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
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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
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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
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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
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Item 1. BUSINESS
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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
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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 b