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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, 2001
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 issuer as specified in its charter)
Delaware 58-0977458
(State or other jurisdiction (I.R.S. Employer
of 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
Series A Junior Participating 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 $1,183,944,980 based upon the last reported sale price on
The New York Stock Exchange on August 17, 2001 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 17, 2001 was 33,966,583 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K
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Portions of the Company's Definitive Proxy Statement
relating to the 2001 Annual Meeting of Stockholders
to be held on October 25, 2001 Part III
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NATIONAL DATA CORPORATION
2001 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...................................................... 10
Item 3. LEGAL PROCEEDINGS............................................... 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS....................................................... 11
EXECUTIVE OFFICERS OF THE REGISTRANT............................ 12
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................... 13
Item 6. SELECTED FINANCIAL DATA......................................... 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 16
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................. 34
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 35
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 71
Part III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT...................................................... 71
Item 11. EXECUTIVE COMPENSATION.......................................... 71
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 71
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 71
PART IV
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Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........................................... 72
SIGNATURES................................................................ 78
INDEX TO EXHIBITS......................................................... 80
SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD LOOKING STATEMENTS
When used in this Annual Report on Form 10-K, in documents incorporated
herein and elsewhere by management of National Data Corporation ("NDCHealth" or
the "Company"), from time to time, the words "believes," "anticipates,"
"expects," "intends," "plans" and similar expressions and statements that are
necessarily dependent on future events 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 such
statements, the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 is applicable
and invoked. Such statements are based on a number of assumptions, estimates,
projections or plans that are inherently subject to significant risks,
uncertainties and contingencies that are subject to change. Actual revenues,
revenue growth and margins will be dependent upon all such factors and their
results subject to risks related to the implementation of changes by the
Company, the failure to implement changes, and customer acceptance of such
changes or lack of change. There can be no assurance of the expected benefits
and prospects for alliances that may be entered into from time to time. These
alliances involve risks and uncertainties, including market and customer
acceptance of the relationship, the effect of economic conditions, competition,
pricing, and development difficulties. Actual results of events could differ
materially from those anticipated in the Company's forward-looking statements as
a result of a variety of factors, including: (a) those set forth under the
caption "Additional Factors that May Affect Future Performance"; (b) those set
forth elsewhere herein; (c) 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; and (d) those set forth from time to time in the Company's
analyst calls and discussions. 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 update forward-looking or
other statements or 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 ("NDC", "NDCHealth" or the "Company") is a
Delaware corporation incorporated in 1967. On January 31, 2001, NDC completed
the spin-off of its eCommerce business segment, Global Payments Inc. ("Global
Payments"), into a separate publicly traded company with its own management and
Board of Directors to permit the Company to increase focus on its core
healthcare businesses. As a result of the spin-off, NDC's Health Information
Services business segment remains as a stand-alone integrated company operating
as NDCHealth. NDCHealth will continue its focus on providing a full range of
services to the healthcare industry through our integrated intelligent network
solutions and point-of-service systems as well as information management
solutions. Our point-of-service systems, offered directly and indirectly
through alliances, enhance connectivity to our intelligent network and increase
our transaction volume and data sources.
We provide point-of-service systems, high volume, network-based information
solutions and information management services to the healthcare industry. Our
offerings include electronic claims processing, eligibility verification, claims
adjudication and payment systems, processing of administrative and clinical
transactions, database information reporting on prescription drug sales and
pharmacy operations, consulting services, and practice management systems. We
provide products and services to pharmacies, physicians, hospitals, integrated
delivery systems, managed care organizations, payers, government healthcare
agencies, distributors, clinics, Internet portals, pharmaceutical manufacturers
and other healthcare providers and related businesses.
Our business strategy centers on providing integrated solutions. We offer
answers to fulfill our customers' needs with respect to information processing
services for the healthcare industry. We believe that this strategy provides the
greatest opportunity for leveraging our existing infrastructure to maintain a
consistent base of recurring revenues.
We believe that the healthcare market offers attractive opportunities for
continued growth. In pursuing our business strategy, we seek both to increase
our penetration of existing markets and to identify and create new related
markets through the development of new applications, enhancement of existing
products, and increasing Internet utilization. Additionally, we are expanding
our distribution channels, including through the Internet and, where
appropriate, investing in or forging alliances with companies that have
compatible products, services, development, and/or distribution capabilities.
NDCHealth serves a diverse customer base consisting of more than 100,000
physicians. More than ninety percent of the pharmacies in North America and
twenty-five percent of the pharmacies in the United Kingdom are linked to our
value added services; approximately forty percent of the nation's large (400+
beds) hospitals are NDCHealth customers; over 100 pharmaceutical manufacturers
and over 45 retail pharmacy chains
3
rely on NDCHealth for information management services; and NDCHealth has value-
added electronic connections to more than 1,000 commercial and governmental
healthcare payers. In addition, we are in the early phases of entering the
German and U.K. information markets. We believe that our presence in the
pharmacy, managed care organization, physician, hospital, pharmaceutical
manufacturer, and healthcare payer markets is broader than any other similar
healthcare information company and provides us with a strong competitive
advantage.
Further, the Internet provides NDCHealth with new product opportunities for
handling financial, administrative and clinical transactions as well as for
information management services. We are aggressively building upon our systems,
network and information management capabilities to take advantage of the
Internet. As the Internet has expanded the market to new users and provided new
distribution channels, we have and will continue to Internet-enable our existing
and new products and services in a secured environment.
Our intelligent network solutions provide transaction processing services
between providers and payers. Our intelligent network goes beyond simple data
transport by offering customized validation and information processes for a
broad range of transaction types among multiple providers and payers. The point-
of-service systems that we offer directly and through various alliances and
strategic investments provide our customers with applications to improve their
efficiency of operation, promote cost containment and enhance the overall
quality and predictability of patient care outcomes, while providing enhanced
connectivity and additional transaction volume to our intelligent network. Our
information management service solutions include proprietary healthcare
information, consulting services and customized business intelligence solutions
for our customers' emerging healthcare business issues. These services are
currently offered primarily to pharmaceutical manufacturers, retail chain
pharmacies and hospitals. It is our intent to expand our markets for these
services to include physicians and payers.
Our services assist our customers in managing costs and enhancing the
quality of patient care. Our applications help our customers better manage
revenue and cash flow, reduce overhead costs, react quickly to changing market
conditions, improve business operations and streamline administrative processes.
Our revenue consists of recurring transaction processing fees, monthly
maintenance and support fees, information management subscription fees,
consulting services and software license revenue.
Acquisitions, Investments and Strategic Alliances
From time to time, we have made acquisitions and investments and entered
into strategic alliances in an effort to obtain a competitive advantage or an
expanded presence in targeted markets. During the past several years, we made
strategic acquisitions in Western Europe to broaden the market for our
information management service solutions. We have entered into several new
alliances with point of service providers such as Siemens, PDX, TechRx and
Vitalworks for intelligent network solutions. These relationships should
increase the demand for connectivity to our intelligent network in the future.
4
Subsequent to the end of fiscal 2001, we entered into an ongoing
relationship with MedUnite, Inc. and sold our physician network services
business to MedUnite, Inc. As a result of this alliance, NDCHealth became a
founding investor in MedUnite, Inc. with leading national payers. This alliance
should allow us to receive a growing revenue stream from network services sold
to our physician system customers.
For information regarding our acquisitions, please see Note 2 to the
Consolidated Financial Statements. We believe that acquisitions, investments
and strategic alliances will continue to be important to our ability to compete
effectively.
Healthcare Market
We believe that the integrated services that we offer to the healthcare
industry place us strategically in the center of a very dynamic marketplace.
Because of our unique position, we manage healthcare related information from
the point of patient contact through the point of payment. Through our
information management solutions we provide our customers with useable
information while maintaining high standards for patient confidentiality.
There is a growing worldwide need in healthcare for information solutions
and health information technology services. Industry estimates are that over
$1.2 trillion is spent annually on healthcare in the United States alone. Of
this amount, $210 billion is spent on administrative tasks and $400 billion is
spent on inappropriate treatment, while only $590 billion is spent on
appropriate treatment. We believe that our integrated solutions provide
information and services useful in reducing administrative and other related
healthcare costs and expenses and enhancing the quality of care. Additionally,
the aging worldwide population is providing more need for improved information
technology services relating to the healthcare industry. Because a high
percentage of healthcare transactions are still handled using manual, paper-
based methods, or are not being consistently performed, we believe that the
healthcare industry is one of the largest untapped markets for providing
information services. Our solutions provide the tools to help providers and
payers reduce administrative expense and improve the clinical experience, while
at the same time providing a robust source for statistical and analytical
information required by our customers.
Government Regulation
The healthcare industry is highly regulated and is subject to changing
political, regulatory and other influences. These factors affect the purchasing
practices and operation of healthcare organizations such as our customers.
Federal and state legislatures and agencies periodically consider programs to
reform or revise the U.S. healthcare system. These programs may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which healthcare
industry participants operate. We are unable to predict future proposals with
any certainty or to predict the effect they would have on our business.
5
In addition, a number of recent legislative and regulatory changes may
significantly impact our business. Under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, Congress required the adoption of rules to
establish standards and requirements for the electronic transmission of certain
health information. These rules generally govern the use and disclosure of
patient-identifiable health information, and apply to certain of our operations
as well as the operations of many of our customers. See detailed discussion in
"Additional Factors that May Affect Future Performance."
Products, Services and Distribution Channels
The following discussion provides greater detail on our major products and
services and our distribution channels. NDCHealth, MediSoft, Lytec and Concept
are service marks or trademarks, or registered service marks or trademarks, of
NDCHealth.
Network Services and Systems Solutions
We believe our intelligent network and point-of-service systems streamline
our customers' workflow, improve cash flow, provide real-time information to
help providers better manage their practices, and give the healthcare industry
new and improved methods to assure a higher quality of care at a lower cost. We
process over five billion transactions per year including those that we process
for Global Payments Inc., our former eCommerce business segment, under a network
services agreement. Over two billion of these transactions are healthcare
transactions and the value of the healthcare claims processed is over $250
billion. We believe that our real-time intelligent health information network is
the world's largest and most advanced. We offer our customers NDCHealth
proprietary solutions as well as those of our multiple alliance partners. The
point-of-service systems that we offer help our customers improve efficiency and
reduce costs while also serving as an additional source of transaction volume
for our intelligent network.
We offer payers customized real-time electronic connectivity to our
provider networks through the NDCHealth intelligent network, including Internet
access for claims/encounter editing, submission and adjudication, eligibility
verification, remittance advice, referral authorization, and claim status and
tracking. We also offer payers the ability to receive non-HIPAA transactions
through the NDCHealth intelligent network, saving payers from costly legacy
system conversions.
We believe that with the growing acceptance of healthcare technology and
the need to speed payment while reducing costs, there will be a significant
increase in the number and types of electronic transactions. Many of the new
transaction types may have broad impact across the healthcare continuum. For
example, new solutions such as electronic prescriptions add new information
management needs as well as directly impacting the way physicians, hospitals,
pharmacies and payers practice and do business. Other examples include
electronic referrals by physicians to hospitals and the increased
6
use of medical data by physicians, hospitals and other providers to satisfy new
types of healthcare information needs.
Accordingly, we expect growth opportunities from further automating
existing NDCHealth customers. This will happen as a result of the continued
increase in transactions as the population ages and increased use of electronic
transmission for both existing transaction sets and new transaction sets. We
believe that the HIPAA requirements will accelerate this trend.
Our Network Services and Systems solutions distributed to the pharmacy,
hospital and physician markets described below generally represent between 55%
and 60% of our revenues:
Pharmacy Solutions
Our pharmacy solutions include transaction processing, information
management services, value added pre- and post-transaction edit processes,
payer adjudication services and, through our alliance with TechRx
Incorporated, in-store practice management systems. More than ninety
percent of the pharmacies in North America and twenty-five percent of the
pharmacies in the United Kingdom are linked to our value added services,
totaling over 55,000 chain, independent, mail order, managed care and
institutional outlets.
Our pharmacy solutions are currently offered in the United States, Canada
and the United Kingdom through the Internet, our direct sales force, and
alliance partners. We compete with many companies; however, we believe
that we are the largest provider of pharmacy solutions in North America.
Hospital Solutions
Our hospital solutions provide transaction processing, Internet-based
services and application software to support the administrative, financial
and clinical information management requirements of hospitals and health
systems in the United States. Our over 1,200 hospitals and health system
customers represent approximately 40% of hospitals in the United States
with more than 400 beds. Our application software solutions include claims
preparation and submission, payer specific edits, eligibility verification,
remittance management, compliance management and document storage. These
solutions provide additional transaction volume and interface with our
intelligent network to access our transaction processing solutions. We
compete with many companies; however, we believe that we are the largest
provider of network transaction solutions to large hospitals in North
America.
Our hospital solutions are offered in the United States through our
direct sales force as well as through multiple strategic alliances.
7
Physician Solutions
Our physician solutions provide practice management systems and, through
our alliance with MedUnite, Inc., transaction processing services to
support the administrative, financial and clinical information management
requirements of physicians. We believe more than 100,000 physicians in the
United States use one or more of our systems or services, including our
industry leading, Windows-based practice management systems: MediSoft,
Lytec and Concept. In addition, we have a number of alliance partners
through which we offer our solutions. Through our alliance with MedUnite,
Inc., we are able to offer transaction processing solutions providing
claim/encounter editing, submission and adjudication, authorization, and
prescription order and refill authorization.
Our physician solutions are offered in the United States through value-
added resellers, direct mail, our direct sales force, alliance partners,
and the Internet.
Information Management Solutions
We provide sales and marketing management information, research and
consulting services, and customized business intelligence information solutions
to more than 100 pharmaceutical manufacturers and 45 pharmacy chains, with sales
to a single customer representing approximately 11% of total NDCHealth revenue.
Our offerings include numerous products and services and customized solutions
that draw statistical and analytical inferences and models from our data
repository. Our data repository is managed and maintained in a 28-terabyte
dynamic data warehouse. Our solutions transform this vast volume of anonymous
patient data into information that our customers can use in order to more
effectively manage their businesses and provide better patient care. This
information includes data sets with information on prescription sales, rebates,
and sampling as well as demographic and prescription information on managed care
payers, pharmacy providers, physician over the counter recommendations,
physician and healthcare providers, retail prescription sales, non-retail
institutional sales and non-retail outlets. NDCHealth is able to provide this
information in a secure environment respecting the confidentiality, privacy and
ownership of patient and provider records. Our customers are able to use this
information in analyzing issues such as prescriber targeting and profiling,
product research and development, new product launches, sales compensation and
management, the influence of managed care, pricing, clinical information and
payment information. These solutions generally represent between 40% and 45% of
our revenue.
Our information solutions are offered in the United States and in early
phase operations in the United Kingdom and Germany through our direct sales
force. Our primary competitor in providing these solutions is IMS Health.
8
Operations and Systems Infrastructure
We operate multiple data and customer support facilities. The primary
facilities are in Atlanta, Georgia; Phoenix, Arizona; Tulsa, Oklahoma; the
United Kingdom; and Germany.
Because of the large number and variety of our products and services, we do
not rely on a single technology to satisfy our sophisticated computer systems
needs but instead employ technology that is suitable for each particular
processing requirement. Given this approach, we utilize (i) fault-tolerant
computers for high volume, real-time transaction processing; (ii) client-server
technology for end-user data base applications; (iii) Internet technology for
transaction processing among computers in our solutions; (iv) Internet solutions
to reach directly to providers and pharmaceutical manufacturers; (v) the latest
central systems for large scale transaction and batch data processing; and (vi)
HP, Compaq, SUN, IBM, UNIX, Dell, 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; other systems use high speed LAN
connections. The bulk of these system connections utilize the Internet TCP/IP
architecture. We also maintain storage systems connected to the backbones,
including robotic tape libraries and optical storage for archival purposes. Our
systems are supported using advanced network control by our experienced systems,
operations and production control staffs.
Our communications network is made up of numerous discrete networks, each
designed for a different purpose. We maintain four primary communications
networks in addition to our support of the public Internet: a dial-up, short
transaction network; a private line nationwide high bandwidth network; a frame
relay network; and a dial-up voice/data network for interactive and voice
traffic. We also maintain a number of support services offering wireless,
Internet and ISDN connectivity. The network environment supports a diverse set
of telecommunication protocols to respond to its diverse customer requirements.
Research and Development
During fiscal 2001, 2000, and 1999, NDCHealth expended approximately $17.5
million, $20.7 million, and $20.0 million, respectively, on activities relating
to the development and improvement of new and existing products, services and
techniques. Of these amounts, approximately $9.0 million, $9.6 million, and $9.5
million were capitalized in fiscal 2001, 2000, and 1999, respectively, resulting
in net expenses of approximately $8.5 million, $11.1 million, and $10.5 million,
respectively.
9
Employees
As of May 31, 2001, NDCHealth had approximately 1,650 employees. On August
6, 2001, we announced the sale of our physician network services business to
MedUnite, Inc. As a result of this transaction, we currently have approximately
1,450 employees. Many of our employees are professionals or are highly skilled
in technical areas specific to the healthcare industry, and we believe that our
current and future operations depend substantially on retaining such employees.
Our employees are not represented by any labor union and we believe our employee
relations to be excellent.
Item 2. PROPERTIES
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Our corporate headquarters are located in Atlanta, Georgia. We occupy 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, we purchased a previously leased (by NDC), fully occupied five-story,
85,000 square foot building at Four Corporate Square in Atlanta. This facility
is currently leased to Global Payments Inc. for a term ending January 31, 2004.
There is an existing $3.1 million mortgage on this facility which we assumed
from the seller.
In addition to the above facilities, we lease or rent a total of 22 other
facilities. Of these 22, three are primary locations and 19 are sales and
support offices. Included in these totals are five foreign locations. We own or
lease a variety of computers and other computer equipment for our operational
needs. We continue to upgrade and expand our computers and related equipment in
order to increase efficiency, enhance reliability, and provide the necessary
base for business expansion.
We believe that our facilities and equipment are suitable and adequate for
the business of NDCHealth as presently conducted.
Information about leased properties is incorporated by reference from Note
15 of the Notes to the Consolidated Financial Statements.
10
Item 3. LEGAL PROCEEDINGS
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We are involved in litigation related to our divested Physician and
Hospital Support Services and Hospital Management Services (PHSS) units. We have
obtained a ruling from the European Commission ordering IMS Health to license
its structure for organizing pharmaceutical sales data to us. We are unable to
predict whether IMS Health may be successful in overturning the EU ruling.
Additionally, we are party to a number of other claims and lawsuits incidental
to our business.
We believe that the ultimate outcome of such matters, in the aggregate,
will not have a material adverse impact on our financial position, liquidity or
results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None submitted.
11
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
---- ------------------- ---
Walter M. Hoff President and Chief Executive Officer of NDCHealth since April 2001, 48
Chief Executive Officer of NDC Health Information Services from August
1998 to March 2001; Executive Vice President of First Data Corporation
from 1992 to 1998. Director of Metris Corporation.
Randolph L.M. Hutto Executive Vice President - Finance and Business Development and Chief 52
Financial Officer of NDCHealth since November 2000; Executive Vice
President and General Counsel of Per-Se Technologies from 1998 to 2000;
Senior Vice President - Strategic Planning and Business Development of
First Data Corporation from 1996 to 1998.
Charles W. Miller Executive Vice President - Operations of NDCHealth since January 2000; 56
various executive positions with McKesson from 1995 to 2000, most
recently as Group President - Enterprise Operations.
Glenn N. Rosenkoetter Executive Vice President - Sales and Marketing of NDCHealth since April 53
2000; Group President - Payor Solutions Group, and European Operations
for the Information Technology Business of McKesson from 1998 to 2000;
Senior Vice President - Strategic Business Units of HBO & Company from
1994 to 1998.
E. Christine Rumsey Vice President - Human Resources of NDCHealth since September 1999; 50
Senior Vice President - Human Resources and Administration for McKesson
from January to September 1999; Senior Vice President - Human Resources
for HBO & Company from 1995 to 1999.
12
Name Business Experience Age
---- ------------------- ---
David H. Shenk Vice President, Corporate Controller and Chief Accounting Officer of 53
NDCHealth since January 1998; Corporate Controller, Rollins, Inc.,
1992-1997.
Patricia A. Wilson General Counsel and Secretary of NDCHealth since October 2000; partner 50
with Troutman Sanders LLP from 1988 to 2000.
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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Our common stock is traded on the New York Stock Exchange under the ticker
symbol "NDC." The high and low sales prices and dividends declared per share of
the Company's common stock for each quarter during the last two fiscal years are
listed below. The amount of our quarterly dividend was reduced in the third
quarter of fiscal 2001 due to the spin-off of Global Payments. While we have
historically paid dividends to owners of our common stock, the declaration and
payment of future dividends will depend on many factors, including our earnings,
financial condition, business needs, capital and surplus, and regulatory
considerations, and is at the discretion of our Board of Directors.
Dividend
High Low Per Share
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Fiscal Year 2001
First Quarter $31.38 $20.75 $.075
Second Quarter 38.94 27.31 .075
Third Quarter 38.90 23.90 .040
Fourth Quarter 30.80 21.17 .040
Fiscal Year 2000
First Quarter $51.56 $37.14 $.075
Second Quarter 40.62 21.58 .075
Third Quarter 42.79 30.04 .075
Fourth Quarter 31.34 22.00 .075
The number of shareholders of record as of August 17, 2001 was 3,563.
13
On January 31, 2001, we completed the spin-off of Global Payments Inc. The
Company's shareholders received 0.8 share of Global Payments Inc. common stock
for each share of common stock held as of the January 19, 2001 record date. In
light of the spin-off and the resulting change in sales price of our common
stock, the high and low sales prices of our common stock for each quarter during
the last two fiscal years listed below have been adjusted to reflect the spin-
off.
High Low
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Fiscal Year 2001
First Quarter $19.17 $12.65
Second Quarter 23.79 16.69
Third Quarter 27.46 17.45
Fourth Quarter 30.80 21.17
Fiscal Year 2000
First Quarter $31.43 $22.64
Second Quarter 24.76 13.16
Third Quarter 26.08 18.31
Fourth Quarter 19.11 13.41
14
Item 6. SELECTED FINANCIAL DATA
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The table below summarizes selected historical financial information of
NDCHealth for each of the last five fiscal years. All amounts have been restated
on a continuing operations basis. Discontinued operations and restructuring,
impairment, and non-recurring charges are more fully discussed in the Notes to
the Consolidated Financial Statements. The selected financial information shown
below has been derived from our audited financial statements. This table should
be read in conjunction with other financial information included in this report,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements.
(In thousands, except per share data) Fiscal Years Ended May 31,
------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------
Revenue:
Information Management $138,091 $ 131,229 $128,961 $ 55,223 -
Network Services and Systems 205,862 158,051 141,832 130,994 $109,521
Divested Businesses 5,862 56,393 68,203 62,929 64,300
------------------------------------------------------
Total $349,815 $ 345,673 $338,996 $ 249,146 $173,821
Operating Income (Loss) $ 58,861 $ 12,383 $ 62,104 ($82,595) $ 15,215
Income (Loss) Before Discontinued
Operations $ 28,068 ($ 1,163) $ 33,863 ($90,013) $ 4,175
Diluted Earnings (Loss) Per Share
Before Discontinued Operations $ .82 ($.03) $ .97 ($2.80) $ .13
Dividends Declared Per Share $ .23 $ .30 $ .30 $ .30 $ .30
Total Assets $488,212 $ 653,632 $534,723 $ 482,961 $391,136
Long-Term Obligations $155,431 $ 160,250 $165,013 $ 160,040 $144,855
Total Shareholders' Equity $230,467 $ 330,136 $409,094 $ 347,935 $323,249
The Company incurred restructuring and impairment charges of $2.2 million
and $34.4 million in fiscal 2001 and 2000, respectively, and non-recurring
charges of $119.5 million and $9.5 million in fiscal 1998 and 1997,
respectively. Operating income excluding these charges was $61.0 million, $46.8
million, $36.9 million and $24.7 million in fiscal 2001, 2000, 1998 and 1997,
respectively. Income before discontinued operations excluding these charges was
$29.5 million or $0.86 per share, $21.2 million or $0.64 per share, $20.8
million or $0.64 per share, and $14.6 million or $0.45 per share in fiscal 2001,
2000, 1998 and 1997, respectively.
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
General
For an understanding of the significant factors that influenced our results
during the past three years, the following discussion should be read in
conjunction with the consolidated financial statements of NDCHealth and related
notes appearing elsewhere in this report.
As a result of the January 31, 2001 spin-off of Global Payments Inc., NDC's
eCommerce business segment, NDC's Health Information Services business segment
remains as a stand-alone integrated company operating as NDCHealth. NDCHealth
classifies its business into two fundamental segments: Network Services and
Systems; and Information Management.
Network Services and Systems provides point of service systems, high
volume, network based information solutions and information management services
to the healthcare industry. Our products and services are provided to
pharmacies, physicians, hospitals, integrated delivery systems, managed care
organizations, payers, government healthcare agencies, distributors, clinics,
Internet portals, and other healthcare providers and related businesses and
include electronic claims processing, eligibility verification, claims
adjudication and payment systems, provision of administrative and clinical
services, and physician practice management systems. NDCHealth serves a diverse
customer base comprised of more than 100,000 physicians. More than ninety
percent of the pharmacies in North America and twenty-five percent of the
pharmacies in the United Kingdom are linked to our value added services;
approximately forty percent of the nation's large (400+ beds) hospitals are
NDCHealth customers; and NDCHealth has value-added electronic connections to
more than 1,000 commercial and governmental healthcare payers
Information Management products and services provided to pharmaceutical
manufacturers, pharmacy chains and hospitals include database information
reporting on prescription drug sales and pharmacy operations and consulting
services. Our customer base is comprised of over 100 pharmaceutical
manufacturers and 45 pharmacy chains. Additionally, we are in the early phases
of entering the German and U.K. information markets.
We believe that our presence in the pharmacy, managed care organization,
physician, hospital, pharmaceutical manufacturer, and healthcare payer markets
is broader than any other similar healthcare information company and provides us
with a strong competitive advantage.
16
Results of Operations
On January 31, 2001, NDC completed the spin-off of its eCommerce business
segment, Global Payments Inc., into a separate publicly traded company with its
own management and Board of Directors to permit the remaining company to
increase focus on its healthcare information businesses. As a result of the
spin-off, the Company's financial statements have been prepared with Global
Payments' net assets, results of operations, and cash flows displayed separately
as "discontinued operations" with all historical financial statements restated
to conform to this presentation.
National Data Corporation's healthcare information business segment is the
remaining stand-alone business after the spin-off. Accordingly, National Data
Corporation is now doing business as NDCHealth.
Additionally, during the last 24 months we completed a significant strategy
review and implemented a plan to focus on our core health products and services.
As a result, the last two years have represented a major transition period for
our company. As a part of that plan, we determined to divest our management
services business in the third quarter of fiscal 2000. The sale of this
management services business was completed in the first quarter of fiscal 2001.
This business is also accounted for as discontinued operations.
The remainder of the results of operations excludes these discontinued
operations.
During the last eighteen months, we have also eliminated non-core as well
as obsolete and redundant product and service offerings. In addition, we
accelerated clearinghouse integration, consolidation of locations and associated
staff and expense reductions. Total charges related to restructuring and asset
impairment were $34.4 million during fiscal 2000.
During the second quarter of fiscal 2000, management also evaluated certain
significant business risks related to recent acquisitions and those locations
that were closed as part of the strategic review, including bankrupt accounts
and customer disputes. As a result of this review, unusual expenses were
recorded in the second quarter of fiscal 2000 as follows: accounts receivable
write-off of $8.0 million; bad debt allowance increases of $2.0 million;
litigation settlement expenses of $1.3 million; and write-off of $0.8 million of
prepaid expenses and recording of $1.2 million of accrued expenses.
Approximately $2.2 million of these unusual expenses were related to the
management services operation and are reflected in the results of the
discontinued operations. Accordingly, the results of fiscal 2000 include
approximately $45.5 million of charges related to restructuring and asset
impairment ($34.4 million) and other unusual expenses ($11.1 million). These
unusual expenses are included in Sales, General and Administrative expenses
($9.2 million) and Cost of Service ($1.9 million).
At the end of the second quarter of fiscal 2000, we disclosed that we would
have additional restructuring and other potential charges in the next twelve
months. In the
17
second quarter of fiscal 2001, both our Salt Lake City operations and a portion
of our Cleveland operations were closed. We also wrote down and divested a small
software operation. Therefore, in fiscal 2001, $2.2 million of restructuring and
impairment charges are reflected. These actions essentially complete all of the
programs identified in our strategic review.
For more detailed discussion of these charges, refer to Note 13 to the
Consolidated Financial Statements.
Additionally, during the first quarter of fiscal 2001, we sold our Pharmacy
Systems business to TechRx Incorporated. Through our alliance with TechRx
Incorporated, we are able to leverage the combined product development and
distribution of systems to the pharmacy market.
As we believe it will provide a better comparison and indication of the
historical performance of NDCHealth, the table below provides certain financial
information regarding NDCHealth that has been "normalized" by adjusting for the
following:
a) Discontinued operations, net of tax, for all periods (discussed above),
b) Restructuring and impairment charges in the amount of $34.4 million and
$2.2 million recorded in fiscal 2000 and fiscal 2001, respectively
(discuss ed above),
c) Unusual expenses in the amount of $11.1 million also recorded in fiscal
2000 (discussed above),
d) Other income related to the gain from sale of marketable securities in
the amount of $1.6 million recorded in fiscal 2000,
e) Other income related to the gain on the divestiture of a business in
the amount of $2.3 million recorded in fiscal 2000,
f) Other expense related to the non-cash loss recorded to mark to market
the Medscape, Inc. investment in the amounts of $9.7 million and $7.0
million recorded in fiscal 2000 and fiscal 2001, respectively,
g) Revenue and operating expenses related to divested businesses, as
follows:
1) Fiscal 1999: Revenue $68.2 million; and Operating expenses $61.2
million,
2) Fiscal 2000: Revenue $56.4 million; Operating expenses $57.2
million; and Other Income $0.7 million ,
3) Fiscal 2001: Revenue $5.9 million; and Operating expenses $5.5
million,
h) Incremental Sales, General and Administrative expenses associated with
being a separate public company of approximately $2.3 million have been
added to fiscal 1999 and 2000. These expenses are estimates for the
additional functionality needed for corporate activities such as legal,
financial, human resources, communication and similar functions, and
i) Income tax provisions for all periods have been recalculated for the
above effects utilizing the appropriate effective rate for each period.
18
The following tables are a summary of our results of continuing operations
as reported and "normalized" as described above (in millions, except per share
data). Please see Exhibit 99.1 to this report for more detailed "normalized"
results of operations.
2001 vs. 2000 2000 vs. 1999
2001 2000 1999 Change Change
- ------------------------------------------------------------------------------------------------
As Reported
- -----------
Revenue:
Information Management $138.1 $131.2 $129.0 $ 6.9 5% $ 2.2 2%
Network Services and Systems 205.9 158.1 141.8 47.8 30% 16.3 11%
Divested Businesses 5.8 56.4 68.2 (50.6) (90%) (11.8) (17%)
-----------------------------------------------------------
Total Revenue $349.8 $345.7 $339.0 $ 4.1 1% $ 6.7 2%
Operating Income $ 58.9 $ 12.4 $ 62.1 $ 46.5 375% $(49.7) (80%)
Income (Loss) Before
Discontinued Operations $ 28.1 $ (1.2) $ 33.9 $ 29.3 * $(35.1) (104%)
Diluted Earnings (Loss) Per Share
Before Discontinued Operations $ 0.82 $(0.03) $ 0.97 $ 0.85 * $(1.00) (103%)
Normalized
- ----------
Revenue:
Information Management $138.1 $131.2 $129.0 $ 6.9 5% $ 2.2 2%
Network Services and Systems 205.9 158.1 141.8 47.8 30% 16.3 11%
-----------------------------------------------------------
Total Revenue $344.0 $289.3 $270.8 $ 54.7 19% $ 18.5 7%
Operating Income $ 60.7 $ 55.4 $ 52.8 $ 5.3 10% $ 2.6 5%
Net Income $ 33.6 $ 30.0 $ 28.5 $ 3.6 12% $ 1.5 5%
Diluted Earnings Per Share $ 0.98 $ 0.87 $ 0.81 $ 0.11 13% $ 0.06 7%
* - percentage change deemed not meaningful
The remainder of the results of operations discussion will be based on the
"normalized" results of NDCHealth as we believe that this will provide for more
meaningful comparisons.
19
Fiscal Years 2001 and 2000
The following tables provide comparisons of the Company's results of
operations (normalized) for fiscal years 2001 and 2000:
(In millions)
2001 2000 Change
------------------ ------------------- ------
Revenue:
Information Management $138.1 40% $131.2 45% 5%
Network Services and Systems 205.9 60% 158.1 55% 25%
-------------------------------------------------------------
Total Revenue $344.0 100% $289.3 100% 19%
=============================================================
Operating Income:
Information Management $ 19.7 32% $ 25.0 45% (21%)
Network Services and Systems 41.0 68% 30.4 55% 35%
-------------------------------------------------------------
Total Operating Income $ 60.7 100% $ 55.4 100% 10%
=============================================================
Consolidated
Total revenue for fiscal 2001 was $344.0 million, an increase of $54.7
million, or 19%, from fiscal 2000. This increase was the result of growth in
customer base, transaction volumes and new services to our customers due to
increased demand for our services in the pharmacy and hospital markets and due
to the favorable impact of the Medisoft systems acquisition in April 2000.
Cost of service ("COS"), as a percentage of revenue, increased to 50% in
fiscal 2001 from 49% in fiscal 2000 due primarily to increased costs for data
acquisition and investments in start-up operations in Western Europe. Absolute
COS expense increased $30.1 million, or 21%, from the prior year due primarily
to the 19% increase in revenue in addition to the increased data acquisition
costs.
Sales, general and administrative expenses ("SG&A"), as a percent of
revenue, remained constant at 22% for both years due to increased spending in
support of operations growth. Absolute SG&A expense increased $14.0 million, or
22%, in fiscal 2001 from fiscal 2000. This increase exceeded the 19% growth in
revenue due primarily to increased spending in preparation for the spin-off of
Global Payments.
Depreciation and amortization expense ("D&A"), as a percent of revenue, was
10% in both fiscal 2001 and fiscal 2000. Absolute D&A expense increased $5.3
million, or 18%, in fiscal 2001 from fiscal 2000 primarily due to the
amortization of goodwill from newly acquired businesses.
Operating income increased 10% to $60.7 million in fiscal 2001 from $55.4
million in fiscal 2000. As a percentage of revenue, the operating income margin
decreased to 18% in fiscal 2001 from 19% in fiscal 2000 due to the increased
operating expenses described above.
20
Total other expense decreased from $6.6 million in fiscal 2000 to $6.1
million in fiscal 2001. This decrease was due primarily to the minority
interest credit of $1.1 million which represents the minority's share of losses
attributable to subsidiaries consolidated in our financial statements but not
100% owned by us, partially mitigated by an increase in convertible debt
interest expense that was previously shared with Global Payments.
Income before income taxes ("IBIT") increased 12% to $54.6 million in
fiscal 2001 from $48.8 million in fiscal 2000. Diluted earnings per share for
fiscal 2001 increased 13% to $0.98 as compared to $0.87 for fiscal 2000.
Information Management
Information Management revenue grew by 5% to $138.1 million in fiscal 2001
from $131.2 million in fiscal 2000 due to new products and services offered to
new and existing customers and start-up operations in Western Europe, and was
reflective of an accelerating revenue trend throughout the year which offset the
negative revenue impact of pharmaceutical company consolidations in our customer
base.
Operating income for fiscal 2001 was $19.7 million compared to $25.0
million in fiscal 2000. This 21% decline in Operating income was due to the
previously described pharmaceutical company consolidations and our investment in
start-up operations in Western Europe.
Network Services and Systems
Network Services and Systems revenue increased 25% to $205.9 million in
fiscal 2001 from $158.1 million in fiscal 2000 primarily due to increased demand
for our services in the pharmacy and hospital markets resulting in growth in
customer base, transaction volume, and new services to existing customers as
well as the favorable impact of the Medisoft systems acquisition in April 2000.
Operating income for fiscal 2001 was $41.0 million compared to $30.4
million in fiscal 2000. This 35% increase in Operating income was reflective of
the 25% increase in revenue and increased leverage of our infrastructure.
21
Fiscal Years 2000 and 1999
The following tables provide comparisons of the Company's results of
operations (normalized) for fiscal years 2000 and 1999:
(In millions)
2001 2000 Change
------------------ ------------------- ------
Revenue:
Information Management $131.2 45% $129.0 48% 2%
Network Services and Systems 158.1 55% 141.8 52% 11%
------------------------------------------------------------
Total Revenue $289.3 100% $270.8 100% 7%
============================================================
Operating Income:
Information Management $ 25.0 45% $ 25.8 49% (3%)
Network Services and Systems 30.4 55% 27.0 51% 13%
------------------------------------------------------------
Total Operating Income $ 55.4 100% $ 52.8 100% 5%
============================================================
Consolidated
Total revenue for fiscal 2000 was $289.3 million, an increase of $18.5
million, or 7%, from fiscal 1999. This increase was the result of growth in
distribution channels, customer base, transaction volumes and new services to
our customers in the pharmacy and hospital markets.
COS increased $6.1 million, or 5%, in fiscal 2000 from fiscal 1999. This
increase was the result of increased operating costs associated with the 7%
growth in revenue. COS, as a percentage of revenue, was 49% in fiscal 2000 and
50% in fiscal 1999.
SG&A expenses increased $7.6 million, or 14%, from the prior year. This
increase was primarily due to expenses associated with continuing investments in
product development, expenses to support operations growth, and expenses related
to the planned spin-off of Global Payments. As a percentage of revenue, SG&A
expenses increased to 22% for fiscal 2000 from 21% for fiscal 1999 for the same
reasons.
D&A expense, as a percent of revenue, was 10% in both fiscal 2000 and
fiscal 1999. Absolute D&A expense increased $2.2 million, or 8%, in fiscal 2000
from fiscal 1999 due to capital expenditures for network and database
infrastructure made during the year to support future revenue growth.
Operating income increased 5% to $55.4 million in fiscal 2000 from $52.8
million in fiscal 1999. As a percentage of revenue, the operating income margin
was 19% in both fiscal 2000 and fiscal 1999.
Total other expense increased 3% to $6.6 million in fiscal 2000 from $6.4
million in fiscal 1999. This increase was reflective of an increase in interest
expense due to increased average borrowings under our line of credit.
22
IBIT for fiscal 2000 increased $2.4 million, or 5%, to $48.8 million from
$46.4 million in fiscal 1999. Diluted earnings per share grew 7% to $0.87 for
fiscal 2000 versus $0.81 for fiscal 1999.
Information Management
Information Management revenue increased $2.2 million, or 2%, in fiscal
2000 from fiscal 1999. Information Management revenue growth was negatively
impacted in fiscal 2000 by consolidation in our pharmaceutical company customer
base.
Operating income for fiscal 2000 was $25.0 million compared to $25.8
million in fiscal 1999. This 3% decline in Operating income was due to the
pharmaceutical industry consolidation described above.
Network Services and Systems
Network Services and Systems revenue increased 11% to $158.1 million in
fiscal 2000 from $141.8 million in fiscal 1999 reflecting the increased demand
for our services in the pharmacy and hospital markets and the favorable impact
of our UK pharmacy acquisition in January 1999.
Operating income for fiscal 2000 was $30.4 million compared to $27.0
million in fiscal 1999. This 13% growth in Operating income was primarily due to
the 11% increase in revenue.
Liquidity and Capital Resources
Cash flow generated from operations provides us with a significant source
of liquidity to meet our needs. At May 31, 2001, we had cash and cash
equivalents totaling $12.4 million. Net cash provided by operating activities
increased $10.1 million to $68.1 million for fiscal 2001 as compared $58.0
million in fiscal 2000. This difference is driven primarily by the increase in
earnings, the change in income taxes, increases in prepaid expenses and other
assets and decreases in accrued liabilities. The change in income taxes is
primarily due to the loss on the disposal of the management services
discontinued operations. These losses were not deductible for tax purposes until
the business was divested. During fiscal 2001, we completed the sale of these
discontinued operations; therefore, the previously non-deductible reserves are
deductible for tax purposes and will decrease the amount of income taxes
payable, thereby favorably impacting cash flow. The decrease in accounts
payable and accrued liabilities primarily relates to decreases in accruals
relating to our recent divestitures. The increase in prepaids and other assets
primarily relates to increases in non-trade receivables related to our recent
investments and alliances.
Net cash used in investing activities was $55.0 million for fiscal 2001
compared to $68.2 million for fiscal 2000. This change is primarily due to
capital expenditures of
23
$32.9 million, business acquisitions of $23.2 million and investments of $18.8
million, partially offset by $20.0 million in proceeds received from the
divestiture of the management services business. We continue to invest in
capital expenditures related to growth in our business and acceleration of
certain strategic initiatives. Additionally, during the first quarter of fiscal
2001 we sold existing assets, liabilities and cash for our investment interest
in TechRx Incorporated.
Net cash used in financing activities increased to $74.7 million for fiscal
2001 from $20.3 million in fiscal 2000. The net effect of the payments and
borrowings against the lines of credit is $68.5 million in payments for fiscal
2001 compared to $26.8 million in borrowings for fiscal 2000. Principal
payments under capital lease arrangements and other long-term debt decreased
$6.6 million for fiscal 2001 from fiscal 2000 due primarily to reduced capital
lease activity. Dividends of $8.8 million and $9.9 million were paid during
fiscal 2001 and fiscal 2000, respectively.
Based upon the relative financial conditions, results of operations and
prospects of NDCHealth and Global Payments, NDC determined that $96.1 million
would be an appropriate allocation to Global Payments of the existing NDC debt
at May 31, 2000. For the eight months ended January 31, 2001 Global Payments
made net repayments of $18.5 million, thereby reducing the $96.1 million due to
NDCHealth to $77.6 million as of January 31, 2001. At the date of the spin-off
and shortly thereafter, Global Payments Inc. made net cash payments to NDCHealth
equal to the remaining $77.6 million. We used a portion of the proceeds from
this cash payment to retire our existing lines of credit at the time of the
spin-off.
Net cash provided by discontinued operations, including the cash dividend
from Global Payments, was $72.2 million in fiscal 2001 compared to $30.2 million
in fiscal 2000.
We have a new credit facility providing a $50 million unsecured revolving
line of credit which became effective upon completion of the spin-off of Global
Payments Inc. and is available for working capital and general corporate
purposes. The facility has a one-year term, with the option for NDCHealth to
convert any outstanding borrowings at the maturity date to a term loan repayable
at the first anniversary of the initial maturity date or January 31, 2003. At
May 31, 2001, there were no amounts outstanding under the facility. We believe
that our current level of cash and borrowing capacity, along with future cash
flows from operations, are sufficient to meet the needs of our existing
operations and our planned requirements for the foreseeable future. We
regularly evaluate cash requirements for current operations, commitments,
development activities and strategic acquisitions. We may elect to raise
additional funds for these purposes, either through the issuance of additional
debt or equity or otherwise, as appropriate.
24
Forward Looking Results of Operations
We believe that NDCHealth is well positioned to provide processing and
information products and services to the healthcare industry in the future. For
fiscal year 2002, our expectation is that revenue for the full year will be in
the $375-385 million range resulting in diluted earnings per share in the range
of $1.10 to $1.14, excluding the impact of the accounting change described
below.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 deals with, among
other things, amortization of goodwill. We expect to implement this new standard
in the first quarter of fiscal 2002. We estimate that the annual impact of SFAS
142 will be an addition of approximately $0.20 diluted earnings per share in
fiscal 2002, resulting in an expected reported range of $1.30 to $1.34 in
diluted earnings per share for fiscal 2002. Additionally, we estimate that the
fiscal 2002 effective tax rate will decline to 36.0% due to our application of
this new standard.
While past performance does not guarantee future results, the Company is
committed to continuing to sustain quality earnings growth. The Company's
strategy to attain growth is to position the Company for continued future
success through ongoing investment in new market opportunities as well as
through strategic alliances and acquisitions. The Company also intends to
continue expansion into additional market segments related to its two primary
segments. The Company will continue to make investments in new technology
infrastructure and productivity tools to ensure long-term competitiveness and
maximize operating capacity and efficiency.
25
Additional Factors that May Affect Future Performance
In addition to the other information provided in our reports, including
this Annual Report on Form 10-K, the following additional risk factors may
affect the Company's results. We have provided the following risk factor
disclosure in connection with our continuing effort to qualify our written and
oral forward-looking statements for the protection of any safe harbor provision
that protects companies from securities law liability in connection with such
forward-looking statements. We undertake no obligation to update or revise our
forward-looking statements or these risk factors to reflect future developments,
changed assumptions, the occurrence of unanticipated events or changes to future
operating results. Important factors currently known to our management that
could cause actual results to differ materially from those in forward-looking
statements include the disclosures contained herein and also include the
following:
Intense Competition Could Damage Our Sales and Profitability
If we are unable to compete successfully with providers of systems and
services similar to ours, we may lose significant revenue. We compete not only
with independent providers of similar systems and services, but also with
unrelated businesses' internal divisions that provide similar services. The
markets in which we offer our systems and services are highly competitive with
respect to functionality of products and services, price, quality and
innovation. Competition in the markets in which we offer our systems and
services affects our ability to attract new customers and keep existing ones,
hire quality employees, and charge prices for our products and services that
will maximize our profitability. Some of our competitors have greater access to
capital and marketing and technological resources, and we cannot guarantee that
we will be able to compete successfully with them.
Adverse Rulings in Litigation Could Reduce Our Results of Operation
Our profitability could be affected by the outcome of significant
litigation in Europe and in the United States. We have obtained an interim
ruling from the European Commission ordering IMS Health, a strong competitor to
our information business, to license certain proprietary data structures to us.
We are also involved in litigation related to our former Physician and Hospital
Support Services and Hospital Management Services (PHSS) units. We are unable
to predict whether IMS Health may be successful in overturning the EU ruling, or
whether we may incur liability stemming from the PHSS litigation. Liability
resulting from adverse rulings could reduce our results of operation and
profitability.
We May Lose Customers or Revenue Due to Consolidation in the Healthcare Industry
There has been and continues to be significant consolidation in the
healthcare industry, which may reduce the number of existing customers for our
services and may reduce the price we are able to charge those customers. In
addition, this consolidation of
26
healthcare providers and pharmaceutical suppliers may reduce the number of our
potential customers. The increased purchasing power of larger consolidated
organizations could also lead to reductions in the amounts these organizations
are willing to pay for our services. We cannot predict the overall impact of
consolidation in the healthcare industries, and it could have a material adverse
effect on our business, financial condition and results of operations.
Changes in the United States Healthcare Environment Could Have a Material
Negative Impact on Our Revenues
In recent years, the healthcare industry, including the healthcare
financing and reimbursement system has changed significantly in an effort to
reduce costs. These changes include increased use of managed care, cuts in
Medicare reimbursement levels, consolidation of pharmaceutical and medical-
surgical supply distributors, and the development of large, sophisticated
purchasing groups. We expect the healthcare industry to continue to change
significantly in the future. Some of these changes, such as a reduction in
governmental support of healthcare services or adverse changes in the delivery
or pricing of pharmaceuticals and healthcare services or mandated benefits, may
cause healthcare industry participants to reduce the price they are willing to
pay for our products and services. Changes in pharmaceutical manufacturers'
research and distribution policies could also reduce our revenues. We are
unable to predict the effect of such changes on our operations and
profitability.
Our Profitability May Suffer if We Are Unable to Continue Our Expansion in New
and Existing Markets
Our future growth and profitability depends, in part, upon our continued
expansion within the healthcare electronic transaction processing and
information services markets in which we currently operate, the further
expansion of these markets, the emergence of other markets for electronic
transaction processing and healthcare information services and our ability to
penetrate these markets. As part of our strategy to expand into new and existing
markets, we seek acquisition opportunities and alliance relationships with other
businesses that will allow us to increase our market penetration, technological
capabilities, product offerings and distribution capabilities. We cannot
predict whether we will successfully identify suitable acquisition candidates in
the future, or whether any acquisition will provide us with the ability to
expand into new markets.
Expansion of the healthcare information services and electronic transaction
processing markets is dependent upon the continued automation of traditional
paper-based processing systems and demand for new decision support applications.
Our ability to penetrate these markets depends upon our ability to apply our
existing technology, or to develop new technology, to meet the particular
service needs of each new or expanded market. We cannot guarantee that markets
for our services will continue to expand and develop, that we will be successful
in our efforts to meet the demands of these markets, or that we will have
adequate financial, marketing and technological resources to penetrate new
markets.
27
Complex State and Federal Regulations Could Depress the Demand for Information
Products and We Could Incur Redesign Costs or Be Subject to Penalties
The healthcare industry is highly regulated and is subject to changing
political, regulatory and other influences. These factors affect the purchasing
practices and operation of healthcare organizations. Federal and state
legislatures and agencies periodically consider programs to reform or revise the
U.S. healthcare system. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or otherwise
change the environment in which healthcare industry participants operate. We are
unable to predict future proposals with any certainty or to predict the effect
they would have on our business.
HIPAA Administrative Simplification
- -----------------------------------
Under the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, Congress required the adoption of rules to establish standards and
requirements for the electronic transmission of certain health information.
Five rules were proposed, but only two have been published in final form.
Published rules include Standards for Electronic Transactions, published August
17, 2000, and Standards for Privacy of Individually Identifiable Health
Information, published December 28, 2000. Each rule is effective 60 days
following publication in final form, with compliance required for healthcare
providers, healthcare clearinghouses and large health plans two years following
the effective date. Small health plans are given an additional year to comply.
These regulations generally restrict the use and disclosure of personally
identifiable health information without the prior informed consent of the
patient, and apply to certain of our operations as well as the operations of
many of our customers. Compliance with these final rules will entail additional
costs and require changes in our systems.
Transaction Standards
- ---------------------
The Standards for Electronic Transactions rule requires format standards
for eight of the most common healthcare transactions, using technical standards
issued by certain recognized standards publishing organizations. Health care
providers, plans and clearinghouses transmitting or receiving any of these eight
health transactions electronically must send and receive data using the common
format, rather than the large number of different data formats currently used.
The transaction standards are applicable to that portion of our business
involving the processing of healthcare transactions among providers, payers and
other healthcare industry participants. The transaction standards apply to many
of our customers and to our relationships with those customers. We intend to
comply with the transaction standards by the compliance dates. Compliance may
require costly modifications to some of our systems, products and services. We
believe that we are well-positioned to make these changes and to promote
compliance among our customers and strategic partners. However, there can be no
assurance that we or our customers or strategic
28
partners will be able to do so or that we will be able to take advantage of any
business opportunities that implementation of the transaction standards may
provide to us.
Other state and federal statutes and regulations governing transmission of
healthcare information may affect our operations. For example, Medicaid rules
require some processing services and eligibility verification to be maintained
as separate and distinct operations. We carefully review our practices in an
effort to ensure that we are in compliance with all applicable state and federal
laws. These laws, though, are complex and changing, and the courts and other
governmental authorities may take positions that are inconsistent with our
practices.
Privacy Standards
- -----------------
The Standards for Privacy of Individually Identifiable Health Information
rule establishes a set of national privacy standards for the protection of
individually identifiable health information by health plans, healthcare
clearinghouses, healthcare providers and their business associates. This rule
governs the use and disclosure of such information, and establishes procedures
for access to and amendment of information in designated record sets. The rule
went into effect April 14, 2001, and the compliance date for most entities is
April 14, 2003. The privacy standards rule applies to the portions of our
business that process healthcare transactions and provide technical services to
other participants in the healthcare industry. This rule provides for civil and
criminal liability for violations and requires us, our customers and our
partners to use health information in a highly restricted manner, to establish
policies and procedures to safeguard the information, and may require us to
obtain individual consents in some cases, and to provide certain access rights
to individuals. This rule may require us to incur costs to change our systems
and services, may restrict the manner in which we transmit and use the
information, and may therefore adversely affect our ability to generate
revenues.
Numerous state and federal laws other than HIPAA govern the collection,
dissemination, use, access to and confidentiality of patient health information.
Many states are considering new laws and regulations that further protect the
confidentiality of medical records or medical information. These state laws are
not in all cases preempted by the HIPAA privacy standard and may be subject to
interpretation by various courts and other governmental authorities, thus
creating potentially complex compliance issues for us, our customers and
business partners. In addition, determining whether data has been sufficiently
de-identified may require complex factual and statistical analyses. Regulations
governing electronic health data transmissions are evolving rapidly and are
often unclear and difficult to apply. These other privacy laws at a state or
federal level, or new interpretations of these laws, could create liability for
us, could impose additional operational requirements on our business, could
affect the manner in which we use and transmit information and could increase
our cost of doing business.
29
International Data Regulation
- -----------------------------
Other countries also have, or are developing, their own laws governing the
collection, use, storage and dissemination of personal information or patient
data. These laws could create liability for our international operations, impose
additional operations requirements or restrictions on our business, affect the
manner in which we use or transmit data and increase our cost of doing business.
Regulation of Healthcare Relationships
- --------------------------------------
Federal and state laws govern patient referrals, physician financial
relationships and inducements to beneficiaries of federal healthcare programs.
The federal anti-kickback law prohibits any person or entity from offering,
paying, soliciting or receiving anything of value, directly or indirectly, for
the referral of patients covered by Medicare, Medicaid and other federal
healthcare programs or the leasing, purchasing, ordering or arranging for or
recommending the lease, purchase or order of any item, good, facility or service
covered by these programs. The anti-kickback law is broad and may apply to some
of our activities or our relationships with our customers, or business
partners. Penalties for violating the anti-kickback law include imprisonment,
fines and exclusion from participating, directly or indirectly, in Medicare,
Medicaid and other federal healthcare programs. Many states have similar anti-
kickback laws that are not necessarily limited to items or services for which
payment is made by a federal healthcare program. We carefully review our
practices in an effort to ensure that we comply with all applicable laws.
However, the laws in this area are both broad and vague and it is often
difficult or impossible to determine precisely how the laws will be applied.
Any determination by a state or federal regulatory agency that any of our
practices violate any of these laws could subject us to civil or criminal
penalties and require us to change or terminate some portions of our business.
In addition, federal and state agencies have been conducting investigations
purportedly related to referral and billing practices of hospitals, laboratories
and similar institutions. Although we currently monitor our arrangements with
healthcare institutions to ensure compliance with prevailing industry practices
and applicable law, we cannot guarantee that governmental investigators will not
take positions that are inconsistent with our practices.
In order to remain competitive and satisfy the requirements and needs of
our clients, we must remain informed of and adapt to new regulations governing
the transmission, use and processing of personal information in electronic
commerce and over the Internet. Although many of these regulations, such as
those recently issued under the Graham-Leach-Bliley Act, may not apply directly
to our business, we expect that these regulations and any new laws regulating
the solicitation, collection or processing of personal or consumer information
could indirectly affect our business. Our efforts to remain competitive and
profitable and ensure compliance, and our customer's compliance with these
regulations, may require the expenditure of significant sums in research and
30
development and investments in new technology and processes, and will require
significant attention from senior management.
Defaults in Payment or a Material Reduction in Purchases of the Company's
Products by Large Customers Could Have a Significant Negative Impact on Our
Financial Condition, Results of Operations and Liquidity
We have significant relationships with a limited number of large customers
in our electronic processing and information services businesses that are
achieving rapid growth. As a result, our sales concentration has increased.
Any defaults in payment or a material reduction in purchases from us by these
large customers could have a significant negative impact on our financial
condition, results of operations and liquidity.
Proprietary Technology Protections May Not Be Adequate and Proprietary Rights
May Infringe on Rights of Third Parties
We rely on a combination of trade secret, patent, copyright and trademark
laws, nondisclosure and other contractual provisions and technical measures to
protect our proprietary rights in our products and processes. There can be no
assurance that these protections will be adequate or that our competitors will
not independently develop technologies that are substantially equivalent or
superior to our technology. Although we believe that our products and other
proprietary rights do not infringe upon the proprietary rights of third parties,
there can be no assurance that third parties will not assert infringement claims
against us in the future. Additionally, we may find it necessary to initiate
litigation to protect our trade secrets, to enforce our patent, copyright and
trademark rights, and to determine the scope and validity of the proprietary
rights of others. Litigation can be costly and time consuming. Litigation
expenses or any damage payments resulting from adverse determinations of third
party claims could be significant and result in material losses to us.
Recent and Future Combinations and Strategic Relationships May Not Be Profitable
We are currently devoting significant management resources and other
resources toward the integration of our recent strategic combinations and
relationships. We have made investments, and own a majority interest in
HealthTran, LLC, and have equity interests in TechRx Incorporated and MedUnite,
Inc. These relationships may not achieve levels of revenue growth, profitability
or productivity comparable with those achieved by our existing operations, or
otherwise perform as expected, and this may adversely impact our revenue and
profitability.
We May Need Additional Capital to Continue Our Growth and Expansion
We may incur indebtedness in the future, including borrowings under a
credit facility, if a credit facility is available, to finance acquisitions. As
a result, we may be
31
subject to risks associated with debt financing, including increased interest
rate expense, insufficient cash flow to meet required payments on our debt and
inability to refinance or repay the debt as it comes due.
Our Anti-takeover Provisions May Limit Stockholder Value
Certain provisions of our Certificate of Incorporation and By-laws, our
stockholder protection rights agreement, and Delaware law may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interest. A stockholder may not receive as much in exchange for their shares as
they could without these provisions. The following is a description of these
provisions.
Our Certificate of Incorporation and our By-laws separate our Board of
Directors into three classes of directors, with each class as nearly equal in
number as the total number of directors permits. Each class serves for three-
year terms, and each class' term expires in different successive years. In
addition, our Certificate of Incorporation authorizes the Board of Directors to
issue preferred stock in one or more classes or series and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any action on the part of the stockholders. The
rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock.
Our stockholder rights plan issues rights to our common stockholders, that
entitles them to purchase preferred stock upon the happening of certain events.
These rights will cause substantial dilution to a person or group that attempts
to acquire us on terms not approved by our Board of Directors unless the offer
contains certain conditions. In addition, Section 203 of the Delaware
General Corporation Law prohibits certain persons from engaging in business
combinations, which may also have the effect of delaying, deterring or
preventing a change of control.
We May Spend Significant Resources Developing and Promoting New Products That
May Not Be Profitable
The market for our products and services is characterized by rapid
technological change, frequent new product introductions, evolving industry
standards and changing customer needs. We cannot ensure that we will be
successful in developing and marketing new products and services or that our
products and services will adequately meet the quickly changing demands of our
customers. In addition, in order to meet our customers' demands, we are
continually involved in a number of development projects, including our effort
to update our core mainframe-based products for the healthcare information
services markets. Because we cannot predict the time and cost required in
reaching certain research, development and engineering objectives, the costs of
product development initiatives could significantly exceed our estimates, and
project
32
development schedules could require extensions. In either of these events, our
profitability and overall results of operations could be adversely affected. We
believe that the future success of our business will depend in large part upon
our ability to maintain and enhance our current product and service offerings
and to develop and introduce new products and services that will keep pace with
technological advances and satisfy evolving customer requirements. Further, we
cannot ensure that we will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these products
and services. An inability to develop and introduce new products and services in
a timely manner, or an unsuccessful new or updated product could materially
adversely affect our financial condition and results of operations.
We May Experience Volatility in Our Stock Price
The market price of our common stock may experience significant volatility
from time to time. Such volatility may be affected by factors such as our
quarterly operating results or changes in the economy, financial markets or the
healthcare information industry. In recent years, the stock market has
experienced extreme price and volume fluctuations which has sometimes affected
the market price of the securities issued by a particular company which may be
unrelated to the operational performance of the company. This type of market
effect could strike our common stock price as well. In addition, we may be
subject to securities class action litigation if the market price of our stock
experiences significant volatility. Our management's attention and resources may
be diverted from normal operations if we would become subject to any securities
class action, which may have a material adverse effect on our business.
If We Lose the Tax-Free Status of the Recent Spinoff, You and NDC Could Be
Subject to Substantial Tax Liability
As part of our recent spinoff of Global Payments, Inc., we received a tax
ruling relating to the qualification of the distribution as a tax-free
distribution within the meaning of Section 355 of the Internal Revenue Code.
The continuing validity of a tax ruling is subject to certain factual
representations and assumptions. If the distribution were to lose its status as
a tax-free distribution, we would recognize taxable gain equal to the excess of
the fair market value of our common stock distributed to our stockholders over
our tax basis in the stock. In addition, each NDC stockholder who received
Global Payments, Inc. common stock in the distribution would generally be
treated as receiving a taxable distribution in an amount equal to the fair
market value of the stock.
If the distribution disqualified as tax-free to NDC because of certain post
distribution circumstances, such as an acquisition of Global Payments, Inc.
within two years after the distribution that, together with the distribution, is
treated as a single plan, we would recognize taxable gain but the distribution
would generally remain tax-free to each NDC stockholder.
33
Under the tax-sharing and indemnification agreement between us and Global
Payments, Inc., if the distribution fails to qualify as a tax-free distribution
because of an acquisition of their stock or assets, or some other action of
theirs, then Global Payments, Inc. would be solely liable for any resulting
corporate taxes. However, if Global Payments, Inc. fails to indemnify us, we
would be jointly and severally liable for federal income taxes resulting from
the distribution being taxable.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company has performed sensitivity analyses over the near term regarding
the risks listed below. Based on these sensitivity analyses, the Company is not
exposed to material market risk from changes in interest rates, foreign currency
rates and/or Company equity prices. We also do not anticipate any material risk
from changes in interest rates, foreign currency rates and/or Company equity
prices.
Interest Rate
The Company has a line of credit which has variable interest rates for
Eurodollar and other floating rate advances based on the London Interbank
Offered Rates, Prime Rate, or Federal Funds plus applicable margin.
Accordingly, the Company is exposed to the impact of interest rate movement. The
Company has performed an interest rate sensitivity analysis over the near term
with a 10% change in interest rates. Based on this analysis, the Company's Net
income is not subject to material interest rate risk. We also do not anticipate
any material interest rate risk from changes in interest rates.
Foreign Currency Risk
The Company generates a percentage of its Net income from its foreign
operations. The Company has performed a foreign exchange sensitivity analysis
over the near term with a 10% change in foreign exchange rates. Based on this
analysis, the Company's Net income is not subject to material foreign exchange
rate risk. We also do not anticipate any material foreign exchange rate risk
from changes in foreign currency rates.
Convertible Debt
The Company has outstanding 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. We also do not anticipate any material equity price
risk from changes in the Company's equity price. The Company's Diluted earnings
per share incorporates the effect of this debt conversion, where applicable.
34
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Index to Financial Statements and Financial Statement Schedule
Consolidated Statements of Income (Loss) for each of the three years
ended May 31, 2001....................................................... 36
Consolidated Statements of Cash Flows for each of the three years ended
May 31, 2001............................................................. 37
Consolidated Balance Sheets at May 31, 2001 and 2000....................... 38
Consolidated Statements of Changes in Shareholders' Equity for each of
the three fiscal years ended May 31, 2001................................ 39
Notes to Consolidated Financial Statements................................. 40
Report of Independent Public Accountants................................... 68
Consolidated Schedule II - Valuation and Qualifying Accounts............... 69
Report of Independent Public Accountants As to Schedule.................... 70
35
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
NATIONAL DATA CORPORATION AND SUBSIDIARIES
(In thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31,
----------------------------------------------------
2001 2000 1999
--------- -------- ---------
Revenues:
Information management $138,091 $131,229 $128,961
Network services and systems 205,862 158,051 141,832
Divested businesses 5,862 56,393 68,203
---------------------------------------------------
349,815 345,673 338,996
---------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 176,413 181,001 179,654
Sales, general and administrative 77,640 86,062 67,577
Depreciation and amortization 34,745 31,834 29,661
Restructuring and impairment charges 2,156 34,393 -
---------------------------------------------------
290,954 333,290 276,892
---------------------------------------------------
Operating income 58,861 12,383 62,104
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 755 4,549 1,101
Interest and other expense (8,038) (6,532) (7,484)
Valuation adjustment in Medscape investment (6,953) (9,738) -
Minority interest in loss 1,137 - -
---------------------------------------------------
(13,099) (11,721) (6,383)
---------------------------------------------------
Income before income taxes and discontinued operations 45,762 662 55,721
Provision for income taxes 17,694 1,825 21,858
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before discontinued operations 28,068 (1,163) 33,863
Discontinued operations, net of income taxes 8,323 (39,002) 37,574
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 36,391 $(40,165) $ 71,437
===================================================
Basic earnings (loss) per share:
Income (loss) before discontinued operations $ 0.85 $ (0.03) $ 1.00
---------------------------------------------------
Discontinued operations $ 0.25 $ (1.17) $ 1.11
---------------------------------------------------
Basic earnings (loss) per share $ 1.10 $ (1.21) $ 2.12
---------------------------------------------------
Diluted earnings (loss) per share:
Income (loss) before discontinued operations $ 0.82 $ (0.03) $ 0.97
---------------------------------------------------
Discontinued operations $ 0.24 $ (1.17) $ 1.07
---------------------------------------------------
Diluted earnings (loss) per share $ 1.07 $ (1.21) $ 2.02
---------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION AND SUBSIDIARIES
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31,
-------------------------------------
2001 2000 1999
-------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 36,391 $(40,165) $ 71,437
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Non-cash restructuring and impairment charges 930 23,880 -
(Income) loss from discontinued operations (8,323) 39,002 (37,574)
Depreciation and amortization 34,745 31,834 29,661
Deferred income taxes 12,919 (33,106) 11,930
Provision for bad debts 1,322 10,198 2,146
Valuation adjustment in Medscape investment 6,953 9,738 -
Other, net 54 137 3,398
Changes in assets and liabilities which provided (used) cash,
net of the effects of acquisitions:
Accounts receivable, net (4,121) 4,789 (14,245)
Prepaid expenses and other assets (15,539) (325) (1,715)
Accounts payable and accrued liabilities 10,018 16,712 4,867
Deferred income (9,114) (2,685) 2,216
Income taxes 1,857 (1,968) (1,587)
-------------------------------------
Net cash provided by operating activities 68,092 58,041 70,534
-------------------------------------
Cash flows from investing activities:
Capital expenditures (32,915) (26,517) (21,099)
Business acquisitions, net of acquired cash (23,224) (38,098) (8,055)
Business divestiture and sale of marketable securities 20,000 6,474 -
(Purchase) sale of investment (18,831) (10,045) 1,125
-------------------------------------
Net cash used in investing activities (54,970) (68,186) (28,029)
-------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings under lines of credit (68,500) 26,750 (20,000)
Net principal payments under capital lease arrangements
and other long-term debt (4,814) (11,469) (11,637)
Net issuances (purchases) related to stock activities 7,360 (25,680) (790)
Dividends paid (8,762) (9,937) (10,109)
-------------------------------------
Net cash used in financing activities (74,716) (20,336) (42,536)
-------------------------------------
Net cash (used) provided by discontinued operations (5,375) 30,212 2,027
Cash dividend from Global Payments Inc. 77,600 - -
-------------------------------------
Increase (decrease) in cash and cash equivalents 10,631 (269) 1,996
Cash and cash equivalents, beginning of period 1,789 2,058 62
-------------------------------------
Cash and cash equivalents, end of period $ 12,420 $ 1,789 $ 2,058
=====================================
The accompanying notes are an integral part of these Consolidated Financial Statements.
37
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION AND SUBSIDIARIES
(In thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
May 31, May 31,
2001 2000
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 12,420 $ 1,789
Accounts receivable 70,648 76,325
Allowance for doubtful accounts (6,628) (7,316)
--------- ---------
Accounts receivable, net 64,020 69,009
--------- ---------
Income tax receivable 2,265 1,962
Deferred income taxes 29,539 20,097
Prepaid expenses and other current assets 18,788 13,857
--------- ---------
Total current assets 127,032 106,714
--------- ---------
Property and equipment, net 82,956 69,265
Intangible assets, net 221,757 214,800
Deferred income taxes 9,886 32,247
Investments 35,591 5,948
Other 10,990 4,346
Net assets of discontinued operations - 220,312
--------- ---------
Total Assets $ 488,212 $ 653,632
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ 68,500
Current portion of long-term debt 170 159
Obligations under capital leases 2,586 5,803
Accounts payable and accrued liabilities 53,228 55,082
Deferred income 13,624 26,619
--------- ---------
Total current liabilities 69,608 156,163
--------- ---------
Long-term debt 151,567 152,495
Obligations under capital leases 1,108 1,793
Other long-term liabilities 23,044 13,045
--------- ---------
Total liabilities 245,327 323,496
--------- ---------
Commitments and contingencies
Minority interest in equity of subsidiaries 12,418 -
Shareholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized,
none issued - -
Common stock, par value $.125 per share; 200,000,000 shares authorized;
33,875,235 and 33,953,008 shares issued in 2001 and 2000, respectively 4,234 4,244
Capital in excess of par value 188,636 349,387
Treasury stock, at cost, 1,211,880 shares at May 31, 2000 - (31,960)
Retained earnings 48,392 20,763
Deferred compensation and other (7,101) (7,332)
Unrealized holding loss (111) (1,727)
Cumulative translation adjustment (3,583) (3,239)
--------- ---------
Total shareholders' equity 230,467 330,136
--------- ---------
Total Liabilities and Shareholders' Equity $ 488,212 $ 653,632
========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements.
38
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NATIONAL DATA CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Accumulated Other
Comprehensive
Income (Loss)
Common Stock ---------------------
--------------- Unrealized
Number Capital in Deferred Holding Cumulative
of Excess of Treasury Retained Compensation Gain Translation Total
Shares Amount Par Value Stock Earnings and Other (Loss) Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1998 33,792 $4,224 $ 344,019 $ (5,980) $ 9,537 $(1,854) $ - $ (2,011) $ 347,935
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 71,437 71,437
Foreign currency
translation adjustment (571) (571)
---------
Total comprehensive income 70,866
---------
Cash dividends (10,109) (10,109)
Treasury shares purchased (9,465) (9,465)
Stock issued under
employee stock plans 7 2,001 2,008
Stock issued under non-
employee stock plans 166 20 395 4,409 4,824
Stock issued under
restricted stock plans (5) (217) 3,178 (2,961) -
Tax benefit from exercise
of stock options 1,435 1,435
Amortization of deferred
compensation 1,600 1,600
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1999 33,953 4,244 345,639 (5,857) 70,865 (3,215) - (2,582) 409,094
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (40,165) (40,165)
Foreign currency
translation adjustment (657) (657)
Unrealized loss (1,727) (1,727)
---------
Total comprehensive loss (42,549)
---------
Cash dividends (9,937) (9,937)
Treasury shares purchased (42,844) (42,844)
Stock issued under
employee stock plans (1,615) 12,657 11,042
Stock issued under non-
employee stock plans (329) 329 -
Stock issued under
restricted stock plans 3,682 3,755 (7,437) -
Tax benefit from exercise
of stock options 2,010 2,010
Amortization of deferred
compensation 3,320 3,320
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2000 33,953 4,244 349,387 (31,960) 20,763 (7,332) (1,727) (3,239) 330,136
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net Income 36,391 36,391
Foreign currency
translation adjustment (1,387) (1,387)
Realized loss 1,616 1,616
---------
Total comprehensive income 36,620
---------
Cash dividends (8,762) (8,762)
Spin-off dividend (141,572) 3,421 1,043 (137,108)
Stock issued under
employee stock plans 47 6 (19,394) 28,684 (4,287) 5,009
Stock issued under non-
employee stock plans (7) 67 60
Stock issued under
restricted stock plans (125) (16) (839) 3,209 (2,354) -
Tax benefit from exercise
of stock options 1,061 1,061
Amortization of deferred
compensation 3,451 3,451
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2001 33,875 $ 4,234 $ 188,636 $ - $48,392 $(7,101) $ (111) $ (3,583) $ 230,467
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
On January 31, 2001, National Data Corporation (the "Company" or "NDCHealth")
completed the spin-off of its eCommerce business segment, Global Payments Inc.
("Global Payments"), into a separate publicly traded company with its own
management and Board of Directors to permit the Company to increase focus on its
healthcare information businesses. As a result of the spin-off, the Company's
financial statements have been prepared with Global Payments' net assets,
results of operations, and cash flows displayed separately as "discontinued
operations" with all historical financial statements restated to conform to this
presentation, in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations".
National Data Corporation's healthcare information business segment is the
remaining stand-alone business after the spin-off. To more accurately reflect
the Company's business, National Data Corporation is now doing business as
NDCHealth.
In the third quarter of fiscal 2000, the Company decided to pursue the
divestiture of its management services business and accordingly, the Company's
financial statements have been prepared with the net assets, results of
operations, and cash flows of this business displayed separately as
"discontinued operations" with all historical financial statements restated to
conform to this presentation in accordance with Accounting Principles Board
Opinion No. 30. During the first quarter of fiscal 2001, the Company completed
the sale of the management services business.
Nature of operations - The Company provides network based information processing
- --------------------
services and systems to the healthcare market and offers information management
products and services to pharmaceutical manufacturers and pharmacy chains, which
include consulting services and database information reporting on prescription
drug sales and pharmacy operations. The principal markets for the Company's
products and services are healthcare providers, payers, managed care
organizations, pharmaceutical manufacturers, and distributors.
Basis of presentation - The consolidated financial statements include the
- ---------------------
accounts of the Company and its majority-owned subsidiaries. Significant
intercompany transactions have been eliminated in consolidation. Certain
reclassifications have been made to the fiscal 1999 and 2000 consolidated
financial statements to conform with the fiscal 2001 presentation.
Use of estimates - The preparation of financial statements in conformity with
- ----------------
accounting principles generally accepted in the United States requires
management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reported period. Actual results could differ from these estimates.
40
Revenue - Revenue related to services provided is recognized as services are
- -------
performed. Revenue related to software installation is recognized when
obligations to the customer are fulfilled. Revenue related to license
agreements for customer installed software is recognized upon shipment. Revenue
related to software maintenance contracts is recognized ratably over the terms
of the contracts.
Cash and cash equivalents - Cash and cash equivalents includes cash on hand and
- -------------------------
all investments with a maturity of three months or less.
Property and equipment - Property and equipment, including equipment under
- ----------------------
capital leases, are stated at cost. Depreciation and amortization are
calculated using the straight-line method for financial reporting purposes,
whereas accelerated methods are used for income tax reporting purposes.
Equipment is depreciated over 2 to 5 year lives, and buildings are depreciated
over 20 to 40 year lives. Leasehold improvements and property acquired under
capital leases are amortized over the shorter of the useful life of the asset or
the term of the lease. The costs of software are capitalized and amortized on a
straight-line basis over their estimated useful lives, not to exceed five years.
Maintenance and repairs are charged to operations as incurred.
Intangible assets - Intangible assets primarily represent goodwill and customer
- -----------------
relationships associated with the Company's acquisitions. Customer
relationships acquired are amortized using the straight-line method over their
estimated useful lives ranging from 5 to 25 years. Goodwill represents the
excess of the cost of acquired businesses over the fair market value of their
identifiable net assets. Goodwill is being amortized on a straight-line basis
over periods ranging from 10 to 25 years.
Impairment of long-lived assets - The Company regularly evaluates whether events
- -------------------------------
and circumstances have occurred that indicate the carrying amount of property
and equipment or goodwill and other intangibles may warrant revision or may not
be recoverable. When factors indicate that long-lived assets should be evaluated
for possible impairment, the Company uses an estimate of the future undiscounted
net cash flows associated with the asset over the remaining life of the asset in
measuring whether the long-lived asset is recoverable (see Notes 2 and 13). If
such evaluation indicates a potential impairment, the Company uses undiscounted
cash flows to measure fair value in determining the amount of these assets that
should be written off. In management's opinion, the long-lived assets,
including property and equipment and intangible assets, are appropriately valued
at May 31, 2001 and 2000 and any necessary adjustments have been made.
Investments - The Company maintains investments in both publicly traded and
- -----------
privately held entities. The investments in publicly traded entities are
classified as available-for-sale securities and are reported at fair value.
Unrealized gains and losses are reported, net of taxes, as a component of
shareholders' equity. Unrealized losses are charged against income when a
decline in fair value is determined to be other than temporary. The specific
identification method is used to determine the cost of securities sold.
Realized gains and losses on investments are included in other income/expense
when realized. Investments in
41
privately held entities are accounted for under either the cost or equity
method, whichever is appropriate for the level of investment.
Income taxes - The Company uses the asset and liability method of accounting for
- ------------
income taxes in accordance with SFAS No. 109. Under this method, deferred
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax laws and
rates (see Note 9).
Fair value of financial instruments - The carrying amounts of financial
- -----------------------------------
instruments, including cash, receivables, accounts payable and accrued expenses,
and current maturities of long-term obligations, approximate fair value.
Interest on long-term debt is primarily payable at fixed rates, which
approximate market rates at May 31, 2001 and 2000 (see Note 10).
Foreign currency translation - The Company maintains subsidiaries in Western
- ----------------------------
Europe and Canada. The functional currency of these subsidiaries is their local
currency. The assets and liabilities of foreign subsidiaries are translated at
the year-end rate of exchange, and income statement items are translated at the
average rates prevailing during the year. The resulting translation adjustments
are recorded as a component of shareholders' equity. Exchange gains and losses
on intercompany balances of a long-term investment nature are also recorded as a
component of shareholders' equity. The effects of foreign currency gains and
losses arising from these translations of assets and liabilities are included as
a component of other comprehensive income.
Earnings per share - Basic earnings per share is computed by dividing reported
- ------------------
earnings available to common shareholders by weighted average shares outstanding
during the period. Diluted earnings per share is computed by dividing reported
earnings available to common shareholders by weighted average shares outstanding
during the period and the impact of securities that, if exercised, and
convertible debt that, if converted, would have a dilutive effect on earnings
per share.
42
The following table sets forth the computation of basic and diluted earnings for
the fiscal years ending May 31:
Fiscal Year Ended (Before Discontinued Operations)
(In thousands, except per share data) 2001 2000 1999
---------------------------------------------------------------------------
Per Per Per
------ ------ ------
Income Shares Share Loss Shares Share Income Shares Share
------- ------ ------ ------- ------ ------ ------- ------ ------
Basic EPS:
Income (loss) before discontinued $28,068 33,009 $0.85 $(1,163) 33,232 $(0.03) $33,863 33,725 $1.00
operations
Effect of dilutive securities:
Stock options - 1,144 - - - 1,346
--------------- ---------------- ---------------
28,068 34,153 (1,163) 33,232 33,863 35,071
Convertible debt - - - - - -
--------------- ---------------- ---------------
Diluted EPS:
Income (loss) before discontinued
operations available to common
stockholders plus assumed
conversions $28,068 34,153 $0.82 $(1,163) 33,232 $(0.03) $33,863 35,071 $0.97
===========================================================================
Fiscal Year End
(In thousands, except per share data) 2001 2000 1999
---------------------------------------------------------------------------
Per Per Per
------ ------ ------
Income Shares Share Loss Shares Share Income Shares Share
------- ------ ------ ------- ------ ------ ------- ------ ------
Basic EPS:
Net income (loss) $36,391 33,009 $1.10 $(40,165) 33,232 $(1.21) $71,438 33,725 $2.12
Effect of dilutive securities:
Stock options - 1,144 - - - 1,346
--------------- ---------------- ---------------
36,391 34,153 (40,165) 33,232 71,438 35,071
Convertible debt - - - - 4,778 2,752
--------------- ---------------- ---------------
Diluted EPS:
Net income (loss) available to common
stockholders plus assumed
conversions $36,391 34,153 $1.07 $(40,165) 33,232 $(1.21) $76,216 37,823 $2.02
===========================================================================
Basic and diluted earnings per share for the fiscal year ended May 31, 2000 is
the same as the effect of any potentially dilutive securities and convertible
debt is antidilutive due to the loss generated by the restructuring and non-
recurring charges and discontinued operations.
43
Recent accounting pronouncements - In June 1998, the Financial Accounting
- --------------------------------
Standards Board (the "FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes several
existing standards. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The Company adopted this standard on June 1, 2001 and does not expect
that the adoption will have a material impact on its financial statements.
In June 2001, the FASB finalized SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates pooling
of interests accounting and requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. SFAS No. 142
eliminates the amortization of goodwill and other non-separable intangible
assets and requires that goodwill be evaluated for impairment by applying a fair
value-based test. The Company plans to adopt these new standards during the
first quarter of fiscal year 2002, in accordance with the established effective
dates, and estimates that the annual impact of SFAS No. 142 will be an addition
of approximately $0.20 diluted earnings per share in fiscal 2002.
Note 2 - Business Acquisitions and Investments
During fiscal 2001, 2000, and 1999, the Company completed the following
acquisitions:
Date Ownership
Business Acquired Percentage
- --------------------------------------------------------------------------
2001
- ----
Source Dispenser UK, LTD. August 2000 100%
Medprint, Inc. August 2000 100%
Pharma Internet & Co AG October 2000 51%
2000
- ----
The Computer Place, Inc. ("Medisoft") April 2000 100%
1999
- ----
John Richardson Computers January 1999 100%
Each of the above acquisitions has been recorded using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair value as of the
date of acquisition. The operating results of the acquired businesses are
included in the Company's consolidated statements of income (loss) from their
respective dates of acquisition.
The aggregate price paid for the 2001 purchase acquisitions was $23.2 million,
consisting entirely of cash. The goodwill and other intangible assets of these
acquisitions are being amortized over periods ranging from 5 to 20 years.
44
The aggregate price paid for the 2000 purchase acquisition was $44.1 million,
consisting of $38.1 million cash and $6.0 million deferred purchase price. The
excess of cost over tangible assets acquired of $42.3 million was allocated to
goodwill and other intangible assets. The goodwill and other intangible assets
of this acquisition are being amortized over periods ranging from 5 to 15 years.
The aggregate price paid for the 1999 purchase acquisition and final adjustments
to the 1998 purchase price allocation was $8.1 million, consisting of cash. The
excess of cost over tangible assets acquired of $6.6 million was allocated to
goodwill and other intangible assets. The goodwill and other intangible assets
of these acquisitions are amortized over periods ranging from 5 to 20 years.
In July 2000 the Company sold its pharmacy systems business to TechRx, Inc. In
exchange for the business and $10 million, the Company received an equity
interest in TechRx, Inc. This cost method investment is valued at $35.1 million,
net of a deferred gain of $4.9 million.
Note 3 - Discontinued Operations
On December 20, 1999, the Company announced its intention to spin-off its
eCommerce business segment, encompassed in the newly formed Global Payments Inc.
subsidiary. This spin-off was contingent on receiving a favorable opinion from
outside counsel regarding the tax-free status of the dividend. On November 15,
2000 the Company received a favorable opinion from counsel based on an IRS
ruling and completed the spin-off on January 31, 2001. The spin-off was
accomplished by distributing all of the shares of common stock of Global
Payments Inc. to the Company shareholders. The Company shareholders received
0.8 share of Global Payments Inc. common stock for each share of the Company
common stock held as of the January 19, 2001 record date. Certain network and
other services are provided to Global Payments Inc. under the Company's services
agreements.
As a result of the spin-off, the Company's May 31, 2001 financial statements
have been prepared with Global Payments Inc.'s net assets, results of
operations, and cash flows displayed separately as "discontinued operations"
with all historical financial statements restated to conform to this
presentation. During the second quarter of fiscal 2001, the Company recorded an
expense of $10.0 million to reflect the net costs associated with effecting the
spin-off ($8.7 million after tax, or $0.26 per share). These costs include legal
and investment banker fees, severance, duplicate software licenses, and other
related costs partially offset by the projected income for Global Payments Inc.
for the period from the measurement date through January 31, 2001.
Additionally, in the third quarter of fiscal 2000, the Company decided to pursue
the divestiture of its management services business and accordingly, the
Company's financial statements have been prepared with the net assets, results
of operations, and cash flows of this business displayed separately as
"discontinued operations" with all historical financial statements restated to
conform to this presentation. The Company successfully completed the sale of
this management services business for total cash consideration of $20.0 million
in the first quarter of fiscal 2001.
45
The operating results of the discontinued operations are summarized as follows
for the fiscal years ending May 31:
2001
--------------------------------------------------
(In thousands, except per share data): Global Management
Payments Inc. Services Total
- ---------------------------------------------------------------------------------------------------------------------
Revenue $223,592 $ 21,905 $245,497
Operating income $ 40,801 $ 168 $ 40,969
Income from operations, net of tax $ 17,056 - $ 17,056
Spin-off special charge, net of tax (8,733) - (8,733)
-----------------------------------------------
Net income from discontinued operations $ 8,323 $ - $ 8,323
===============================================
Diluted earnings (loss) per share:
From operations $ 0.50 $ - $ 0.50
-----------------------------------------------
Spin-off special charge $ (0.26) $ - $ (0.26)
-----------------------------------------------
Total $ 0.24 $ - $ 0.24
-----------------------------------------------
Share count 34,153 34,153
-----------------------------------------------
2000
--------------------------------------------------
(In thousands, except per share data): Global Management
Payments Inc. Services Total
- ---------------------------------------------------------------------------------------------------------------------
Revenue $340,033 $107,051 $447,084
Operating income (loss) $ 63,212 $(26,587) $ 36,625
Income (loss) from operations, net of tax $ 33,047 $(16,848) $ 16,199
Projected phase-out loss from operations, net of tax - (10,381) (10,381)
Projected loss on disposal, net of tax - (31,060) (31,060)
-----------------------------------------------
Income (loss) from discontinued operations before
cumulative effect of change in accounting principle 33,047 (58,289) (25,242)
Cumulative effect of change in accounting principle, net
of tax - (13,760) (13,760)
-----------------------------------------------
Net income (loss) from discontinued operations $ 33,047 $(72,049) $(39,002)
===============================================
Diluted earnings (loss) per share:
From operations $ 0.96 $ (0.51) $ 0.47
-----------------------------------------------
Projected phase-out loss from operations $ - $ (0.31) $ (0.31)
-----------------------------------------------
Projected loss on disposal $ - $ (0.94) $ (0.94)
-----------------------------------------------
Cumulative effect of change in accounting principle $ - $ (0.41) $ (0.41)
-----------------------------------------------
Total $ 0.96 $ (2.17) $ (1.17)
-----------------------------------------------
Share count 34,448 33,232 33,232
-----------------------------------------------
46
1999
--------------------------------------------------
(In thousands, except per share data): Global Management
Payments Inc. Services Total
- ---------------------------------------------------------------------------------------------------------------------
Revenue $330,051 $115,859 $445,910
Operating income (loss) $ 76,675 $ (5,773) $ 70,902
Net income (loss) from discontinued operations $ 41,335 $ (3,761) $ 37,574
===============================================
Diluted earnings (loss) per share:
-----------------------------------------------
Total $ 1.18 $ (0.11) $ 1.07
===============================================
Share count 35,071 33,725 35,071
-----------------------------------------------
The net income (loss) from discontinued operations for fiscal 2001, 2000, and
1999 is net of tax expense (benefit) of $13.1 million, $(17.2) million, and
$22.9 million, respectively.
For the Physician Management Services component of the discontinued operations,
the Company continued a revenue recognition accounting policy followed by this
business prior to its acquisition by the Company. The Company maintained this
generally accepted policy after the acquisition for Physician Management
Services offerings for which the Company invoiced and collected amounts on its
customers' behalf. Previously, for customers where the amount and timing of
collection of their accounts receivable could be reasonably estimated, the
Company estimated the fees that it expected to invoice upon collection of their
accounts receivable. It recognized such revenues when substantially all services
performed by the Company had been completed. The estimated costs to complete
were accrued separately.
Effective June 1, 1999, the Company elected to change its revenue recognition
policy. Effective with the change in policy, the Company recognized revenue when
the services were billed to the customer, at which point all services performed
by the Company were completed. The impact of this change resulted in the
elimination of estimated or unbilled receivables and related accrued collection
costs. Management believes that this change was appropriate and was consistent
with recent authoritative literature, specifically SEC Staff Accounting Bulletin
No. 101, issued December 3, 1999.
The cumulative after-tax effect of this change in accounting principle was $13.8
million, net of income taxes of $8.6 million, at June 1, 1999. The cumulative
after-tax effect on both the basic and diluted earnings per share was $(0.41).
The following unaudited pro forma information assumes the new revenue
recognition policy was retroactively applied:
(in thousands) 2000 1999
- --------------------------------------------------------------------------
Net income (loss) $(26,405) $68,661
Basic earnings (loss) per share $ (0.79) $ 2.04
Diluted earnings (loss) per share $ (0.79) $ 1.94
47
As of May 31, 2000, the net assets of discontinued operations are summarized as
follows:
May 31, 2000
------------------------------------------------------
Global Management
(In thousands): Payments Inc. Services Total
- --------------------------------------------------------------------------------------------------------------------------
Current assets $ 67,935 $ 27,535 $ 95,470
Property and equipment, net 28,665 5,756 34,421
Intangible assets, net 173,726 - 173,726
Other assets (liabilities) (73) 1,384 1,311
Current liabilities (28,149) (7,788) (35,937)
Other long-term liabilities (6,623) (2,370) (8,993)
Provision for estimated losses - (21,214) (21,214)
Minority interest in equity of subsidiaries (18,472) - (18,472)
----------------------------------------------------
Net assets of discontinued operations $217,009 $ 3,303 $220,312
====================================================
Note 4 - Property and Equipment
As of May 31, 2001 and 2000, property and equipment consisted of the following:
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------------------------------
Land $ 1,602 $ 1,602
Buildings 11,792 12,161
Property under capital leases 1,504 15,932
Equipment 48,330 35,581
Software 38,240 31,616
Leasehold improvements 3,654 7,397
Furniture and fixtures 4,081 3,995
Work in progress 24,936 22,363
------------------------------
134,139 130,647
Less: accumulated depreciation and amortization 51,183 61,382
------------------------------
$ 82,956 $ 69,265
==============================
48
Note 5 - Software Costs
The following table sets forth information regarding the Company's costs
associated with software development for the years ended May 31, 2001, 2000 and
1999:
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Total costs associated with software
development $17,501 $20,725 $20,002
Less: capitalization of internally
developed software 8,999 9,609 9,471
---------------------------------------
Net research and development expense $ 8,502 $11,116 $10,531
========================================
The Company capitalizes costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed", capitalization of costs begins when technological feasibility has
been established and ends when the product is available for general release to
customers. Amortization is computed on an individual product basis and has been
recognized for those products available for market based on the products'
estimated economic lives, not to exceed five years.
Additionally, the Company capitalizes costs related to the development of
computer software developed or obtained for internal use in accordance with the
AICPA SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Costs incurred in the application development phase
are capitalized by the Company and amortized over the useful life, not to exceed
five years.
Total unamortized capitalized software costs (purchased and internally
developed) were approximately $24.6 million and $18.4 million as of May 31, 2001
and 2000, respectively and are included in Property and equipment. Total
software amortization expense was approximately $6.9 million, $6.4 million and
$4.9 million in fiscal 2001, 2000 and 1999, respectively.
Note 6 - Intangible Assets
As of May 31, 2001 and 2000, intangible assets consisted of the following:
(In thousands) 2001 2000
- ------------------------------------------------------------------------------------------------
Customer relationship $ 56,415 $ 55,115
Goodwill 201,395 184,077
Other intangibles 15,437 15,237
-------------------------
273,247 254,429
Less: accumulated amortization 51,490 39,629
-------------------------
$221,757 $214,800
=========================
49
Note 7 - Accounts Payable and Accrued Liabilities
As of May 31, 2001 and 2000, accounts payable and accrued liabilities consisted
of the following:
(In thousands) 2001 2000
- ------------------------------------------------------------------------------------------------
Trade accounts payable $26,816 $22,185
Accrued compensation and benefits 13,361 16,337
Deferred purchase price on acquisition - 6,000
Accrued restructuring and merger related costs 420 4,789
Other accrued liabilities 12,631 5,771
------------------------
$53,228 $55,082
========================
Note 8 - Retirement Benefits
The Company provides a variety of retirement benefits for its employees. During
fiscal year 1998, the Company made an evaluation of its current retirement plan
offerings and decided to provide its employees with a greater emphasis on its
deferred compensation 401(k) plan by substantially increasing the Company's
match of participants' contributions. At the same time, the Company closed the
defined benefit pension plan to new participants beginning June 1, 1998.
The Company has a noncontributory defined benefit pension plan (the "Plan")
covering substantially all of its United States employees who have met the
eligibility provisions of the Plan as of May 31, 1998. Benefits are based on
years of service and the employee's compensation during the highest five
consecutive years of earnings of the last ten years of service. Plan provisions
and funding meet the requirements of the Employee Retirement Income Security Act
of 1974, as amended.
The following table provides a reconciliation of the changes in the Plan's
benefit obligations and fair value of assets over the two-year period ending May
31, 2001 and a statement of funded status at May 31 for each year:
Changes in benefit obligations
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------------
Balance at beginning of year $24,012 $24,598
Interest cost 1,831 1,750
Amendments 32 -
Benefits paid (1,223) (860)
Actuarial loss (gain) 857 (1,476)
-------------------------
Balance at end of year $25,509 $24,012
=========================
50
Changes in plan assets
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------------------
Balance at beginning of year $24,277 $22,619
Actual return on plan assets (669) 2,518
Employer contributions - -
Benefits paid (1,223) (860)
-------------------------
Balance at end of year $22,385 $24,277
=========================
The accrued pension costs recognized in the Consolidated Balance Sheets were as
follows:
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------------------
Funded status $(3,124) $ 265
Unrecognized net (gain) loss 2,379 (1,535)
Unrecognized prior service cost 121 159
Unrecognized net asset at June 1, 1985, being
amortized over 17 years (164) (352)
-------------------------
Accrued pension cost $ (788) $(1,463)
==========================
Net pension expense/(income) included the following components for the fiscal
years ending May 31:
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Service cost $ - $ - $ 197
Interest cost on projected benefit obligation 1,831 1,750 1,794
Expected return on plan assets (2,389) (2,225) (2,068)
Net amortization and deferral (117) (117) (117)
-------------------------------------------
Net pension expense/(income) $ (675) $ (592) $ (194)
===========================================
Significant assumptions used in determining net pension expense and related
obligations were as follows:
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Discount rate 7.50% 7.75% 7.50%
Rate of increase in compensation levels 4.33% 4.33% 4.33%
Expected long-term rate of return on assets 10.00% 10.00% 10.00%
- -------------------------------------------------------------------------------------------------------------------
The Company has a retirement plan for non-employee directors of the Company
elected prior to January 1, 1995 with five or more years of service (the
"Directors' Plan"). The Directors' Plan benefits are based on 50% of the annual
director retainer amount in effect on the date of a director's retirement plus
10% for each year of service for a combined total of up to 100% of the base
amount for 10 years' service. The benefits are payable upon retirement, at or
after age 70, for a period equal to the number of years of service as a
director, but not more than 15 years for participants with 15 or more years of
board service as of the effective date of the Directors' Plan and not more than
10 years for all other
51
participants. The expense related to the Directors' Plan was immaterial in 2001,
2000, and 1999. The projected benefit obligation for the plan was $0.7 million
and $0.3 million as of May 31, 2001 and 2000, respectively.
On June 1, 1997, the Company adopted a pilot Supplemental Executive Retirement
Plan ("SERP") for certain key executives. Benefits payable under this plan are
based upon the participant's highest three consecutive years of earnings of the
last ten years of service. Retirement benefits are reduced by a portion of the
participant's annual social security benefits and any retirement benefits under
the company's tax-qualified or non-qualified defined benefit plans. Benefits
earned under the SERP are fully vested after five years of service. Expense
related to the plan was $1.0 million, $0.7 million and $1.0 million in 2001,
2000, and 1999, respectively. The projected benefit obligation for the plan was
$6.4 million and $3.6 million as of May 31, 2001 and 2000, respectively.
The Company sponsors a deferred compensation 401(k) plan that is available to
substantially all employees. The charges to expense for the Company match were
$1.9 million in 2001, $1.1 million in 2000, and $2.3 million in 1999.
Note 9 - Income Taxes
The provision for income taxes for continuing operations includes:
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Current tax expense:
Federal $ 7,117 $ 15,175 $ 5,175
State 1,253 1,197 1,311
------------------------------------------
8,370 16,372 6,486
------------------------------------------
Deferred (prepaid) tax expense:
Federal 9,569 (13,399) 14,144
State (245) (1,148) 1,228
------------------------------------------
9,324 (14,547) 15,372
------------------------------------------
Total $17,694 $ 1,825 $21,858
==========================================
The Company's effective tax rates differ from federal statutory rates as
follows:
2001 2000 1999
------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.3% 4.7% 3.0%
Other 0.4% 235.9% 1.2%
------------------------------------------
Total 38.7% 275.6% 39.2%
==========================================
52
Deferred income taxes as of May 31, 2001 and 2000 reflect the impact of
temporary differences between the amounts of assets and liabilities for
financial accounting and income tax purposes. As of May 31, 2001 and 2000,
principal components of deferred tax items were as follows:
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss and credit
carryforwards $27,918 $12,340
Write-down of investment 6,197 4,493
Accrued non-recurring charges 5,944 21,402
Accrued expenses 5,871 2,729
Other 2,636 2,147
Employee benefit plans 2,218 1,065
Acquired intangibles 2,011 2,397
Projected loss on discontinued operations - 16,583
-------------------------
52,795 63,156
Deferred tax liabilities:
Property and equipment 12,600 10,428
Prepaid expenses 515 384
Other 255 -
-------------------------
13,370 10,812
-------------------------
Net deferred tax asset 39,425 52,344
Less: current deferred tax asset 29,539 20,097
-------------------------
Non-current deferred tax asset $ 9,886 $32,247
=========================
Net operating loss and credit carryforwards expire between the years 2002 and
2021.
Note 10 - Long-Term Debt
As of May 31, 2001 and 2000, long-term debt consisted of the following:
(In thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------
Mortgage payable - due in monthly installments until
May 15, 2005 with interest at 6.87% $ 3,056 $ 3,195
Convertible notes - mature on November 1, 2003 143,750 143,750
Promissory notes issued in consideration for acquisitions:
Spring Anesthesia Group, Inc. - 7.6% due August 2003 4,831 5,500
Hadley Hutt Computing Ltd. - 6.97% due June 2003 100 209
--------------------------
151,737 152,654
Less: current maturities 170 159
--------------------------
Long-term debt $151,567 $152,495
==========================
53
On November 6, 1996, the Company issued convertible notes (the "Notes"),
providing $139.7 million in proceeds, net of $4.1 million in debt issuance
costs. The issuance costs are included in other assets and are being amortized
over the life of the Notes. The Notes are unsecured subordinated obligations of
the Company, $143.8 million aggregate principal amount, and will mature on
November 1, 2003. The Notes bear interest at 5% per annum. When originally
issued, the Notes were convertible into approximately 2,752,000 shares of common
stock at $52.23 per share at any time prior to maturity. On January 22, 2001,
in anticipation of the spin-off of Global Payments Inc., the conversion rate of
the Notes was adjusted as provided for in the indenture governing the Notes. As
a result of this adjustment, the Notes are now convertible into approximately
4,140,000 shares of common stock at $34.72 per share at any time prior to
maturity. Subsequent to November 1, 1999, the Notes are redeemable at the
option of the Company, in whole or in part, initially at 102.857% and thereafter
at prices declining to 100% at maturity, together with accrued interest.
On April 29, 1999, the Company assumed a mortgage payable in connection with the
purchase of an office building. The mortgage is due in monthly installments
with a fixed rate of 6.87% per annum with the final installment due on May 15,
2005. This final installment includes a balloon payment of $2.4 million.
Scheduled maturities of the Company's long-term debt during the fiscal years
subsequent to May 31, 2001 are as follows: $0.2 million in 2002; $0.2 million in
2003; $148.9 million in 2004; and $2.5 million in 2005.
Note 11 - Shareholders' Equity
Stock Option Plans - On October 28, 1999, the Company adopted a stock-based
- ------------------
compensation plan, the 2000 Long-Term Incentive Plan (the "2000 Plan"). The
aggregate number of shares of common stock of the Company reserved and available
for awards at May 31, 2001 was 1,446,341 shares. The number of shares available
for awards will be adjusted annually on the last day of the Company's fiscal
year through fiscal 2004. The 2000 Plan authorizes the granting of awards to
employees, officers and directors of the Company or its subsidiaries in the
following forms: (i) options to purchase shares of common stock, which may be
incentive stock options or nonqualified stock options, (ii) stock appreciation
rights; (iii) performance shares; (iv) restricted stock; (v) dividend
equivalents; (vi) other stock-based awards; or (vii) any other right or interest
relating to common stock or cash. During fiscal 2000 and 2001, the Company has
only granted awards in the forms of options and restricted stock. Not more than
15% of the total authorized shares may be granted as awards of restricted stock
or unrestricted stock awards. Shares awarded as restricted stock under the plan
are held in escrow and released to the grantee upon the grantee's satisfaction
of conditions set forth in the grantee's restricted stock agreement. Such awards
are recorded as deferred compensation, a reduction of shareholders' equity,
based on the quoted fair market value of the Company's common stock at the award
date. Compensation expense is recognized ratably during the escrow period of the
award. Options may be issued at, below, or above the fair market value of the
common stock at the time of grant. No awards have been granted below the
54
fair market value since the 2000 Plan's inception. Options granted become
exercisable in various annual increments and terminate over a period not to
exceed 10 years.
The Company has two employee stock option plans, the 1997 Stock Option Plan (the
"1997 Plan") and the 1987 Stock Option Plan (the "1987 Plan"), that provide for
the granting of options to certain officers and key employees to purchase the
Company's common stock. No additional options will be granted under the 1997 and
1987 Plans. Options granted under such plans become exercisable in various
annual increments and terminate over a period not to exceed 10 years.
The Company's 1984 Non-Employee Directors Stock Option Plan (the "1984 Plan")
provided for annual grants of options (each to purchase 5,000 shares of common
stock of the Company), to directors who are not employees of the Company. The
maximum number of shares for which options may be granted is 545,000. No
additional options will be granted under the 1984 Plan. Options granted prior to
October 26, 1995 are exercisable immediately at the current market value on the
date of grant. Options granted on or after October 26, 1995 vest 20% two years
after the date of grant, an additional 25% after three years, another 25% after
four years, and the remaining 30% after five years.
Additionally, as a result of the merger with PHSS on December 19, 1997, the
Company assumed the Physician Support Systems, Inc. Stock Option Plan and the
Synergistic Systems, Inc. Stock Option Plan (the "PHSS Plans"). No additional
options will be granted under the PHSS Plans. All options issued under the PHSS
Plans have an exercise price of not less than 100% of the fair market value of a
share of the Company's common stock on the date of the grant, vest over five
years and must be exercised within 10 years from the date of the grant. Each
PHSS option outstanding on December 19, 1997 was converted to 0.435 options to
receive the Company's common stock. The PHSS Plans were terminated during
fiscal year 2001. Accordingly, there are no outstanding or available stock
options under the PHSS Plans at May 31, 2001.
Other Stock Plans - On October 26, 2000, the Company adopted an Employee Stock
- -----------------
Purchase Plan under which the sale of 1,500,000 shares of its common stock has
been authorized. During each quarterly offering period under the plan,
employees may authorize payroll deductions of up to 20% of compensation, which
funds are used to purchase shares of the Company's common stock at the end of
the offering period at a price equal to the lower of 85% of market value on the
first day or the last day of the offering period, subject to an annual purchase
limit of $25,000. At May 31, 2001, 88,136 shares have been issued under this
plan, with 1,411,864 shares reserved for future issuance.
The Company's 1983 Restricted Stock Plan (the "1983 Restricted Stock Plan")
authorizes shares of the Company's common stock to be awarded to key employees.
No additional shares will be awarded under the 1983 Restricted Stock Plan.
Shares previously awarded under the 1983 Restricted Stock Plan are held in
escrow and released to the grantee upon the grantee's satisfaction of conditions
set forth in the grantee's restricted stock agreement. Such awards are recorded
as deferred compensation, a reduction of shareholders' equity, based on the
quoted fair market value of the Company's common stock at the award date.
55
Compensation expense is recognized ratably during the escrow period of the
award.
Under the 1983 Restricted Stock Plan and the 2000 Plan, there were 122,962,
311,850 and 83,138 shares of the Company's common stock awarded as restricted
stock during fiscal years 2001, 2000 and 1999, respectively. These awards have
restriction periods of one to four years. As of May 31, 2001, 161,783
restricted shares remained in escrow. The Company expensed $1.8 million, $2.2
million and $1.0 million in 2001, 2000 and 1999, respectively, in connection
with restricted stock awards granted under these two plans.
Transactions under the stock option plans are summarized in the following
tables. On January 31, 2001, as a result of the spin-off of Global Payments
Inc., options and restricted stock held by Global Payments Inc. employees were
cancelled and replaced with grants of Global Payments Inc. options. The number
of options outstanding and the exercise prices for options held by employees
that remained with the Company have been adjusted pursuant to a formula. This
was accomplished by canceling each option and replacing them with newly issued
options. Each replacement stock option had an aggregate intrinsic value and term
equal to the aggregate intrinsic value of the original option.
1987 Plan 1984 Plan
-----------------------------------------------------------------------------
Weighted Weighted
Shares Under Option Average Option Shares Under Average Option
Price Per Share Option Price Per Share
- ------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1998 2,271,983 $19.21 244,500 $18.65
Granted - - 20,000 33.88
Exercised (220,073) 11.64 (27,000) 16.64
Expired or terminated (114,585) 37.59 (14,000) 35.01
- ------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1999 1,937,325 18.98 223,500 19.23
Granted - - 29,000 29.25
Exercised (298,452) 9.58 (45,000) 14.71
Expired or terminated (63,923) 30.52 - -
- ------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 2000 1,574,950 20.30 207,500 21.61
Option adjustment due to spinoff 1,427,430 - 324,160 -
Granted - - 39,312 37.44
Exercised (939,934) 25.07 (7,500) 35.00
Expired or terminated (1,396,310) 18.70 (215,000) 23.23
- ------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 2001 666,136 14.85 348,472 14.33
- ------------------------------------------------------------------------------------------------------------------
Exercisable at May 31, 2001 574,324 14.18 245,540 11.43
- ------------------------------------------------------------------------------------------------------------------
Available for future grants - - - -
- ------------------------------------------------------------------------------------------------------------------
56
1997 Plan PHSS Plans
-----------------------------------------------------------------------------
Weighted Weighted
Shares Under Option Average Option Shares Under Average Option
Price Per Share Option Price Per Share
- -----------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1998 114,800 $33.40 241,771 $37.79
Granted 817,075 35.88 - -
Exercised - - (62,442) 31.05
Expired or terminated (38,325) 34.09 - -
- -----------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1999 893,550 35.63 179,329 40.14
Granted 322,525 25.45 - -
Exercised - - (14,167) 27.91
Expired or terminated (237,066) 33.36 (121,306) 42.18
- -----------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 2000 979,009 32.83 43,856 38.46
Option adjustment due to spinoff 782,176 - - -
Granted - - - -
Exercised (20,723) 30.75 (10,875) 25.81
Expired or terminated (1,011,453) 32.21 (32,981) 44.53
- -----------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 2001 729,009 20.65 - -
- -----------------------------------------------------------------------------------------------------------------
Exercisable at May 31, 2001 123,071 22.26 - -
- -----------------------------------------------------------------------------------------------------------------
Available for future grants - - - -
- -----------------------------------------------------------------------------------------------------------------
2000 Plan
----------------------------------------
Weighted
Shares Under Option Average Option
Price Per Share
- --------------------------------------------------------------------------------
Outstanding at May 31, 1999
Granted 824,200 25.48
Exercised - -
Expired or terminated (5,880) 31.48
- --------------------------------------------------------------------------------
Outstanding at May 31, 2000 818,320 25.44
Option adjustment due to spinoff 1,552,368 -
Granted 874,021 26.03
Exercised (13,927) 29.88
Expired or terminated (1,683,430) 24.90
- --------------------------------------------------------------------------------
Outstanding at May 31, 2001 1,547,352 17.43
- --------------------------------------------------------------------------------
Exercisable at May 31, 2001 152,925 19.63
- --------------------------------------------------------------------------------
Available for future grants 1,446,341 -
- --------------------------------------------------------------------------------
57
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant dates:
1987 Plan 1984 Plan
----------------------------------------------------------------------------------------------
Number of Weighted Weighted Number of Weighted Weighted
Exercise Price Range Shares Average Price Average Shares Average Price Average
Contractual Life Contractual Life
- -------------------------------------------------------------------------------------------------------------------
$ 4.12 - $12.42 209,045 $10.98 3.6 years 145,872 $ 5.62 1.4 years
$12.96 - $13.91 185,522 11.25 4.0 years - - -
$14.73 - $21.21 202,985 16.90 4.2 years 97,248 17.11 6.7 years
$22.79 - $25.37 68,584 23.61 5.0 years 105,352 23.83 6.7 years
1997 Plan 2000 Plan
----------------------------------------------------------------------------------------------
Number of Weighted Weighted Number of Weighted Weighted
Exercise Price Range Shares Average Price Average Shares Average Price Average
Contractual Life Contractual Life
- -------------------------------------------------------------------------------------------------------------------
$13.54 - $13.69 - - - 315,959 13.65 9.0 years
$13.69 - $16.47 219,053 16.05 8.3 years 394,488 13.96 8.8 years
$16.51 - $18.71 - - - 206,489 16.86 9.0 years
$19.75 - $20.21 254,770 20.13 6.2 years 255,806 19.93 6.8 years
$20.36 - $21.95 - - - 191,570 21.50 9.6 years
$22.14 - $29.25 255,186 25.07 7.4 years 183,040 24.33 9.2 years
The Company has chosen the disclosure option under SFAS No. 123 and continues to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for options granted under the plans. Had
compensation cost for these plans been recognized based on the fair value of the
options at the grant dates for awards under the plans consistent with the method
of SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
(In thousands, except per share data) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Net income (loss):
As reported $36,391 $(40,165) $71,437
Pro forma 28,858 (44,461) 68,250
Basic earnings (loss) per share:
As reported 1.10 (1.21) 2.12
Pro forma 0.87 (1.34) 2.02
Diluted earnings (loss) per share:
As reported 1.07 (1.21) 2.02
Pro forma 0.85 (1.34) 1.97
58
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for the grants during the respective fiscal year:
2001 2000 1999
-----------------------------------------------------
Non-employee Directors Plan
Risk-free interest rates 6.3% 6.6% 4.5%
Expected dividend yields 1.1% 1.3% 0.9%
Expected lives 10 years 10 years 10 years
1997 Plan
Risk-free interest rates - 6.3% 4.7%
Expected dividend yields - 1.1% 0.9%
Expected lives - 7 years 7 years
2000 Plan
Risk-free interest rates 5.8% 6.5% -
Expected dividend yields 0.9% 1.0% -
Expected lives 7 years 7 years -
Employee Stock Purchase Plan
Risk-free interest rates 5.4% 5.5% 4.4%
Expected dividend yields 0.8% 1.4% 1.0%
Expected lives 1 year 1 year 1 year
Expected volatility-all plans 47% 50% 40%
Note 12 - Segment Information
SFAS 131 defines operating segments as components of an enterprise whose
operating results are regularly reviewed by the chief operating decision maker
to make decisions about resources to be allocated to the segment and to assess
performance. The chief operating decision making group for NDCHealth consists
of the Chief Executive Officer, the Chief Financial Officer, the Executive Vice
President - Operations, and certain senior executive officers.
NDCHealth operates its business as two fundamental reportable segments: Network
Services and Systems; and Information Management. Network Services and Systems
provides electronic connectivity to our intelligent network and system solutions
throughout the healthcare industry. Information Management provides management
information, research, and consulting services to pharmaceutical manufacturers,
pharmacy chains and hospitals. Other includes results from divested businesses,
restructuring and impairment charges, income related to gains from the sale of
securities, income related to gains on business divestitures, and expense
related to non-cash losses on an investment in Medscape.
59
The accounting policies of the reportable segments are generally the same as
those described in the summary of significant accounting policies. Corporate
overhead is allocated to the segments based on various methodologies (i.e.,
percentage of revenue, square footage, headcount, etc.). These various
methodologies allow the Company to equitably allocate overhead costs based on
the demands of the segment. Income taxes are not allocated to the segments
incurring them for internal evaluation purposes. Revenues are attributed to
geographic region based on the location of the business unit processing the
transactions. No individual foreign country accounted for more than 10% of
consolidated revenues in any period presented.
Network
Year Ended May 31, 2001 Information Services and
(In thousands) Management Systems Other Totals
- ----------------------------------------------------------------------------------------------------------
Revenues $138,091 $205,862 $ 5,862 $349,815
Income before income taxes and
discontinued operations 18,105 36,482 (8,825) 45,762
Depreciation and amortization 15,303 19,173 269 34,745
Segment assets 133,675 354,537 - 488,212
Network
Year Ended May 31, 2000 Information Services and
(In thousands) Management Systems Other Totals
- ----------------------------------------------------------------------------------------------------------
Revenues $131,229 $158,051 $ 56,393 $345,673
Income before income taxes and
discontinued operations 17,728 24,781 (41,847) 662
Depreciation and Amortization 14,875 14,320 2,639 31,834
Segment assets 98,966 303,484 30,870 433,320
Network
Year Ended May 31, 1999 Information Services and
(In thousands) Management Systems Other Totals
- ----------------------------------------------------------------------------------------------------------
Revenues $128,961 $141,832 $68,203 $338,996
Income before income taxes and
discontinued operations 23,857 24,842 7,022 55,721
Depreciation and Amortization 12,772 14,269 2,620 29,661
Segment assets 117,985 293,376 18,908 430,269
60
A reconciliation of reportable segment assets to the Company's consolidated
assets is as follows:
(In thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Assets:
Information Management $133,675 $ 98,966 $117,985
Network Services and Systems 354,537 303,484 293,376
Other - 30,870 18,908
---------------------------------------------
Total reportable segment assets 488,212 433,320 430,269
Net assets of discontinued operations - 220,312 104,454
---------------------------------------------
Consolidated total assets $488,212 $653,632 $534,723
=============================================
The following presents information about the Company's operations in different
geographic regions for and as of the years ended May 31, 2001, 2000, and 1999:
(In thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Revenues:
United States $334,553 $330,562 $323,095
All other 15,262 15,111 15,901
---------------------------------------------
Total revenues $349,815 $345,673 $338,996
=============================================
Long-lived assets:
United States $ 79,586 $ 66,433 $ 59,311
All other 3,370 2,832 3,288
---------------------------------------------
Total long-lived assets $ 82,956 $ 69,265 $ 62,599
=============================================
61
Note 13 - Non-recurring, Restructuring and Impairment Charges and Other Unusual
Expenses:
During the last 24 months, the Company completed a significant strategy review
and implemented a plan to focus on core products and services. As a result, the
last two years have represented a major transition period for the Company. This
included management's evaluation, during the second quarter of fiscal year 2000,
of the Company's current product and service offerings in light of changing
market and technological environments. The decision was made to focus management
attention on the core information management and network services and systems as
well as related Internet initiatives. Accordingly, actions were initiated to
eliminate non-core as well as obsolete and redundant product and service
offerings. In addition, the Company accelerated clearinghouse integration,
consolidation of locations, and associated staff and expense reductions.
Total restructuring and asset impairment charges during the second quarter of
fiscal 2000 were $34.4 million and were categorized as follows:
(in thousands)
Total Cash Non-cash
- ---------------------------------------------------------------------------------------------------
Impairment of goodwill and other intangibles $15,972 $ - $15,972
Impairment of property and equipment 6,908 - 6,908
Closed or planned closings of facilities 6,100 6,100 -
Estimated costs for settlements on contracts 3,236 2,236 1,000
Severance and related costs 2,177 2,177 -
-----------------------------------------
Total $34,393 $10,513 $23,880
=========================================
The items considered cash items were accrued at the time the charges were
incurred.
Based on management's assessment during the second quarter of fiscal 2000, the
Company evaluated whether events and circumstances had occurred that indicated
the carrying amount of property and equipment or goodwill and other intangibles
may warrant revision or may not be recoverable. The Company uses an estimate of
the future undiscounted net cash flows associated with the asset over the
remaining life of the asset in measuring whether the long-lived asset is
recoverable. Management believes this approach is consistent with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). As a
result, it was determined the above impairment losses should be recognized under
SFAS 121.
At the end of the second quarter of fiscal 2000, the Company also disclosed that
we would have additional restructuring and other unusual charges. Subsequently,
the Company incurred $2.2 million of restructuring and impairment charges during
the second quarter of fiscal 2001 as these actions were finalized and
implemented. Of this total, approximately $1.2 million were cash items that
were accrued at the time the charges were incurred. These cash items include
severance and related costs of $1.1 million and facility exit costs of $0.1
million. The severance and related costs arose from the Company's actions to
reduce personnel staffing in areas of redundant operations and activities. These
charges
62
reflect 58 specifically identified executives and employees who were informed of
their termination during the second quarter of fiscal 2001. The facility costs
relate to a location that was closed during the quarter. The remaining $1.0
million impairment charge was the result of the write down and divestiture of a
non-core operation.
As of May 31, 2001, $0.4 million of the cash portion of the restructuring
charges remains accrued as a current liability in the liabilities sections of
the balance sheet as follows:
(in thousands)
Original FY00 FY01 FY01
Total Payments Additions Payments Current
- ----------------------------------------------------------------------------------------------------------------
Closed or planned closings of
facilities $ 6,100 $1,768 $ 160 $4,372 $120
Estimated costs for settlements on
contracts 2,236 498 - 1,738 -
Severance and related costs 2,177 1,621 1,066 1,322 300
------------------------------------------------------------------
Total $10,513 $3,887 $1,226 $7,432 $420
===================================================================
In accordance with the Company's policy regarding investments in publicly traded
entities, losses in the amounts of $9.7 million and $7.0 million were recognized
in fiscal 2000 and fiscal 2001, respectively, to mark to fair value its
investment in Medscape, Inc. as these losses were determined to be other than
temporary.
Note 14 - Related Party Transactions
Executive recruiting services provided by related parties were $0.2 million and
$0.1 million for the years ended May 31, 2001 and 2000, respectively.
Promissory notes totaling approximately $4.3 million were issued to the Company
in fiscal 2001 by a partnership owned by a director of the Company for the
exercise of stock options previously granted to the director and transferred to
the partnership. The interest rates on these notes range from 4.63% to 4.77%,
payable at the maturity date. The notes mature on various dates between July
2002 and June 2004. The notes are secured by substantially all the assets of
the partnership. The entire $4.3 million note balance was outstanding at May
31, 2001, and is included in Deferred compensation and other as a reduction of
Shareholders' equity.
63
Note 15 - Lease Obligations
The Company conducts a major part of its operations using leased facilities and
equipment. Many of these leases have renewal and purchase options and provide
that the Company pay the cost of property taxes, insurance and maintenance.
Rent expense on all operating leases for fiscal 2001, 2000 and 1999 was
approximately $8.5 million, $10.2 million and $9.4 million, respectively.
Future minimum lease payments for all non-cancelable leases at May 31, 2001 were
as follows:
Capital Operating
(In thousands) Leases Leases
- ------------------------------------------------------------------------------------------------------------
2002 $2,626 $ 8,785
2003 870 5,734
2004 239 3,995
2005 - 2,684
2006 - 191
Thereafter - -
------------------------
Total future minimum lease payments 3,735 $21,389
=======
Less: amount representing interest 41
------
Present value of net minimum lease payments 3,694
Less: current portion 2,586
------
Long-term obligations under capital leases at May 31, 2001 $1,108
======
Note 16 - Commitments and Contingencies
The Company is involved in litigation related to its divested Physician and
Hospital Support Services and Hospital Management Services (PHSS) units. The
Company has obtained a ruling from the European Commission ordering IMS Health
to license its structure for organizing pharmaceutical sales data to us. The
Company is unable to predict whether IMS Health may be successful in overturning
the EU ruling. Additionally, the Company is party to a number of other claims
and lawsuits incidental to its business.
In the opinion of management, the ultimate outcome of such matters, in the
aggregate, will not have a material adverse impact on the Company's financial
position, liquidity or results of operations.
The Company has obtained a credit facility providing a $50 million unsecured
revolving line of credit. This credit facility replaced the Company's $125
million line of credit and became effective upon completion of the spin-off of
Global Payments Inc. on January 31, 2001, and is available for working capital
and general corporate purposes. The line has a variable interest rate based on
market rates and is not secured. The credit agreement contains certain financial
and non-financial covenants customary for financings of this
64
nature. The facility has a one-year term, with the option for NDC Health to
convert any outstanding borrowings at the maturity date to a term loan repayable
at the first anniversary of the initial maturity date or January 31, 2003. As
of May 31, 2001 and 2000, there was $0.0 million and $68.5 million,
respectively, outstanding under this line of credit and its predecessor and the
Company was in compliance with all restrictive covenants.
Note 17 - Supplemental Cash Flow Information
Supplemental cash flow disclosures and non-cash investing and financing
activities for the years ended May 31, 2001, 2000 and 1999 are as follows:
(in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Net income taxes paid (refunded) $(1,174) $ 754 $ 6,122
Interest paid 8,226 8,506 7,070
Supplemental non-cash investing and financing activities:
Capital leases entered into in exchange for property
and equipment - 1,197 13,191
Mortgage assumed with purchase of office building - - 3,362
Investment in MedicaLogic/Medscape, Inc. - 7,000 -
In fiscal 2001, 2000 and 1999, the Company acquired various businesses that were
accounted for as purchases (see Note 2). In conjunction with these
transactions, liabilities were assumed as follows:
(in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Fair value of assets acquired $23,624 $46,160 $10,473
Notes and deferred payments - (6,000) -
Stock issued - - -
Cash acquired - (902) -
Liabilities assumed (400) (1,160) (2,418)
---------------------------------------
Cash paid for acquisitions $23,224 $38,098 $ 8,055
=======================================
65
Note 18 - Quarterly Consolidated Financial Information (Unaudited)
(in thousands, except per share data) Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------
August 31 November 30 February 28 May 31
--------- ----------- ----------- -----------
Fiscal Year 2001
- ----------------
Revenue $85,874 $83,666 $88,232 $92,043
Restructuring and impairment
charge - 2,156 - -
Operating income 14,187 12,780 15,175 16,719
Income before discontinued
operations 7,531 6,689 8,649 5,199
Discontinued operations 8,649 (326) - -
Net income 16,180 6,363 8,649 5,199
Basic earnings per share:
Income before discontinued
operations 0.23 0.20 0.26 0.15
Discontinued operations 0.26 (0.01) - -
Basic earnings per share 0.49 0.19 0.26 0.15
Diluted earnings per share:
Income before discontinued
operations 0.21 0.20 0.25 0.15
Discontinued operations 0.24 (0.01) - -
Diluted earnings per share 0.48 0.19 0.25 0.15
66
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------
August 31 November 30 February 28 May 31
--------- ----------- ----------- -----------
Fiscal Year 2000
- ----------------
Revenue $85,720 $ 85,027 $85,868 $ 89,058
Restructuring and impairment
charge - 34,393 - -
Operating income (loss) 15,823 (32,330) 14,331 14,559
Income (loss) before discontinued
operations 9,633 (21,168) 7,810 2,562
Discontinued operations (4,696) 5,700 (6,616) (33,390)
Net income (loss) 4,937 (15,468) 1,194 (30,828)
Basic earnings (loss) per share:
Income (loss) before discontinued
Operations 0.28 (0.63) 0.24 0.08
Discontinued operations (0.14) 0.17 (0.20) (1.02)
Basic earnings (loss) per share 0.15 (0.46) 0.04 (0.94)
Diluted earnings (loss) per share:
Income (loss) before discontinued
operations 0.27 (0.63) 0.23 0.08
Discontinued operations (0.14) 0.17 (0.20) (1.02)
Diluted earnings (loss) per share 0.14 (0.46) 0.04 (0.94)
Note 19 - Subsequent event (Unaudited)
On August 6, 2001, the Company announced that it had sold its physician network
services business to MedUnite. As a result of this alliance, NDCHealth became a
founding investor in MedUnite, joining Aetna, Anthem, CIGNA, Health Net, Inc.,
Oxford, Pacificare and WellPoint Health Networks. In exchange for the assets of
its physician network services business, NDCHealth received a 17.9% equity
interest in MedUnite.
67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Data Corporation:
We have audited the accompanying consolidated balance sheets of National Data
Corporation (a Delaware corporation) and subsidiaries as of May 31, 2001 and
2000 and the related consolidated statements of income (loss), changes in
shareholders' equity, and cash flows for each of the three years in the period
ended May 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Data Corporation and
subsidiaries as of May 31, 2001 and 2000 and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 2001,
in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 3 to the consolidated financial statements, effective June
1, 1999, the Company changed the method of revenue recognition in its Physicians
Management Services business.
/s/ Arthur Andersen LLP
Atlanta, Georgia
July 13, 2001
68
NATIONAL DATA CORPORATION
CONSOLIDATED SCHEDULE II
Valuation & Qualifying Accounts
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Column A Column B Column C Column D Column E
1 2
Balance at Charged to Acquired/ Uncollectible Balance at
Beginning Costs and (Divested) Accounts End
Description of Period Expenses Balances Write-Off of Period
Trade Receivable Allowances
May 31, 1999 $2,371 $ 4,823 $ - $ 3,212 $3,982
May 31, 2000 3,982 14,165 - 10,831 7,316
May 31, 2001 7,316 5,189 (1,113) 4,764 6,628
69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements included in National Data Corporation's
annual report to shareholders in this Form 10-K and have issued our report
thereon dated July 13, 2001. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the index
on page 35 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
July 13, 2001
70
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------
None.
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 the Nominees
and Other Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" from its definitive Proxy Statement (the "2001 Proxy Statement") to
be delivered to the stockholders of the Company in connection with the 2001
Annual Meeting of Stockholders to be held on October 25, 2001. Certain
information relating to executive officers of the Company appears in Part I 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 the
2001 Proxy Statement. In no event shall the information contained in the 2001
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 the 2001 Proxy
Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company hereby incorporates by reference the information contained under
the headings "Transactions with Related Parties" and "Compensation Committee
Interlocks and Insider Participation" from the 2001 Proxy Statement.
71
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Listing of Financial Statements
The following consolidated financial statements for the Registrant and its
subsidiaries are included in Part II, Item 8 of this report and are filed as a
part hereof:
Consolidated Statements of Income (Loss) for each of the three fiscal years
ended May 31, 2001.
Consolidated Statements of Cash Flows for each of the three fiscal years ended
May 31, 2001.
Consolidated Balance Sheets at May 31, 2001 and 2000.
Consolidated Statements of Changes in Shareholders' Equity for each of the three
fiscal years ended May 31, 2001.
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(a)(2) Listing of Financial Statement Schedules
Other than as described below, Financial Statement Schedules are not filed with
this Report because the Schedules are either inapplicable or the required
information is presented in the Financial Statements or Notes thereto.
Consolidated Schedule II - Valuation and Qualifying Accounts
Report of Independent Public Accountants as to Schedule
(a)(3) Exhibits
2(i) Distribution Agreement, Plan of Distribution and Reorganization, dated as
of January 31, 2001 by and between National Data Corporation and Global Payments
Inc. (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed
on February 14, 2001, file No. 001-12392, and incorporated herein by reference).
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).
72
(ii) Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated October 28, 1996 (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated October 29, 1996, file No. 001-12392, and
incorporated herein by reference.)
(iii) Amended Certificate of Designations of the Registrant, dated October 28,
1996 (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated
October 29, 1996, file No. 001-12392, and incorporated herein by reference.)
(iv) Certificates of Amendment to Certificate of Incorporation of the
Registrant, dated March 22, 1999; May 26, 1999; June 21, 1999 and June 30, 2000
(filed as Exhibit 3(iv) to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 2000, file No. 001-12392, and incorporated herein by
reference.)
(v) Certificate of Amendment to Certificate of Incorporation of the Registrant,
dated March 26, 2001.
(vi) 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.)
(vii) 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) 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.)
(ii) 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.)
(iii) Stockholder Protection Rights Agreement, dated March 26, 2001, between
the Registrant and the Rights Agent (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated March 26, 2001, file No. 001-12392, and
incorporated herein by reference.)
10(i) Tax Sharing and Indemnification Agreement, dated as of January 31, 2001
by and between National Data Corporation and Global Payments Inc. (filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on February
14, 2001, file No. 001-12392, and incorporated herein by reference).
(ii) Employee Benefits Agreement, dated as of January 31, 2001 by and between
National Data Corporation and Global Payments Inc. (filed as Exhibit 10.2 to the
73
Registrant's Current Report on Form 8-K filed on February 14, 2001, file
No. 001-12392, and incorporated herein by reference).
(iii) Transition Support Agreement, dated as of January 31, 2001 by and between
National Data Corporation and Global Payments Inc. (filed as Exhibit 10.3 to the
Registrant's Current Report on Form 8-K filed on February 14, 2001, file No.
001-12392, and incorporated herein by reference).
(iv) Intercompany Systems/Network Services Agreement, dated as of January 31,
2001 by and between National Data Corporation and Global Payments Inc. (filed as
Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on February
14, 2001, file No. 001-12392, and incorporated herein by reference).
(v) Services Agreement (Batch Processing), dated as of January 31, 2001 by and
between National Data Corporation and Global Payments Inc. (filed as Exhibit
10.5 to the Registrant's Current Report on Form 8-K filed on February 14, 2001,
file No. 001-12392, and incorporated herein by reference).
(vi) Amendment to Services Agreement (Batch Processing), dated as of May 31,
2001 by and between National Data Corporation and Global Payments Inc.
(vii) Headquarters Lease Agreement, dated as of January 31, 2001 by and between
National Data Corporation and Global Payments Inc. (filed as Exhibit 10.6 to the
Registrant's Current Report on Form 8-K filed on February 14, 2001, file No.
001-12392, and incorporated herein by reference).
(viii) Sublease Agreement, dated as of January 31, 2001 by and between National
Data Corporation and Global Payments Systems LLC. (filed as Exhibit 10.7 to the
Registrant's Current Report on Form 8-K filed on February 14, 2001, file No.
001-12392, and incorporated herein by reference).
(ix) Sublease Agreement, dated as of January 31, 2001 by and between National
Data Corporation and National Data Payment Systems, Inc. (filed as Exhibit 10.8
to the Registrant's Current Report on Form 8-K filed on February 14, 2001, file
No. 001-12392, and incorporated herein by reference).
(x) Credit Agreement dated as of January 31, 2001, among the Registrant, Bank
One, N.A., as Administrative Agent, Wachovia Bank, N.A., as Documentation
Agent, and the Lenders named therein.
(xi) First Amendment dated May 22, 2001 to the Credit Agreement dated as of
January 31, 2001, among the Registrant, Bank One, N.A., as Administrative Agent,
Wachovia Bank, N.A., as Documentation Agent, and the Lenders named therein.
74
(xii) Second Amendment dated July 25, 2001 to the Credit Agreement dated as of
January 31, 2001, among the Registrant, Bank One, N.A., as Administrative Agent,
Wachovia Bank, N.A., as Documentation Agent, and the Lenders named therein.
(xiii) Promissory Notes dated April 3, 2001 and May 14, 2001 between MRY
Partners, L.P. and the Registrant.
(xiv) Stock Pledge Agreement dated as of April 3, 2001 by and between MRY
Partners, L.P. and the registrant.
Executive Compensation Plans and Arrangements
(xv) 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. 001-2392, and incorporated herein by reference).
(xvi) 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).
(xvii) 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).
(xviii) 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).
(xix) 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).
(xx) 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).
(xxi) 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).
(xxii) 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).
(xxiii) 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).
75
(xxiv) 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).
(xxv) 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).
(xxvi) 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).
(xxvii) 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).
(xxviii) 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).
(xxix) Amendment dated May 31, 1999 to the Employment Agreement effective
June 1, 1997 between Robert A. Yellowlees and the Registrant. (incorporated by
reference from Exhibit 10(xxvii) to the Registrant's Annual Report on Form 10-K
for the year ended May 31, 1999, file No. 001-12392).
(xxx) Amendment to the National Data Corporation Employees Retirement Plan
effective July 31, 1998 (incorporated by reference from Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter end August 31, 1998,
file No. 001-12392).
(xxxi) Amendment to the 1984 Non-Employee Director Stock Option Plan effective
October 22, 1998. (filed as Exhibit 10 (xxix) to the Registrant's Annual Report
on Form 10-K for the year ended May 31, 1999, file No. 001-12392, and
incorporated herein by reference).
(xxxii) 2000 Long-term Incentive Plan (filed as Exhibit A to the Registrant's
Definitive Proxy Statement on Form 14A for the year ended May 31, 1999 and
incorporated herein by reference).
(xxxiii) Employment Agreement effective December 1, 1999 between Walter M. Hoff
and the Registrant.
(xxxiv) Employment Agreement effective December 1, 1999 between E. Christine
Rumsey and the Registrant.
76
(xxxv) Employment Agreement effective January 17, 2000 between Charles W.
Miller and the Registrant.
(xxxvi) Employment Agreement effective May 1, 2000 between Glenn Rosenkoetter
and the Registrant.
(xxxvii) Employment Agreement effective November 20, 2000 between Randolph L.M.
Hutto and the Registrant.
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
99.1 National Data Corporation (unaudited) Consolidated Statements of Income
(normalized) for fiscal 1999, 2000 (by quarter) and 2001 (by quarter).
(Normalized for certain items discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations herein)
99.2 National Data Corporation (unaudited) Consolidated Statements of Income or
(Loss) (GAAP) for fiscal 1999, 2000 (by quarter) and 2001 (by quarter).
(b) Listing of Reports on Form 8-K
(i) National Data Corporation's Current Report on Form 8-K dated March 21,
2001, was filed on March 21, 2001, reporting as an exhibit under Item 7 the
Company's press release dated March 21, 2000 and under Item 9 the Company's
release of business and financial information giving effect to the spin-off of
the Global Payments Inc. subsidiary.
(ii) National Data Corporation's Current Report on Form 8-K dated March 26,
2001, was filed on March 27, 2001, reporting under Item 5 the adoption of the
Company's Stockholder Protection Rights Agreement, dated March 26, 2001, between
the Registrant and the Rights Agent.
(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.
77
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/ Walter M. Hoff
------------------------------
Walter M. Hoff, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Randolph L.M. Hutto
-----------------------------
Randolph L.M. Hutto
Chief Financial Officer
(Principal Financial Officer)
By: /s/ David H. Shenk
-----------------------------
David H. Shenk
Corporate Controller
(Chief Accounting Officer)
Date: August 27, 2001
78
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 17, 2001
- --------------------------
Robert A. Yellowlees
/s/ J. Veronica Biggins Director August 17, 2001
- --------------------------
J. Veronica Biggins
/s/ Terri A. Dial Director August 17, 2001
- --------------------------
Terri A. Dial
/s/ Walter M. Hoff Director August 17, 2001
- --------------------------
Walter M. Hoff
/s/ Kurt M. Landgraf Director August 17, 2001
- --------------------------
Kurt M. Landgraf
/s/ Neil Williams Director August 17, 2001
- --------------------------
Neil Williams
79
NATIONAL DATA CORPORATION
FORM 10-K
INDEX TO EXHIBITS
Exhibit
Numbers Description
3(v) Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated March 26, 2001.
10(vi) Amendment to Services Agreement (Batch Processing), dated as of
May 31, 2001 by and between National Data Corporation and Global
Payments Inc.
(x) Credit Agreement dated as of January 31, 2001, among the Registrant,
Bank One, N.A., as Administrative Agent, Wachovia Bank, N.A., as
Documentation Agent, and the Lenders named therein.
(xi) First Amendment dated May 22, 2001 to the Credit Agreement dated as of
January 31, 2001, among the Registrant, Bank One, N.A., as
Administrative Agent, Wachovia Bank, N.A., as Documentation Agent, and
the Lenders named therein.
(xii) Second Amendment dated July 25, 2001 to the Credit Agreement dated
as of January 31, 2001, among the Registrant, Bank One, N.A., as
Administrative Agent, Wachovia Bank, N.A., as Documentation Agent, and
the Lenders named therein.
(xiii) Promissory Notes dated April 3, 2001 and May 14, 2001 between MRY
Partners, L.P. and the Registrant.
(xiv) Stock Pledge Agreement dated as of April 3, 2001 by and between MRY
Partners, L.P. and the registrant.
(xxxiii) Employment Agreement effective December 1, 1999 between Walter M. Hoff
and the Registrant.
(xxxiv) Employment Agreement effective December 1, 1999 between E. Christine
Rumsey and the Registrant.
(xxxv) Employment Agreement effective January 17, 2000 between Charles W.
Miller and the Registrant.
(xxxvi) Employment Agreement effective May 1, 2000 between Glenn Rosenkoetter
and the Registrant.
80
(xxxvii) Employment Agreement effective November 20, 2000 between Randolph L.M.
Hutto and the Registrant.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants
99.1 National Data Corporation (unaudited) Consolidated Statements of
Income (normalized) for fiscal 1999, 2000 (by quarter) and 2001 (by
quarter). (Normalized for certain items discussed in Management's
Discussion and Analysis of Financial Condition and Results of
Operations herein)
99.2 National Data Corporation (unaudited) Consolidated Statements of
Income or (Loss) (GAAP) for fiscal 1999, 2000 (by quarter) and 2001
(by quarter).
81