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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 001-12392
NATIONAL DATA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
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<S> <C>
DELAWARE 58-0977458
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
NATIONAL DATA PLAZA
ATLANTA, GEORGIA 30329-2010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 728-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<C> <S>
Common Stock, Par Value $.125 Per Share New York Stock Exchange, Inc.
Junior Preferred Stock Purchase Rights New York Stock Exchange, Inc.
5% Convertible Subordinated Notes due
2003 New York Stock Exchange, Inc.
</TABLE>
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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $973,661,697 based upon the last reported sale price on The New
York Stock Exchange on August 25, 1997 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 25, 1997 was 26,630,732 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
DOCUMENT FORM 10-K
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<S> <C>
Portions of the Company's Definitive Proxy Part III
Statement relating to the 1997 Annual Meeting of
Stockholders to be held on October 23, 1997
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<PAGE>
NATIONAL DATA CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I.
- -------
<S> <C> <C>
Item 1. BUSINESS..................................... 2
Item 2. PROPERTIES................................... 14
Item 3. LEGAL PROCEEDINGS............................ 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.................................... 14
EXECUTIVE OFFICERS OF THE REGISTRANT................... 15
PART II
- -------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.................. 17
Item 6. SELECTED FINANCIAL DATA...................... 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.. 17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 17
Part III
- --------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................... 18
Item 11. EXECUTIVE COMPENSATION....................... 18
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................... 18
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
- -------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.......................... 19
SIGNATURES............................................. 24
APPENDIX A............................................. 26
</TABLE>
<PAGE>
PART I
------
ITEM 1. BUSINESS
- -----------------
GENERAL
National Data Corporation (together with its subsidiaries herein referred
to as the "Company" or "NDC") is a Delaware corporation that was incorporated in
1967. The Company is a leading provider of high-volume information services and
application systems to the health care and payment systems markets. The Company
serves a diverse customer base comprised of almost 120,000 health care
providers, 3,500 health care plans, more than 750,000 merchant locations, 35,000
corporations and 400 banking institutions, as well as federal and state
government agencies. The Company markets its services directly to merchants and
health care providers and indirectly through business alliances with a wide
range of banks, insurance companies and distributors.
The Company is one of the largest independent providers of health care
information services and integrated payment systems services in the United
States, processing transactions at an annualized rate of approximately 3 billion
at the end of fiscal 1997. NDC provides electronic claims processing and
adjudication services, practice management systems, electronic data interchange
("EDI") services, billing services, business office management services and
clinical data base information for pharmacies, dentists, physicians, hospitals,
health maintenance organizations, managed care companies, clinics and nursing
homes, as well as other health care providers. Management believes that the
Company is the largest independent processor of real-time health care
transactions in the country, and that it is well positioned to capitalize on the
growing demand for cost containment and improved patient care in the health care
industry. By the end of fiscal 1997, approximately 41% of the Company's total
revenue was derived from the Company's health care systems and services, which
represent the fastest growing portion of the Company's business.
The Company's Global Payment Systems LLC subsidiary ("Global Payment
Systems" or "Global") offers such services as authorization, equipment
deployment, customer support, back office processing, merchant accounting and
card issuing services on an outsourcing basis for banks and other participants
in the payment systems industry. Global also offers information reporting and
EDI services, cash management systems and services to government and corporate
customers. In recent years, the Company has expanded the range of payment
instruments services offered and distribution channels utilized. The Company
recently introduced a purchase card processing program that provides electronic
payment capabilities for business-to-business purchasing transactions.
Approximately 29% of the Company's total revenue for fiscal 1997 was derived
from Global.
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The Integrated Payment Systems business unit provides a broad range of
payment acceptance services primarily in partnership with banks. Under its Bank
Alliance Program, as well as through other distribution channels, it adds
marketing and risk management services to the range of services provided by
Global Payment Systems. The Company's Integrated Payment Systems unit accounted
for approximately 30% of the Company's total revenue for fiscal 1997.
The Company's products offer greater convenience to purchasers and
providers of goods and services. They reduce processing costs, settlement delays
and losses from fraudulent transactions. NDC's advanced high speed computer and
telecommunications network enables the Company to electronically process,
capture and transmit a high volume of point-of-service transactions 24 hours a
day, seven days a week. While the transition from paper-based to electronic
transaction processing continues, the earliest and most significant penetration
has occurred in the areas of credit card authorization and settlement and
pharmacy transaction processing. NDC believes that the rapid transition to
electronic transaction processing in these areas demonstrates the potential for
automation of other market segments and markets still dominated by paper-based
processing requiring timely information, such as additional health care
applications, check and cash transactions and the transfer of information
between businesses.
The Company's business strategy is to be a total solution provider of
value-added systems and services in the markets it serves. NDC believes that
both the health care and payment systems markets present attractive
opportunities for continued growth. In pursuing its strategy, the Company seeks
both to increase its penetration of existing application systems and point-of-
use transaction processing markets and to continue to identify and create new
markets for its services. The Company will also continue to seek to enhance
existing products and develop, as well as acquire, new systems and services;
such as services relating to credit card issuing services, financial electronic
data interchange and health care information management services.
To support its business strategy, the Company has expanded its focus on
acquisition opportunities and alliances with other companies that allow NDC to
increase its market penetration, technological capabilities, product offerings
and distribution capabilities. During fiscal year 1996, the Company completed
five (5) acquisitions and alliances and in fiscal year 1997, completed an
additional six (6) acquisitions to give NDC expanded capabilities and customer
bases in the managed care, hospital and physician and payment systems markets.
RECENT DEVELOPMENTS
On August 20, 1997, the Company entered into agreements to acquire two
related health care database information management businesses based in Phoenix,
Arizona. Under the first agreement, the Company will acquire the stock of
Source Informatics Inc., a privately held company, in exchange for 1,555,556
3
<PAGE>
shares of the Company's Common Stock and $31.9 million in cash. The second
agreement provides for the acquisition of the stock of a subsidiary of
Pharmaceutical Marketing Services Inc. ("PMSI"), which holds its Over-The-
Counter Physician Survey business unit as well as PMSI's interest in a joint
venture it formed with Source Informatics, Inc. PMSI will receive 1,059,829
shares of the Company's Common Stock and $6.5 million in cash for this
subsidiary.
INDUSTRY BACKGROUND
Advances in computer software, hardware and telecommunications technology
have aided the development of on-line, real-time information processing systems
that electronically capture and transmit high volumes of information. These
advances in technology allow information processors to offer greater convenience
to purchasers and providers of goods and services and reduce processing costs,
settlement delays and losses from fraudulent transactions.
HEALTH CARE MARKET
The health care sector of the market for information services and systems
is growing rapidly due to the need of employers, health care payers and
providers to control costs and to improve quality of care. A high percentage of
health care transactions are still processed using manual, paper-based methods.
Third party payers, managed care companies and health care providers continue to
seek methods to automate processing in order to reduce costs and improve the
quality of health care services. The Company believes the health care industry
is one of the largest untapped markets for electronic information processing
services, including the electronic transmission and capture of data for on-line
eligibility verification and reimbursement for services. The application of
technology to improve the flow of information to address the quality of patient
care quality is expanding as well.
Since the late 1980s, electronic processing technology has been applied to
the transmission and capture of data for pharmacy claims and transaction
processing. This technology is being adapted to the processing of other health
care data, including a variety of transactions for dentists, physicians and
hospitals.
The Company believes that the ability to offer total solutions will be an
important competitive advantage as automated transactions processing and the
availability of information as this market continues to grow. As electronic
processing of health care claims accelerates, the Company believes it will be
important for companies to be able to offer integrated, value-added services and
systems to industry participants who continue to automate. Included in the
market's requirements are practice management systems, contract management,
referrals, eligibility verification and outsourcing capabilities, as well as new
information processing services. The market includes, among others, managed
care companies, payers and providers in the health care markets.
4
<PAGE>
Consistent with this strategy, at the end of fiscal 1996 the Company
acquired Conceptual Systems and C.I.S. Technologies, Inc. ("CIS"). In fiscal
1997, the Company acquired Equifax Health EDI Services, Inc. and Health
Communication Services, Inc. These acquisitions provided additional penetration
of the physician and hospital electronic transaction markets and expanded the
scope of the Company's health care product offerings to include managed care
software and services and accounts receivable and business office consulting and
outsourcing services. With the CIS merger, the Company became the worldwide
leader in hospital electronic claims processing services. That position was
strengthened by the acquisition of Health Communication Services, Inc. The
Company's position in the physician market was expanded by those as well as the
acquisition of the Equifax Health EDI business. These acquisitions have been
subsequently integrated with previous NDC internal programs addressing these
same segments.
PAYMENT SYSTEMS MARKET
Electronic transaction processing for the payment systems market involves
transaction authorization, data capture and settlement for credit and debit
cards, check verification and guarantee services and financial electronic data
interchange. Most retail credit card transactions are no longer processed
through paper-based systems and are instead electronically authorized, with an
increasing number electronically settled as well. The Company believes that the
number of transactions will continue to grow and that an increasing percentage
of these transactions will be processed electronically due to convenience,
efficiency and a desire to reduce fraud and other processing costs in a
continually growing number of vertical markets in the U.S. and internationally.
The Company believes that there are significant opportunities for continued
growth in the application of electronic transaction processing services to the
payment systems market. Utilization of debit cards as a general payment
mechanism for goods and services continues to increase. Smart cards are also
becoming more widely accepted. The Company is also seeing good growth in the
check verification/guarantee areas. There is also significant potential for
growth in the use of credit and debit cards in other traditional cash payment
markets such as fast-food restaurants, gaming establishments, cinemas and
convenience stores. The increased use of credit and debit cards for such
transactions is primarily driven by the convenience they provide as well as the
ability to efficiently track expenses and purchase activity. The continued rapid
expansion of the Internet also provides potential growth opportunities for
electronic payment applications. In addition, the Company believes the
proliferation of affinity or co-branded cards that provide consumers with added
benefits should contribute to increased use of credit and debit cards and the
growth of the payment systems market.
Purchasing cards provide business-to-business credit card acceptance for
industries that have not traditionally utilized credit cards. Purchasing cards
replace the paper ordering, invoicing and payment processing with electronic
transactions. This market continues to grow and provide excellent
opportunities.
5
<PAGE>
Other service providers similar to the Company provide high volume
electronic transaction processing and support services directly to banking
institutions and other new entrants into the business. The shift in the industry
from traditional financial institution providers to independent providers is due
in large part to more efficient distribution channels as well as the increased
technological capabilities required for the rapid and efficient creation,
processing, handling, storage and retrieval of information. These technological
capabilities have become increasingly complex, requiring significant capital
commitments to develop, maintain and update the systems necessary to provide
these technologically advanced services at a competitive price. As a result,
several large merchant processors, including the Company, have expanded their
operations through the creation of alliances or joint ventures with banks and
acquisitions of new merchant accounts from banks who previously serviced those
accounts. In addition, many small information processing organizations are
consolidating with larger service providers.
In addition to services that enable merchants to accept credit and debit
cards, the payment systems market continues to expand to include increasing
levels of check verification and guarantee services. Demand for these services
has been growing in recent years as merchants seek to reduce losses related to
bad checks and use check acceptance to increase sales.
During fiscal 1996 the Company further expanded its presence and range of
services for the payment systems market. The Company formed Global Payment
Systems for the primary purpose of combining two of the industry's leading
electronic payment processing operations to create one of the largest such
operations in the world and to expand to a new class of back office services.
MasterCard's Merchant Automated Point-of-Sale Program ("MAPP") was acquired by
the Company and combined with NDC's card authorization network services, certain
of its merchant processing back office processing services and the Company's
information systems and services business. This combination resulted in a
broadening of the products and services available to the Company's customers.
During fiscal 1997, Global acquired Electronic Data Systems Corporation's
("EDS") service bureau-based card processing business, adding credit card
issuing as well as additional merchant processing capabilities to its existing
business line. The Company also acquired Merchant Services USA, Inc., a terminal
deployment and customer support management business in fiscal 1997. (See Note 2
- - Business Acquisitions of the Notes to Consolidated Financial Statements for
further discussion.) With the product capabilities acquired in these
transactions, combined with the Company's extensive range of payment systems,
the Company is now positioned to provide a full range of end-to-end systems and
services to its target markets.
BUSINESS STRATEGY
The Company's business strategy centers on providing total solution, value-
added information processing services and application systems in the markets it
serves. NDC believes that both the health care and payment systems markets
present attractive
6
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opportunities for continued growth. In pursuing its business
strategy, the Company seeks both to increase its penetration of existing
information processing and application systems markets and to continue to
identify and create new markets through the:
. development of value-added applications, enhancement of existing products
and development of new systems and services;
. expansion of distribution channels; and
. acquisition of, or alliance with, companies that have desirable products,
market share and/or distribution capabilities.
PRODUCTS AND SERVICES
HEALTH CARE
The Company is a leading provider of a full range of products and services
that address health care cost containment and improved patient care issues. The
Company's products include electronic claims processing, claims adjudication and
payment systems, funding capabilities, billing services, accounts receivable
resolution, business office management services, practice management systems and
clinical data base information for pharmacies, dentists, physicians, managed
care organizations, hospitals, HMO's, clinics and nursing homes. Revenue for the
Company's Health Care unit's products and services consists of recurring
transaction processing, monthly maintenance and support fees, software license
revenue and proceeds from the sale of practice management systems as well as
upgrade charges for additional applications. In addition, the Company realizes
revenue based on the results related to the management of hospital and physician
group practice business offices. Fees for electronic claims processing services
are based on a per transaction rate, with the rate varying depending upon the
volume and scope of services provided.
ELECTRONIC PROCESSING
The Company's electronic processing services are offered to managed care
companies, pharmacies, physicians, HMO's and preferred provider organizations.
These services include transaction submission, eligibility verification,
patient-specific benefit coverage, transaction data capture and editing,
transaction adjudication and retrospective and prospective drug utilization
review. Electronic processing for health care transactions represents the
Company's fastest growing service. The Company recently expanded its presence in
the health care transaction processing market with two acquisitions Health
Communication Services, Inc., specializing in hospital claims processing and
Equifax Health EDI Services, Inc., further expanding NDC's penetration of the
market for transaction clearing and processing systems for physicians' offices.
7
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PRACTICE MANAGEMENT SYSTEMS
The Company's practice management systems are designed to provide the
health care market with application solutions that improve the efficiency of
operations, address cost containment concerns and enhance overall quality of
patient care. In addition, NDC's practice management systems are offered with
the Company's transaction processing services, credit and debit card processing
capabilities and other associated functions such as inventory reporting and
ordering. These systems are offered through various practice management system
vendors, payer organizations and health care product distributors.
The Company's pharmacy practice management systems provide solutions for
independent and chain pharmacies, hospitals, HMO's, clinics and nursing homes.
These systems enable pharmacists to manage and perform patient registration,
drug record-keeping, private and third-party billing, inventory control and
ordering, price updates, management reporting and drug database updates to
detect potential clinical dispensing and prescribing problems. In addition, the
Company's systems provide value-added transaction processing services. The
Company's systems are sold and maintained by the Company and can be tailored
to the needs of users utilizing micro- and mini-computer platforms. In fiscal
years 1996 and 1997, the Company expanded the capabilities of its pharmacy
practice management systems through the development of sophisticated, new order
entry and inventory management capabilities and enhanced retail point-of-sale
capabilities. The Company also introduced products enhancing customers' ability
to order re-fill prescriptions via telephone and developed physician/pharmacy
connectivity products enabling physicians to electronically transmit
prescriptions directly to pharmacies utilizing NDC's pharmacy management
systems.
The Company's dental management systems are designed to provide dentists
with patient record accounting, patient scheduling and recall, billing and
collection, insurance transaction information and electronic processing to
improve the efficiency of office management. The systems also incorporate
advanced clinical functionality with customary business automation functions.
The Company's physician management systems are designed to provide
physicians with patient scheduling, billing and collection, patient record
accounting, eligibility verification, coordination of multiple payers and
payment plans, insurance transaction information and electronic processing
designed to improve the efficiency of office management as well as electronic
communication with pharmacies to reduce time spent on prescription requests and
refill authorizations.
BUSINESS OFFICE SOLUTIONS
The Company provides business office services designed to increase
profitability in hospital and physician group business offices. To assist with
managed care contract administration, the Company offers systems that provide
consistent interpretation of contract terms and improved revenue recovery rates.
Consultant audit services identify lost revenue, improve billing accuracy and
speed reimbursement. The Company also can provide comprehensive outsourcing
services for managing and staffing business office accounting functions.
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PAYMENT SYSTEMS
The Company's Payment Systems products provide a wide range of end-to-end
transaction processing alternatives to the retail, hospitality, lodging, health
care and government markets. The Company offers credit and debit card services,
check verification and guarantee and other related services directly to
merchants and indirectly through financial institutions.
GLOBAL PAYMENT SYSTEMS
Global provides financial institutions with end-to-end payment services
supporting both issuer and acquirer operations.
ACQUIRER SERVICES. The acquirer services provide a single source solution for
delivering merchant payment services. These services consist of:
. comprehensive authorization network for credit cards, debit cards and checks;
. electronic data capture, which incorporates the capabilities of the Company's
authorization system, combined with enhanced software, to enable an entire
transmission to be electronically captured and transmit value-added
information enabling faster clearing through the banking system;
. an advanced merchant accounting system allowing maximum flexibility to record
activity and fund merchants;
. exception processing, including sales draft retrieval and chargeback
resolution;
. point of sale terminal deployment and management;
. fraud monitoring; as well as
. customized, value-added applications for retailers, restaurants, lodging and
direct marketers.
ISSUER SERVICES. Global's issuer services allow financial institutions to create
new card programs and monitor credit risk to enhance the profitability of their
portfolios by providing services such as:
. authorization;
. card production, fulfillment and inventory services;
. automated credit application processing systems;
. cardholder statements;
. exception processing; and
. cardholder analysis systems.
ELECTRONIC INFORMATION SOLUTIONS. Global's information systems and services
products include cash management, information reporting and electronic data
9
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interchange ("EDI"). Global recently introduced a new cash management system
specifically designed for use by large multi-national corporations. This new
offering is being marketed internationally through Global's sales force and
through relationships with several large international financial institutions.
The products and services provide multi-currency/multi-format financial,
management and operational data to corporate and government institutions
worldwide. Corporate and government organizations use these services to collect,
consolidate and report financial, administrative and operating data from more
than 230,000 locations.
INTEGRATED PAYMENT SYSTEMS
NDC is a leader in partnering with banks and others to offer its merchant
processing support. Under the Company's Bank Alliance Program, the Company and
financial institutions jointly market and sell card acceptance services.
Integrated Payment Systems performs the financial settlement between the
merchant and the card association, offers risk management services and provides
merchant customer support in addition to all the authorization, terminal
deployment and back office services performed by Global Payment Systems. Fees
for the Company's merchant processing services are principally based on a
percentage of the dollar volume of transactions processed for merchants.
The Integrated Payment Systems unit also offers merchants check guarantee
services. Check guarantee differs from check verification in that the Company
not only verifies the transaction but also guarantees payment. If a check is not
paid, the Company assumes the right to collect from the individual writing the
check. Fees for the Company's check services are based on a per transaction
rate, while fees for its check guarantee services are based on a percentage, or
discount, of the face value of each check guaranteed by the Company.
SALES AND MARKETING
The Company's electronic transaction processing services are offered to the
health care markets directly through Company personnel and through alliances
with other organizations. The Company's practice management systems are marketed
primarily through the Company's personnel but also jointly through alliances
with other companies and value-added re-sellers. The Company markets its Payment
Systems products and services through financial institutions, bank alliance
programs, its own sales personnel and also through independent contractors.
10
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OPERATIONS AND SYSTEMS
The Company operates multiple data and customer support facilities. The
primary facilities are in Atlanta, Georgia, and St. Louis, Missouri with others
in Oklahoma, Ohio, North Carolina, Texas, California, Virginia, Canada and the
United Kingdom.
Because of the large number and variety of NDC's products and services, the
Company does not rely on a single technology to satisfy its sophisticated
computer systems needs but instead employs the best available technology that is
suitable for each particular task. Given this approach, NDC utilizes (i) Tandem
and Stratus fault-tolerant computers for high volume, fast response transaction
processing; (ii) client-server technology for end-user data base applications;
(iii) the latest Unisys mainframe class systems and the OS/2200 operating system
for large scale transaction and batch data base processing; and (iv) UNIX and
Windows based systems for specialized communication applications systems. These
systems are linked via high speed, fiber optic-based networked backbones for
file exchange and inter-system communication purposes. NDC also maintains
storage systems connected to the backbones, including a robotic tape library and
optical storage for archival purposes. All of the Company's systems are
supported by an experienced systems support, operations and production control
staff with an advanced network control center.
The Company's communications network is made up of several discrete
networks, each designed for a different purpose. NDC maintains three primary
networks: a high speed, short transaction network called FASTNET; a private line
nationwide high bandwidth backbone network; and a dial-up voice/data network for
interactive and voice traffic. The Company also maintains a number of support
services offering satellite, wireless, INTERNET and ISDN/DOV connectivity.
COMPETITION
The markets for the application systems and services offered by the Company
are highly competitive. The Company has a number of actual and potential
competitors for all of the systems and services that it offers. Many of the
Company's services compete directly with computer manufacturers that encourage
businesses to purchase or lease the manufacturers' computers and establish in-
house systems. In addition to this competition, the Company believes that there
are several companies that have the capability to offer some of the Company's
services in competition with the Company, certain of which are substantially
larger than the Company. The Company believes that its knowledge of its specific
markets and its ability to offer market specific, integrated solutions to its
customers, including hardware, software, processing and network facilities and
its flexibility in packaging these products, is a positive factor pertaining to
the competitive position of the Company. The Company recognizes, however, that
its industry segment is increasingly competitive. The key competitive factors
for the Company are functionality of products, quality of service and price.
11
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RESEARCH AND DEVELOPMENT
The Company has a research and development staff of approximately 427
persons. During fiscal 1995, 1996, and 1997, the Company spent approximately
$7.7 million, $8.8 million, and $13.2 million, respectively, on activities
relating to the development and improvement of new and existing products,
services and techniques.
EMPLOYEES
As of May 31, 1997 the Company and its subsidiaries had approximately 2,900
employees.
12
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FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENT
AND CLASSES OF SERVICES
The Company operates in one reportable industry segment, Data Processing
Services. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a further discussion.
The following table sets forth the approximate contribution to consolidated
revenues of each class of service in the Data Processing Services segment during
the Company's last three fiscal years.
Year ended May 31,
------------------------
1997 1996 1995
- ------------------------ ---- ---- ----
(In thousands)
Health Care $176,181 $144,879 $119,705
Integrated Payment Systems 131,477 104,829 88,489
Global Payment Systems 126,202 76,095 69,889
- -------------------------------------------------------------------------------
Total $433,860 $325,803 $278,083
ITEM 2. PROPERTIES
- -------------------
In January 1987, the Company took occupancy of a newly constructed six-
story, 120,000 square foot corporate headquarters building at Two National Data
Plaza in Atlanta, Georgia. There is no outstanding debt on the facility.
In addition to the above facility, the Company leases or rents a total of
41 other facilities to serve as regional operating centers or sales offices. The
Company owns or leases a variety of computers and other computer equipment for
its operational needs. In recent years the Company has significantly upgraded
and expanded its computers and related equipment in order to increase
efficiency, enhance reliability, and provide the necessary base for business
expansion.
The Company believes that its facilities and equipment are suitable and
adequate for the business of the Company as presently conducted.
Information about leased properties and equipment is incorporated by
reference from Note 7 of the Notes to the Consolidated Financial Statements on
page A-31 of this Report.
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ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is party to a number of claims and lawsuits incidental to its
business. In the opinion of management, the ultimate outcome of such matters,
in the aggregate, will not have a material adverse impact on the Company's
financial position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The names, titles, ages, and business experience of all present executive
officers of the Company are listed below. All officers hold office at the
pleasure of the Board of Directors, unless they earlier retire or resign.
Name Business Experience Age
---- ------------------- ---
Robert A. Yellowlees Chairman of the Board of the Company
since June 1992; 58
President, Chief Executive Officer
and Chief Operating Officer of the
Company since May 1992; director
of John H. Harland Co. and Protective
Life Corporation. Mr. Yellowlees has
been a director of the Company since
April 1985.
Steven L. Arnold Chief Administrative Officer of the
Company since March 1997; 57
Lt. General, United States Army
from July 1994 to March 1997;
Major General, United States Army
from April 1991 to July 1994.
Richard S. Cohan General Manager, Health Care
Information Network, of the 44
Company since April 1995;
Senior Vice President, Health
Care Business Development from
December 1993 through March 1995;
Senior Vice President of the Health
Care Application Systems and Services
unit of the Company from September
1992 to November 1993.
Thomas M. Dunn General Manager, Integrated Payment
Systems since June 1996; 40
Group Vice President from August
1992 to June 1996; and Division
Vice President from August 1988 to
August 1992.
15
<PAGE>
David K. Hunt President, Chief Executive Officer 51
and member of the Board of Directors
of Global Payments Systems LLC, a
subsidiary of the Company, since
January 1997; President and Chief
Executive Officer of AT&T Universal
Card Services, Inc. from May 1993
to November 1996; Senior Executive
Vice President of Signet Banking
Corporation from October 1989
until May 1993.
E. Michael Ingram General Counsel and Secretary of 45
the Company since January 1985.
Barbara W. Morgan Controller of the Company since 35
August 1996; Assistant
Controller of the Company from
August 1994 until August
1996; Director of Accounting of
the Company from November 1992
until August 1994; and Senior
Manager of Accounting of the
Company from March 1991 until
November 1992.
Kevin C. Shea Executive Vice President, Corporate 46
Strategy & Business Development since
June 1996; General Manager, Integrated
Payment Systems, of the Company from
April 1995 to May 1996; Executive Vice
President, Integrated Payment Systems
from September 1992 through March 1995;
and Executive Vice President, National
Data Payment Systems, Inc. ("NDPS")
from December 1990 through August 1992.
M.P. Stevenson Jr. Interim Chief Financial Officer of the 42
Company since September 1996;
Vice President and Controller of the
Company from September 1992 until
August 1996; and Division Controller,
NDPS from March 1991 to August 1992.
16
<PAGE>
PART II
-------
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
- ----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
Market Price and Dividend Information appears on Page A-2 of this report.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Selected Financial Data appears on Page A-1 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages A-3 to A-12 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Financial statements and supplementary information appears on pages A-13 to A-39
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
17
<PAGE>
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 Nominees and
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" from
its definitive Proxy Statement to be delivered to the stockholders of the
Company in connection with the 1997 Annual Meeting of Stockholders to be held on
October 23, 1997. Certain information relating to executive officers of the
Company appears at pages 15 to 16 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The Company hereby incorporates by reference the information contained under
the heading "Election of Directors - Compensation and Other Benefits" from its
definitive proxy statement to be delivered to the stockholders of the Company in
connection with the 1997 Annual Meeting of Stockholders to be held on October
23, 1997. In no event shall the information contained in the proxy statement
under the sections entitled "Stockholder Return Analysis," "Comparison of
Cumulative Total Returns," and "Report of the Compensation and Stock Option
Committees" be included in this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The Company hereby incorporates by reference the information contained under
the headings "Election of Directors - Common Stock Ownership of Management" and
" - Common Stock Ownership by Certain Other Persons" from its definitive Proxy
Statement to be delivered to the stockholders of the Company in connection with
the 1997 Annual Meeting of Stockholders to be held on October 23, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None.
18
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) The following consolidated financial statements for the Registrant and
its subsidiaries appear in Appendix A to this report and are filed as a part
hereof:
Consolidated Statements of Income for the three fiscal years
ended May 31, 1997.
Consolidated Balance Sheets at May 31, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
three fiscal years ended May 31, 1997.
Consolidated Statements of Cash Flows for the three fiscal years
ended May 31, 1997.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants
(a)(2) Other than as described below, Financial Statement Schedules are not
filed with this Report because the Schedules are either inapplicable or the
required information is presented in the Financial Statements or Notes thereto.
The following Schedule is filed in Appendix A as a part hereof:
Consolidated Schedule II - Valuation and Qualifying Accounts.
Report of Independent Public Accountants as to Schedule
(a)(3) Exhibits
2(i) Stock Purchase Agreement dated September 3, 1996, as amended, September
24, 1996 between the Registrant and Equifax Healthcare Information Services,
Inc. (filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated
October 1, 1996, File No. 001-12392, and incorporated herein by reference.)
(ii) Stock Purchase Agreement dated December 5, 1996 among the Registrant,
Blue Cross and Blue Shield of Virginia and Consolidated Healthcare, Inc. (filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K dated December 31,
1996, File No. 001-12392, and incorporated herein by reference.)
19
<PAGE>
(3)(i) Certificate of Incorporation of the Registrant, as amended (filed as
Exhibit 4(a) to the Registrant's Registration Statement on Form S-8
(Registration No. 333-05427) and incorporated herein by reference).
(ii) Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated October 28, 1996 (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated October 29, 1996, file No. 001-12392, and
incorporated herein by reference.)
(iii) Amended Certificate of Designations of the Registrant, dated October
28, 1996 (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated October 29, 1996, file No. 001-12392, and incorporated herein by
reference.)
(iv) Bylaws of the Registrant, as amended (filed as Exhibit 3(ii) to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1991,
File No. 03966, and incorporated herein by reference.)
(v) Amendment to Bylaws of the Registrant, as previously amended (filed as
Exhibit 3(iii) to the Registrant's Annual Report on Form 10-K for the year
ended May 31, 1995, File No. 03966, and incorporated herein by reference.)
(4)(i) Rights Agreement, dated as of January 18, 1991, between the Registrant
and Trust Company Bank, as amended on June 18, 1992 to substitute Wachovia
Bank of North Carolina, N.A. as Rights Agent (incorporated by reference
from Exhibit 2 to the Registrant's Registration Statement on Form 8-A as
filed on October 5, 1993.)
(ii) Form of Indenture between the Registrant and The First National Bank of
Chicago, as Trustee, relating to Registrant's 5% Convertible Subordinated
Notes due 2003 (filed as Exhibit 4.1 to Registrant's Current Report on Form
8-K dated October 29, 1996, File No. 001-12392, and incorporated herein by
reference.)
(iii) Form of the Registrant's 5% Convertible Subordinated Note due 2003
(filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K dated October
29, 1996, File No. 001-12392, and incorporated herein by reference.)
(10)(i) Operating Agreement of Global Payment Systems LLC dated March 31, 1996
between MasterCard International Incorporated, GPS Holding Limited
Partnership, National Data Corporation of Canada, Ltd., National Data
Corporation, NDC International, Ltd. and National Data Payment Systems,
Inc. (filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K
for the year ended May 31, 1996, File No. 001-12392, and incorporated
herein by reference).
(ii) Registration Rights Agreement dated April 1, 1996 between Global Payment
Systems LLC and MasterCard International Incorporated (filed as Exhibit
10(ii) to the Registrant's Annual Report on Form 10-K for the year ended
May 31, 1996, File No. 001-12392, and incorporated herein by reference).
20
<PAGE>
(iii) Credit Agreement dated as of March 18, 1996 between the Registrant and
Wachovia Bank of Georgia, N.A., as Agent (filed as Exhibit 10(iii) 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).
(iv) Credit Agreement dated as of July 16, 1996 between the Registrant and the
First National Bank of Chicago, as Agent (filed as Exhibit 10(iv) 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).
(v) Amendment dated as of October 23, 1996, to the Credit Agreement between
the Registrant and Wachovia Bank of Georgia, N.A., as Agent, dated as of May 31,
1996 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
October 29, 1996, File No. 001-12392, and incorporated herein by reference.)
(vi) Amendment dated as of October 23, 1996, to the Credit Agreement between
Registrant and The First National Bank of Chicago, as Agent, dated as of
July 16, 1996 (filed as Exhibit 10.2 to the Registrant's Current Report on
Form 8-K dated October 29, 1996, File No. 001-12392, and incorporated
herein by reference.)
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
(vii) Form of Executive Severance Compensation Agreement with certain
executive officers (filed as Exhibit 10(ii) to the Registrant's Annual Report on
Form 10-K for the year ended May 31, 1986, File No. 03966, and incorporated
herein by reference.)
(viii) 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. 03966, and incorporated herein by reference.)
(ix) 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).
(x) Renewal Employment Agreement effective as of May 18, 1995 between Robert
A. Yellowlees and the Registrant (filed as Exhibit 10(x) to the Registrant's
Annual Report on Form 10-K for the year ended May 31, 1994, File No. 03966, and
incorporated herein by reference.)
(xi) Amended and Restated Retirement Plan for Non-Employee Directors,
dated as of April 20, 1994 (filed as Exhibit 10(xii) to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1994, File No. 03966, and
incorporated herein by reference.)
21
<PAGE>
(xii) Amendment to Amended and Restated Retirement Plan for Non-Employee
Directors (filed as Exhibit 4(xi) to the Registrant's Annual Report on Form 10-
K for the year ended May 31, 1995, File No. 03966, and incorporated herein by
reference).
(xiii) 1983 Restricted Stock Plan, as amended (incorporated by reference from
Exhibit 10 to the Registrant's Registration Statement on Form S-8, No. 333-
05451).
(xiv) 1987 Stock Option Plan, as amended (incorporated by reference from
Exhibit 10 to the Registrant's Registration Statement on Form S-8, No. 333-
05449).
(xv) Amended and Restated C.I.S. Technologies, Inc. Stock Option Plan
(incorporated by reference from Exhibit 10(a) to the Registrant's
Registration Statement on Form S-8, No. 333-05427).
(xvi) Amended and Restated C.I.S. Technologies, Inc. Employee Stock Option
Plan (incorporated by reference from Exhibit 10(b) to the Registrant's
Registration Statement on Form S-8, No. 333-05427).
(xvii) C.I.S. Technologies, Inc. HCC Management Stock Option Plan
(incorporated by reference from Exhibit 10(c) to the Registrant's Registration
Statement on Form S-8, No. 333-05427).
(xviii) C.I.S. Technologies, Inc. 1995 Directors' Stock Option Plan
(incorporated by reference from Exhibit 10(d) to the Registrant's Registration
Statement on Form S-8, No. 333-05427).
(xix) C.I.S. Technologies, Inc. 1995 Stock Incentive Plan (incorporated by
reference from Exhibit 10(e) to the Registrant's Registration Statement on Form
S-8, No. 333-05427).
(xx) Supplemental Executive Retirement Plan effective June 1, 1997.
(xxi) Amendment to Registrant's 1987 Stock Option Plan effective September 28,
1996.
(xxii) Amendment to Registrant's 1983 Restricted Stock Plan effective December
17, 1996.
(xxiii) Global Payment Systems 1996 Option Plan effective September 13, 1996.
(xxiv) Employment Agreement effective June 1, 1997 between Robert A. Yellowlees
and the Registrant.
(21) Subsidiaries of the Registrant.
22
<PAGE>
(23) Consent of Independent Public Accountants (included in Appendix A, page
A-45).
(27) Financial Data Schedule (for SEC use only).
(b) None.
(c) The Exhibits to this Report are listed under Item 14(a)(3) above.
(d) The Financial Statement Schedule to this Report is listed under Item
14(a)(2) above.
23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, National Data Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL DATA CORPORATION
By: /s/ Robert A. Yellowlees
----------------------------
Robert A. Yellowlees, Chairman of the
Board, President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ M.P. Stevenson Jr.
--------------------------
M.P. Stevenson Jr.
Interim Chief Financial Officer
(Principal Financial Officer)
By: /s/ Barbara W. Morgan
-----------------------------
Barbara W. Morgan
Controller
(Principal Accounting Officer)
Date: August 29, 1997
24
<PAGE>
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 29, 1997
- ------------------------
Robert A. Yellowlees Chief Executive Officer
/s/ Edward L. Barlow Director August 29, 1997
- --------------------
Edward L. Barlow
/s/ J. Veronica Biggins Director August 29, 1997
- -----------------------
J. Veronica Biggins
/s/ James B. Edwards Director August 29, 1997
- ----------------------
James B. Edwards
/s/ Don W. Sands Director August 29, 1997
- ----------------
Don W. Sands
/s/ Neil Williams Director August 29, 1997
- ------------------
Neil Williams
25
<PAGE>
APPENDIX A
to
ANNUAL REPORT ON FORM 10-K
NATIONAL DATA CORPORATION AND ITS SUBSIDIARIES
FINANCIAL STATEMENTS AND SCHEDULES
CONTENTS
Selected Financial Data ...................................................A-1
Market Price and Dividend Information......................................A-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................A-3
Consolidated Statements of Income for the three years
ended May 31, 1997....................................................A-13
Consolidated Statements of Cash Flows for the three years ended
May 31, 1997..........................................................A-14
Consolidated Balance Sheets at May 31, 1997 and 1996.......................A-15
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended May 31, 1997....................................A-16
Notes to Consolidated Financial Statements.................................A-17
Report of Independent Public Accountants...................................A-40
Consolidated Schedule II - Valuation and Qualifying Accounts...............A-41
Report of Independent Public Accountants As to Schedule....................A-42
Index to Exhibits .........................................................A-43
Consent of Independent Public Accountants..................................A-45
<PAGE>
Selected Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Health Care $176,181 $144,879 $119,705 $94,870 $89,840
Integrated Payment Systems 131,477 104,829 88,489 78,787 69,579
Global Payment Systems 126,202 76,095 69,889 64,002 80,391
--------------------------------------------------------------
Total $433,860 $325,803 $278,083 $237,659 $239,810
Operating Income (Loss) 66,656 (11,834) 28,246 18,423 14,894
Net Income (Loss) 38,753 (8,458) 18,421 12,226 8,045
Earnings (Loss) Per Share $1.38 ($.31) $.79 $.55 $.37
Dividends Per Share $.30 $.30 $.30 $.29 $.29
Total Assets $521,683 $368,039 $255,758 $214,864 $203,391
Long-Term Obligations $155,690 $13,324 $26,410 $21,664 $20,254
Total Shareholders' Equity $277,470 $233,299 $164,651 $134,723 $124,001
</TABLE>
All years have been adjusted to include the results of C.I.S. Technologies,
Inc., acquired May 31, 1996 in a pooling-of-interests transaction.
A-1
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
_____________________________________________________________
National Data Corporation's common stock is traded on the New York Stock
Exchange under the ticker symbol "NDC." The high and low sales prices and
dividend paid per share of the Company's common stock for each quarter during
the last two fiscal years were as follows:
<TABLE>
<CAPTION>
Dividend Per
High Low Share
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal Year 1997
First Quarter $44.50 $33.75 $.075
Second Quarter 46.63 37.88 .075
Third Quarter 47.50 35.00 .075
Fourth Quarter 44.00 33.75 .075
Fiscal Year 1996
First Quarter $26.63 $20.50 $.075
Second Quarter 28.00 22.00 .075
Third Quarter 35.00 20.00 .075
Fourth Quarter 40.25 29.88 .075
</TABLE>
The number of shareholders of record as of July 31, 1997 was 3,544.
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the Company's
results during the past three years, the following discussion should be read in
conjunction with the consolidated financial statements of the Company and
related notes appearing elsewhere in this report.
Results of Operations Fiscal Years 1997 and 1996
- ---------------------
The following table is a summary of the Company's fiscal 1997 results of
operations and 1996 results before and after effects of restructuring,
impairment and merger charges ("restructuring") and the merger with C.I.S.
Technologies, Inc. ("CIS"), which was accounted for as a pooling-of-interests:
(In millions, except per share data)
<TABLE>
<CAPTION>
1996
------------------------------------------------------
1997 As Reported Restructuring CIS NDC Operations
---------- ------------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $433.9 $325.8 - $44.8 $281.0
Operating Income (Loss) 66.7 (11.8) (44.1) (3.9) 36.2
Net Income (Loss) 38.8 (8.5) (30.0) (3.2) 24.7
Earnings (Loss) Per Share $1.38 ($.31) ($1.10) ($.22) $1.01
</TABLE>
The merger with CIS was effective on May 31, 1996, the last day of the Company's
fiscal year 1996 in a transaction accounted for as a pooling-of-interests and
accordingly, was included in the reported results of the Company. However,
since only the fiscal 1997 operating results of CIS were subject to the
Company's management, the Company believes a more meaningful understanding of
its results of operations would be one that addresses the performance of the
Company both with and without the restructuring and the CIS operating results in
fiscal 1996 compared to the consolidated fiscal 1997 results. Therefore, the
following discussion will address comparisons of the results of operations both
including and excluding the restructuring and CIS operating results in fiscal
1996, where applicable.
A-3
<PAGE>
REVENUE
(In millions)
<TABLE>
<CAPTION>
1997 1996 Increase
---------------------- ----------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Health Care $176.2 41% $144.9 45% 22%
Integrated Payment Systems 131.5 30% 104.8 32% 25%
Global Payment Systems 149.8 34% 79.7 24% 88%
Intercompany Revenue (23.6) (5%) (3.6) (1%) -
------------------------- ------------------------ ------------
Total Revenue $433.9 100% $325.8 100% 33%
======================== ======================== ============
</TABLE>
Total revenue for fiscal 1997 was $433.9 million, an increase of $108.1
million (33%) from the same period in fiscal 1996. The increase was the result
of increased revenue in Health Care, $31.3 million (22%); Integrated Payment
Systems, $26.7 million (25%); and Global Payment Systems, $70.1 million (88%).
Excluding CIS revenue of $44.8 million for fiscal 1996, but including CIS
for fiscal 1997, total revenue increased $152.9 million (54%). The CIS
subsidiary is a component of the Health Care business unit. Accordingly, Health
Care revenue increased $76.1 million (76%), excluding CIS revenue from fiscal
1996 but including CIS for fiscal 1997.
Health Care. Health Care revenue growth (22%) in fiscal 1997 was a result
-----------
of increases from existing products and services, primarily electronic
transaction processing and the impact of acquisition activity. The acquisitions
of Equifax Healthcare EDI Services, Inc. and Health Communication Services, Inc.
were completed in fiscal 1997.
Excluding CIS revenue of $44.8 million for fiscal 1996, but including CIS
for fiscal 1997, Health Care revenue increased $76.1 million (76%).
Integrated Payment Systems. The Integrated Payment Systems revenue
--------------------------
increase of $26.7 million (25%) was primarily due to higher volumes of merchant
sales processed, which resulted from increased sales productivity and an
alliance established with a financial institution in April 1996.
Global Payment Systems. Global Payment Systems ("Global") revenue reflects
----------------------
an increase in the number of authorizations performed for the Company's
customers and the full-year impact of the acquisition of the Merchant Automated
Point-of-Sale Program ("MAPP") on April 1, 1996. In addition, during the third
quarter of fiscal 1997, Global completed the purchase of a portion of Electronic
Data System Corporation's ("EDS") card processing business and launched a joint
marketing and service alliance with EDS.
Intercompany. Commencing April 1, 1996, with the formation of Global
------------
Payment Systems, a portion of Global's revenue was derived from intercompany
sales of services to primarily the Integrated Payment Systems business unit.
A-4
<PAGE>
COSTS AND EXPENSES
The following table represents the primary components of cost of service as a
percentage of total revenue:
<TABLE>
<CAPTION>
1996 1996
---- ----
1997 As Reported Excluding CIS
----------------- ------------------ -----------------
<S> <C> <C> <C>
Cost of Service:
Operations 37% 38% 39%
Depreciation and Amortization 7% 8% 7%
Hardware Sales 4% 4% 4%
------------------------------------------------------------
48% 50% 50%
============================================================
</TABLE>
Total cost of service as a percentage of revenue decreased to 48% for the
fiscal year ending May 31, 1997 from 50% for the same period in fiscal 1996.
This decrease is attributable to cost of operations and depreciation, each
declining one percentage point. As a percentage of revenue, cost of operations
was 37% for fiscal 1997, compared to 38% last year. The decrease as a
percentage of revenue is attributable to the leverage of the Company's computer
operations and synergies from acquisitions. Cost of operations increased $39.7
million (32%) for fiscal 1997 when compared to the same period last year,
primarily as a result of increased operating costs associated with revenue
growth and acquisitions.
Excluding CIS from fiscal 1996, but including CIS for fiscal 1997, total
cost of service as a percentage of revenue decreased from 50% in fiscal 1996 to
48% in fiscal 1997; the result of leveraging the cost of operations.
Depreciation and amortization expense increased $4.4 million (17%) as a
result of six purchase acquisitions completed during fiscal 1997. As a
percentage of revenue, depreciation and amortization costs decreased to 7% from
8% in fiscal 1996.
Hardware sales costs as a percentage of revenue remained constant at 4% of
revenue for both fiscal years.
Sales, general and administrative expense increased $29.2 million (22%)
from the same period last year. This increase was primarily due to expenses
associated with investments made in product development and sales personnel for
future revenue growth. In addition, the increases in expenses were due to
higher sales, general and administrative expense ratios in acquired businesses.
However, as a percentage of revenue, these expenses decreased to 37% for fiscal
1997 from 40% for fiscal 1996. The Company attributes the improvement in this
expense margin to synergies realized from acquisitions, principally CIS.
A-5
<PAGE>
OPERATING INCOME
Operating income, excluding the restructuring charge of $44.1 million in
fiscal 1996, increased from $32.3 million to $66.7 million (107%) in fiscal
1997. As a percentage of revenue, operating income increased to 15% in fiscal
1997 from 10% in fiscal 1996, excluding the restructuring charge, reflecting
improved margins in operations and profitability from CIS. Earnings before
interest, taxes, depreciation and amortization were $101.3 million for fiscal
1997 and $60.8 million for fiscal 1996 (excluding restructuring) and as a
percentage of revenue were 23% and 19%, respectively.
Excluding restructuring and CIS operating results from fiscal 1996, but
including CIS for fiscal 1997, operating income increased 84% and as a
percentage of revenue increased from 13% in fiscal 1996 to 15% in fiscal 1997.
Earnings before interest, taxes, depreciation and amortization were $101.3
million for fiscal 1997 and $59.4 million for fiscal 1996, excluding CIS and
restructuring, and as a percentage of revenue were 23% and 21%, respectively.
INTEREST AND OTHER INCOME
Interest and other income decreased $2.1 million (46%) for fiscal 1997.
This decrease was primarily the result of lower interest earnings due to lower
average funds available for investment. The decrease in cash available in the
current year reflects the Company's acquisition activity.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $3.1 million due primarily to the
issuance of $143.8 million in convertible debt on November 6, 1996 (see Note 11
to the Consolidated Financial Statements).
MINORITY INTEREST
The $1.1 million increase in the expense for minority interest for fiscal
1997 was primarily attributable to the MAPP acquisition on April 1, 1996 and an
alliance established with a financial institution in April 1996.
NET INCOME
Net income was $38.8 million ($1.38 per share), an increase of $17.3
million (80%) or $0.59 per share (75%), as compared to fiscal 1996, excluding
restructuring charges ($30.0 million or $1.10 per share, net-of-tax impact).
Excluding restructuring and CIS in 1996, net income for fiscal 1997 improved
$14.1 million (57%) from $24.7 million ($1.01 per share).
A-6
<PAGE>
RESTRUCTURING, IMPAIRMENT AND MERGER EXPENSES
In the fourth quarter of fiscal 1996, the Company incurred a restructuring,
asset impairment and merger charge of $44.1 million, in connection with the
creation of Global Payment Systems LLC and the merger with C.I.S. Technologies,
Inc. This charge consisted of non-cash items of $35.1 million for the write-
down of impaired assets to their realizable value and cash items of $9.0 million
associated with investment banking, accounting and legal fees and severance
costs. As of May 31, 1997, $6.6 million has been expended against the
restructuring accrual. Management believes the remaining accrual is sufficient
to complete the restructuring plans adopted last year.
Results of Operations Fiscal Years 1996 and 1995
- ---------------------
The following table is a summary of the Company's fiscal 1996 and 1995 results
of operations before and after effects of the restructuring and the merger with
CIS, which was accounted for as a pooling-of-interests:
(In millions, except per share data)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
As Reported Restructuring CIS NDC Operations
--------------- --------------- ---------- -------------------
<S> <C> <C> <C> <C>
Revenue $325.8 - $44.8 $281.0
Operating Income (Loss) (11.8) (44.1) (3.9) 36.2
Net Income (Loss) (8.5) (30.0) (3.2) 24.7
Earnings (Loss) Per Share ($.31) ($1.10) ($.22) $1.01
1995
-----------------------------------------------------------------
As Reported Restructuring CIS NDC Operations
--------------- --------------- ---------- -------------------
Revenue $278.1 - $36.1 $242.0
Operating Income 28.4 - 3.6 24.8
Net Income 18.4 - 3.0 15.4
Earnings Per Share $.79 - $.04 $.75
</TABLE>
The merger with CIS was effective on May 31, 1996, the last day of the Company's
fiscal 1996, in a transaction accounted for as a pooling-of-interests. The
fiscal 1996 and 1995 operating results of CIS were not subject to the Company's
management. The following discussion will address comparisons of the results of
operations including and excluding CIS operating results and restructuring in
fiscal 1996 and 1995, where applicable.
A-7
<PAGE>
REVENUE
(In millions)
<TABLE>
<CAPTION>
1996 1995 Increase
------------------------ ------------------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Health Care 144.9 45% 119.7 43% 21%
Integrated Payment Systems 104.8 32% 88.5 32% 18%
Global Payment Systems 79.7 24% 69.9 25% 14%
Intercompany Revenue (3.6) (1%) - - -
------------------------ ------------------------ ------------
Total Revenue 325.8 100% 278.1 100% 17%
======================== ======================== ============
</TABLE>
Total revenue for fiscal 1996 was $325.8 million, an increase of $47.7
million (17%) from fiscal 1995. The revenue increase was the result of increased
revenue in Health Care, $25.2 million (21%); Integrated Payment Systems, $16.3
million (18%); and Global Payment Systems, $9.8 million (14%).
Excluding CIS revenue of $44.8 million for fiscal 1996 and $36.1 million
for fiscal 1995, total revenue increased $39.0 million (16%). Accordingly,
Health Care revenue increased $16.4 million (20%), excluding CIS in both
periods.
Health Care. Health Care revenue increased 21% in fiscal 1996 as a result
-----------
of increases in electronic transaction processing and increases in revenue from
the Company's practice management systems for the pharmacy, dental, physician,
government and institutional sectors. CIS revenue for fiscal 1996 was $44.8
million, an increase of $8.7 million (24%) over fiscal 1995. The CIS increase in
revenue over the prior year was largely due to the acquisition of Hospital Cost
Consultants ("HCC") in June 1995 as well as growth in the financial services and
Electronic Data Interchange areas. Excluding CIS revenue from both periods,
Health Care revenue increased 20%.
Integrated Payment Systems. Integrated Payment Systems increased 18% in
--------------------------
fiscal 1996. This increase was the result of increased volume of merchant sales
processed and an alliance with a financial institution's merchant credit card
portfolio that was consummated on April 1, 1996.
Global Payment Systems. Revenue increased 14% for the fiscal year ended May
----------------------
31, 1996. This increase reflected growth in the credit card processing business
which included the acquisition of MAPP, partially offset by decreased
information systems and services revenue. The decline in revenue experienced
over the last few years leveled off in fiscal 1996, with the greatest
improvement in the third and fourth quarters of that year.
Intercompany. Commencing April 1, 1996, with the formation of Global
------------
Payment Systems, a portion of Global's revenue was derived from intercompany
sales of services from Global to the Integrated Payment Systems business unit.
A-8
<PAGE>
COSTS AND EXPENSES
The following table represents the primary components of cost of service as a
percentage of total revenue:
<TABLE>
<CAPTION>
As Reported Excluding CIS
----------------------------------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cost of Service:
Operations 38% 45% 39% 42%
Depreciation and Amortization 8% 6% 7% 7%
Hardware Sales 4% 4% 4% 5%
----------------------------------------------------------
50% 55% 50% 54%
==========================================================
</TABLE>
Cost of service for the fiscal year ended May 31, 1996 was $163.3 million,
an increase of $9.9 million (6%), compared to fiscal 1995. As a percentage of
revenue, cost of service decreased from 55% in fiscal 1995 to 50% in fiscal
1996. The decrease, principally in cost of operations, is attributed to
operating efficiencies and leveraging of the Company's fixed investments.
Depreciation and amortization increased as a percentage of revenue from 6% in
fiscal 1995 to 8% in fiscal 1996 due to the increase in acquisition activity.
Hardware costs remained constant at 4% of revenue.
Excluding CIS from both periods, cost of service for the fiscal year ended
May 31, 1996 was $141.6 million, an increase of $11.3 million (9%), compared to
fiscal 1995. While the cost of operations increased $7.8 million (8%), cost of
operations as a percentage of revenue decreased from 42% in fiscal 1995 to 39%
in fiscal 1996. Depreciation and amortization as a percentage of revenue held
constant at 7%. Hardware costs decreased one percentage point as a percentage of
revenue.
Sales, general and administrative expense increased $34.0 million (35%) in
fiscal 1996. As a percentage of revenue, sales, general and administrative
expenses increased from 35% in fiscal year 1995 to 40% in fiscal year 1996.
This increase was primarily due to expenses associated with investments made in
product development and sales personnel for future revenue growth. In addition,
the increases in expenses were due to higher sales, general and administrative
expense ratios in acquired businesses. CIS sales, general and administrative
costs account for $17.7 million of this increase due to operating and
acquisition integration costs for CIS' HCC and AMSC business units.
Excluding CIS from both periods, sales, general and administrative expense
increased $16.3 million (19%) for fiscal 1996 as compared to fiscal 1995. As a
percentage of revenue, sales, general and administrative expenses increased from
36% in fiscal year 1995 to 37% in fiscal year 1996.
A-9
<PAGE>
OPERATING INCOME
Operating income, excluding the restructuring charge of $44.1 million,
increased to $32.3 million (14%) from the prior year. As a percentage of
revenue, operating income remained relatively constant at 10% in both fiscal
1996 and fiscal 1995, excluding the restructuring charge. Earnings before
interest, taxes, depreciation and amortization were $60.8 million for fiscal
1996, excluding restructuring, and $53.0 million for fiscal 1995. As a
percentage of revenue, earnings before interest, taxes, depreciation and
amortization were 19% for both years.
Excluding CIS from both periods and restructuring charges from fiscal 1996,
operating income increased 46% from the prior year and as a percentage of
revenue increased to 13% in fiscal 1996 from 10% in fiscal 1995. Earnings
before interest, taxes, depreciation and amortization were $59.4 million for
fiscal 1996 and $45.8 million for fiscal 1995 and as a percentage of revenue
were 21% and 19%, respectively.
INTEREST AND OTHER INCOME
Interest and other income for fiscal 1996 was $4.5 million, an increase of
$2.4 million (115%) over the same period in fiscal 1995. This increase was
principally related to increased cash available for investment during the first
ten months of fiscal 1996 and increased interest rates on the investment of
those cash balances. The increase in cash was the result of the secondary stock
offering completed in the first quarter of fiscal 1996.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $1.1 million (42%) principally due to
interest paid on bank lines of credit and on notes issued by CIS to complete the
HCC acquisition.
NET INCOME
Net income was $21.5 million ($0.79 per share), excluding the impact of
restructuring charges ($30.0 million or $1.10 per share, net-of-tax impact), an
increase of $3.1 million (17%) compared to fiscal 1995. The fully diluted
average number of common and common equivalent shares outstanding for fiscal
1996 was 27,189,000, an increase of 3,708,000 (16%) as compared to the same
period in fiscal 1995. This increase in shares is primarily due to the sale of
approximately 3,162,500 additional shares of the Company's common stock in June
1995.
Excluding CIS from both periods and the restructuring charge in fiscal
1996, net income was $24.7 million ($1.01 per share), an increase of $9.3
million (60%), compared to fiscal 1995.
A-10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations provides the Company with a significant
source of liquidity to meet its needs. At May 31, 1997, the Company and its
subsidiaries had cash and cash equivalents totaling $19.2 million. Net cash
provided by operating activities increased 52% to $68.8 million for fiscal 1997,
from $45.3 million in fiscal 1996. Cash provided by operations before changes
in working capital was $77.5 million for fiscal 1997, an increase of $29.0
million (60%) compared to the prior year. This difference is primarily driven
by the change in net income, from a net loss of $8.5 million in fiscal 1996 to
net income of $38.8 million in fiscal 1997, and the effect on deferred income
taxes in fiscal 1996 from the restructuring charge. Cash was required in
fiscal 1997 to fund net changes in working capital of $8.6 million, compared to
$3.2 million for fiscal 1996. The net increase in the working capital use of
funds was principally the result of the timing and the nature of accruals at May
31, 1996, the consequent net accrual payments in fiscal 1997, and the change
from a net loss in fiscal 1996 to net income in fiscal 1997 and the resultant
income taxes payable. Significant cash flows generated from operating
activities are reinvested by the Company in existing businesses and are used to
fund acquisitions.
For fiscal 1997, cash used in investing activities increased to $149.9
million, compared to $146.7 million in fiscal 1996. The Company continues to
invest in capital expenditures related to growth in the business and
acceleration of certain strategic programs, including product enhancement. In
addition to capital expenditures to support future growth and improve
profitability, in fiscal 1997, the Company completed six acquisitions for an
aggregate cash purchase price of approximately $133.0 million, net of cash
acquired. During fiscal 1996, the Company completed three acquisitions for an
aggregate cash purchase price of approximately $130.5 million, net of cash
acquired. The Company has financed its acquisition program through cash flows
from operations, equity and debt offerings.
Net cash provided by financing activities increased to $90.5 million for
the fiscal year ended May 31, 1997 from $80.1 in the prior year period. As
discussed in Note 11 to the Consolidated Financial Statements, the Company
completed an issuance of long-term public debt, providing net proceeds of $139.7
million. The cash provided by the debt issuance was partially offset by
repayment of the Company's line of credit of $30.0 million drawn down in fiscal
year 1996 and repayments of long-term debt of $13.7 million (including $10.9
million to pay off the mortgage on the Company's headquarters building). In
fiscal 1996, $80.1 million was provided by financing activities, principally the
result of the issuance of stock under a secondary offering (as discussed in Note
5) and net borrowings on a credit facility. Dividends of $7.9 million and $6.9
million were paid during fiscal years 1997 and 1996, respectively.
A-11
<PAGE>
The Company has an unsecured $50.0 million revolving line of credit which
expires in May 1999. Additionally, the Company's Global Payment Systems
subsidiary has an unsecured $50.0 million revolving line of credit which expires
in July 1999. As of May 31, 1997, there were no amounts outstanding under
either facility. Management believes that its current level of cash and
borrowing capability, along with future cash flows from operations, are
sufficient to meet the needs of its existing operations and its planned
operations for the foreseeable future. The Company regularly evaluates cash
requirements for current operations, commitments, development activities and
strategic acquisitions. The Company may elect to raise additional funds for
these purposes, either through the issuance of additional debt or equity or
otherwise, as appropriate.
FORWARD-LOOKING INFORMATION
While past performance does not guarantee future results, the Company is
committed to continue to sustain quality earnings growth. The Company's
strategy to attain growth is through sales and marketing programs of its core
businesses as well as through strategic alliances and acquisitions. The Company
also intends to continue expansion into market segments related to its two
primary market areas. 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.
When used in this report, press releases and elsewhere by management or the
Company from time to time, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify forward-looking statements
concerning the Company's operations, economic performance and financial
condition, including in particular, the likelihood of the Company's success in
developing and expanding its business. These statements are based on a number
of assumptions and estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. A
variety of factors could cause actual results to differ materially from those
anticipated in the Company's forward-looking statements, some of which include
competition in the market for the Company's services, continued expansion of the
Company's processing and payment systems markets, successfully completing and
integrating acquisitions in existing and new markets and other risk factors that
are discussed from time to time in the Company's Securities and Exchange
Commission ("SEC") reports and other filings, including the Company's
Registration Statement on Form S-3 filed on October 17, 1996, as amended.
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
obligations to publicly release the results of any revisions to these forward-
looking statements that may be made to reflect events or circumstances after the
date hereof, or thereof, as the case may be, or to reflect the occurrence of
unanticipated events.
A-12
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
NATIONAL DATA CORPORATION
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------
Year Ended May 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE $433,860 $325,803 $278,083
- --------------------------------------------------------------------------------
Operating Expenses:
Cost of service 207,754 163,323 153,410
Sales, general and administrative 159,450 130,246 96,247
Restructuring, impairment and
merger expenses - 44,068 -
- --------------------------------------------------------------------------------
367,204 337,637 249,657
- --------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 66,656 (11,834) 28,426
- --------------------------------------------------------------------------------
Other income (expense):
Interest and other income 2,403 4,476 2,079
Interest and other expense (6,814) (3,750) (2,635)
Minority interest (1,694) (628) (393)
- --------------------------------------------------------------------------------
(6,105) 98 (949)
- --------------------------------------------------------------------------------
Income (loss) before income taxes 60,551 (11,736) 27,477
Provision (benefit) for income taxes 21,798 (3,278) 9,056
- --------------------------------------------------------------------------------
Net income (loss) $ 38,753 $ (8,458) $ 18,421
====================================
Earnings (loss) per common and common
equivalent share:
Primary $ 1.38 $ (0.31) $ 0.80
====================================
Fully-diluted $ 1.38 $ (0.31) $ 0.79
====================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
A-13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL DATA CORPORATION
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended May 31,
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 38,753 $ (8,458) $ 18,421
Adjustments to reconcile net income (loss)to net
cash provided by operating activities:
Depreciation and amortization 20,093 17,874 16,342
Amortization of acquired intangibles and goodwill 14,514 10,739 8,196
Asset impairment loss and other non-cash restructuring items - 35,116 -
Deferred income taxes 884 (12,550) 123
Minority interest in earnings 1,694 628 -
Provision for bad debts 1,129 4,725 850
Other, net 397 435 99
Changes in current assets and liabilities which provided
(used) cash, net of the effects of acquisitions:
Accounts receivable, net (10,062) (16,562) (7,015)
Merchant processing working capital 3,913 (4,076) 4,993
Inventory (300) 1,060 1,228
Prepaid expenses and other assets (146) 9,024 5,982
Accounts payable and accrued liabilities (4,770) 13,896 (84)
Income taxes payable 2,734 (6,547) 1,631
------------------------------------
Net cash provided by operating activities 68,833 45,304 50,766
------------------------------------
Cash flows from investing activities:
Capital expenditures (16,708) (16,393) (14,101)
Business acquisitions, net of cash acquired (132,983) (130,542) (51,662)
Other, net (189) 275 1,933
------------------------------------
Net cash used in investing activities (149,880) (146,660) (63,830)
------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings under lines of credit (30,000) 28,017 1,622
Payments on notes and earn-out payable (3,613) (3,509) (2,837)
Net principal payments under mortgage, capital lease
arrangements and other long-term debt (13,677) (11,481) (3,770)
Net proceeds from the issuance of long-term debt 139,682 1,250 2,000
Net proceeds from sale of common stock - 63,652 11,692
Net proceeds from the issuance of stock under various
stock plans 8,065 9,057 2,603
Distributions to minority interests (2,068) - -
Dividends paid (7,870) (6,877) (5,663)
------------------------------------
Net cash provided by financing activities 90,519 80,109 5,647
------------------------------------
Increase (decrease) in cash and cash equivalents 9,472 (21,247) (7,417)
Cash and cash equivalents, beginning of period 9,768 31,015 38,432
------------------------------------
Cash and cash equivalents, end of period $ 19,240 $ 9,768 $ 31,015
====================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
A-14
<PAGE>
CONSOLIDATED BALANCE SHEETS
NATIONAL DATA CORPORATION
<TABLE>
<CAPTION>
(In thousands, except share data)
- --------------------------------------------------------------------------------
May 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,240 $ 9,768
Accounts receivable (less allowances of
$2,868 and $2,433, respectively) 78,269 61,618
Deferred income taxes 2,584 1,000
Inventory 2,260 1,869
Prepaid expenses and other current assets 6,271 7,152
-------- --------
Total current assets 108,624 81,407
-------- --------
Property and equipment, net 49,907 49,436
Intangible assets, net 348,476 223,055
Deferred income taxes 9,037 11,505
Other 5,639 2,636
-------- --------
Total Assets $521,683 $368,039
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 51,789 $ 48,561
Line of credit payable - 30,000
Notes and earn-out payable 1,372 1,637
Income taxes payable 4,282 1,548
Obligations under capital leases 2,513 3,011
Mortgage payable - 10,936
Deferred income 7,389 5,996
-------- --------
Total current liabilities 67,345 101,689
-------- --------
Long-term debt 149,750 3,119
Obligations under capital leases 2,287 4,458
Other long-term liabilities 3,653 5,747
-------- --------
Total liabilities 223,035 115,013
-------- --------
Minority interest in equity of subsidiaries 21,178 19,727
Commitments and contingencies (Notes 7, 11
and 13)
Shareholders' equity:
Preferred stock, par value $1.00 per share;
1,000,000 shares authorized, none issued - -
Common stock, par value $.125 per share;
100,000,000 shares authorized, 26,564,668
and 25,962,939 shares issued and outstanding,
respectively. 3,321 3,246
Capital in excess of par value 182,695 168,732
Retained earnings 93,099 62,216
Cumulative translation adjustment (727) (753)
-------- --------
278,388 233,441
Less: Deferred compensation (918) (142)
-------- --------
Total Shareholders' Equity 277,470 233,299
-------- --------
Total Liabilities and Shareholders' Equity $521,683 $368,039
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
A-15
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NATIONAL DATA CORPORATION
- --------------------------------------------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock
-------------------- Capital in Cumulative Deferred
Number Excess of Retained Translation Compen-
of Shares Amount Par Value Earnings Adjustment sation
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994 15,440 $1,930 $ 81,653 $65,595 $(533) $(792)
Net income - - - 18,421 - -
Cash dividends ($.30 per share) - - - (5,663) - -
Stock dividend in the form of a stock split 6,422 802 - (802) - -
Foreign currency translation adjustment - - - - (17) -
Stock issued under employee stock plans 237 30 2,571 - - -
Stock issued under restricted stock plans 38 5 359 - - (362)
Amortization of deferred compensation - - - - - 880
- ----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1995 22,137 2,767 84,583 77,551 (550) (274)
======================================================================================================================
Net loss - - - (8,458) - -
Cash dividends ($.30 per share) - - - (6,877) - -
Secondary stock offering 3,163 395 63,257 - - -
Foreign currency translation adjustment - - - - (203) -
Stock issued under employee stock plans 614 78 4,946 - - -
Stock issued under non-employee stock plans 49 6 500 - - -
Stock issued under restricted stock plans - - 64 - - (100)
Tax benefit from exercise of stock options - - 3,330 - - -
Increase in capital due to issuance of
subsidiary ownership interest - - 12,052 - - -
Amortization of deferred compensation - - - - - 232
- ----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1996 25,963 3,246 168,732 62,216 (753) (142)
======================================================================================================================
Net income - - - 38,753 - -
Cash dividends ($.30 per share) - - - (7,870) - -
Foreign currency translation adjustment - - - - 26 -
Stock issued under employee stock plans 414 52 4,644 - - -
Stock issued under non-employee stock plans 14 2 201 - - -
Stock issued under restricted stock plans 27 3 1,188 - - (1,229)
Tax benefit from exercise of stock options - - 1,955 - - -
Stock issued for acquisitions 147 18 5,975 - - -
Amortization of deferred compensation - - - - - 453
- ----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1997 26,565 $3,321 $182,695 $93,099 $(727) $(918)
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
A-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations - The Company is primarily a provider of information
- --------------------
processing services and application systems to the health care and payments
systems markets. The principal markets for the Company's products and services
are retailers, banks and financial institutions, health care providers,
insurance companies and managed care organizations.
Basis of presentation - The consolidated financial statements include the
- ---------------------
accounts of the Company and its majority-owned subsidiaries including the
retroactive effect of the CIS merger occurring on May 31, 1996, which has been
accounted for under the pooling-of-interests method. Significant intercompany
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the fiscal 1996 and 1995 consolidated financial statements to
conform to the fiscal 1997 presentation.
Use of estimates - The preparation of financial statements in conformity with
- ----------------
generally accepted accounting principles requires management to make certain
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from these estimates.
Cash and cash equivalents - For purposes of reporting cash flows, cash and cash
- -------------------------
equivalents include cash on hand and all liquid investments with a maturity of
three months or less when purchased.
Inventory - Inventory, which is composed primarily of microcomputer hardware and
- ---------
peripheral equipment and electronic point-of-sale terminals, is stated at the
lower of cost or market. Cost is determined by using the average cost method.
Property and equipment - Property and equipment, including equipment under
- ----------------------
capital leases, is stated at cost. Depreciation and amortization are calculated
using the straight-line method. Equipment is depreciated over 2 to 5 year
lives, and buildings are depreciated over a 40 year life. Leasehold
improvements and property acquired under capital leases are amortized over the
shorter of the useful life of the asset or the term of the lease. The costs of
purchased and internally developed software used to provide services to
customers or internal administrative services are capitalized and amortized on a
straight-line basis over their estimated useful lives, not to exceed five years.
A-17
<PAGE>
Intangible assets - Intangible assets primarily represent customer contracts,
- -----------------
trademarks and covenants-not-to-compete associated with the Company's
acquisitions. Acquired intangibles are amortized using the straight-line method
over their estimated useful lives of 4 to 25 years. Goodwill represents the
excess of the cost of acquired businesses over the fair market value of their
identifiable net assets. Goodwill is being amortized on a straight-line basis
over periods ranging from 10 to 40 years. Subsequent to an acquisition, the
Company regularly evaluates whether events and circumstances have occurred that
indicate the carrying amount of goodwill and other intangibles may warrant
revision or may not be recoverable. When factors indicate that intangible assets
should be evaluated for possible impairment, the Company uses an estimate of the
future undiscounted net cash flows of the related businesses over the remaining
life of the asset in measuring whether the intangible asset is recoverable (see
Note 2). In management's opinion, the long-lived assets, including property and
equipment and intangible assets, are appropriately valued at May 31, 1997.
Income taxes - Deferred income taxes are determined based on the difference
- ------------
between financial statement and tax bases of assets and liabilities using
enacted tax laws and rates (see Note 4).
Earn-out payables - Earn-out payables represent the present value of estimated
- -----------------
future payments under earn-out agreements related to the Company's business
acquisitions.
Foreign currency translation - The assets and liabilities of foreign
- ----------------------------
subsidiaries are translated at the year-end rate of exchange, and income
statement items are translated at the average rates prevailing during the year.
The resulting translation adjustment is recorded as a component of stockholders'
equity. Exchange gains and losses on intercompany balances of a long-term
investment nature are also recorded as a component of stockholders' equity.
New accounting standard - The Financial Accounting Standards Board has issued
- -----------------------
Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation".
As permitted by SFAS No. 123, the Company has chosen to continue to apply APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its plans and implement the disclosure option
of SFAS No. 123 (see Note 5).
Revenue - Revenue related to services provided, including the Company's
- -------
government cost-plus contracts, is recognized as services are performed.
Revenue related to software sales, software license agreements and hardware
sales is recognized upon shipment. Revenues related to hardware and software
maintenance contracts are recognized ratably over the terms of the contracts.
A-18
<PAGE>
Earnings per common share - Earnings per common and common equivalent share on
- -------------------------
a primary basis are computed by dividing net income by the weighted average
number of common shares and common equivalent shares outstanding during the
period. Common equivalent shares represent stock options that, if exercised,
would have a dilutive effect on earnings per share. All options with an
exercise price less than the average market share price for the period are
assumed to have a dilutive effect on earnings per share.
Earnings per common and common equivalent share, on a fully diluted basis, are
computed by the same method as described for primary earnings per share, except
that the higher of (1) the ending market share price or (2) the average market
share price is used to compute the fully diluted earnings per share, as compared
to the average market share price for primary earnings per share. The impact
of the fiscal year 1996 shares issued to effect the pooling-of-interests merger
of C.I.S. Technologies, Inc. into a subsidiary of the Company (see Note 2) has
been retroactively applied to all periods for which financial statements are
presented. The effect of the Company's convertible debt (see Note 11) is
excluded since it is antidilutive.
The primary and fully diluted weighted average number of common and common
equivalent shares outstanding are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------
(In thousands) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Primary 27,995 27,189 23,065
Fully Diluted 28,039 27,189 23,481
</TABLE>
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share".
SFAS No. 128 requires primary earnings per share to be replaced with "basic
earnings per share". Basic earnings per share is computed by dividing reported
earnings available to common stockholders by weighted average shares
outstanding. No dilution for any potentially dilutive securities is included.
Fully diluted earnings per share will be called "diluted earnings per share".
The standard is intended to simplify existing computational guidelines, revise
the disclosure requirements, and increase comparability of earnings per share on
an international basis. The pronouncement is effective for financial statements
issued after December 15, 1997 and is not expected to have a material impact on
the Company's reported earnings per share.
A-19
<PAGE>
NOTE 2 - BUSINESS ACQUISITIONS
During fiscal 1997, 1996 and 1995, the Company completed the following purchase
acquisitions:
<TABLE>
<CAPTION>
Date Ownership
Business Acquired Percentage
- ---------------------------------------------------------------------------
<S> <C> <C>
Yes Check Services, Inc. June 1994 80%
Lytec Systems, Inc. July 1994 100%
Mercantile Systems, Inc. September 1994 100%
Zadall Systems Group, Inc. October 1994 100%
AMSC, Inc. November 1994 100%
Learned-Mahn, Inc. January 1995 100%
Physician's Practice Management May 1995 100%
Hospital Cost Consultants, Inc. June 1995 100%
Conceptual Systems Corp., Inc. January 1996 100%
Merchant Automated
Point of Sale Program ("MAPP") April 1996 92.5%
Comerica Bank merchant portfolio April 1996 51%
Equifax Healthcare EDI Services, Inc. October 1996 100%
Health Communication Services, Inc. January 1997 100%
Electronic Data Systems Corporation's
("EDS") multi-client card
processing business January 1997 100%
Comerica Bank merchant portfolio January 1997 51%
Merchant Services U.S.A., Inc. ("MSUSA") March 1997 100%
HealthTec April 1997 100%
</TABLE>
Each of the foregoing acquisitions has been recorded using the purchase method
of accounting, and accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair value as
of the date of acquisition. The allocation of the purchase price of the fiscal
year 1997 acquisitions is in some instances preliminary and will be adjusted
when the necessary information is available. The operating results of the
acquired businesses are included in the Company's consolidated statements of
income (loss) from the respective dates of acquisition.
A-20
<PAGE>
Purchase acquisitions completed in fiscal 1997 consisted of Equifax Health EDI
Services, Inc., Health Communication Services, Inc., EDS's multi-client card
processing business, an additional merchant credit card portfolio from Comerica
Bank, MSUSA and HealthTec. The aggregate price paid for these acquisitions was
$145.0 million, consisting of cash of $133.0 million, common stock of $6.0
million and notes of $6.0 million. The net value of the tangible assets
acquired was approximately $3.2 million, creating an excess of cost over
tangible assets of $141.8 million. The intangible assets will be amortized over
periods ranging from 5 to 25 years.
In order to effect the MAPP acquisition, the Company organized a new Georgia
limited liability company, Global Payment Systems LLC ("Global"), to which it
transferred its Payment Services business unit, its Information Systems and
Services business unit and certain back office support functions from the
Company's Payment Systems business unit. In addition, the Company contributed
$60 million and loaned $50 million to Global. The total cash from the Company,
$110 million, transferred to Global was paid using cash on hand of approximately
$104 million, with the remaining $6 million borrowed under an existing
acquisition line of credit. Global then acquired MAPP from MasterCard
International Incorporated ("MasterCard"). The net assets of MAPP consisted
primarily of tangible personal property, leased personal and real property,
customer contracts, assembled workforce and the goodwill of the business. The
consideration paid for MAPP was $110 million plus the granting of a 7.5%
membership interest in Global to MasterCard. The gain from the issuance of the
7.5% membership interest in Global has been reflected as a capital transaction
in the Consolidated Statements of Changes in Shareholders' Equity.
The total consideration paid for the MAPP business, acquired in fiscal 1996, was
$131.6 million, which consists of $112.8 million in cash and the 7.5% minority
interest with an estimated value of $18.8 million. The net value of the
tangible assets acquired was approximately $5.0 million, creating an excess cost
over tangible assets of $126.6 million. The aggregated estimated life of the
intangible assets is 34 years.
Other purchase acquisitions completed in fiscal 1996 consisted of Hospital Cost
Consultants, Inc. ("HCC"), acquired by CIS prior to its merger with the Company,
Conceptual Systems Corp., and a merchant credit card portfolio of Comerica Bank.
The aggregate price paid for these acquisitions was $34.4 million, consisting of
cash of $29.4 million and notes payable of $5 million. The excess cost over net
tangible assets acquired of $42.1 million was allocated to goodwill and
intangible assets and will be amortized over periods ranging from 10 to 20
years.
A-21
<PAGE>
The following unaudited pro forma information for the 1997 and 1996 purchase
acquisitions discussed above has been prepared as if these acquisitions had
occurred on June 1, 1995. The information is based on historical results of the
separate companies and may not necessarily be indicative of the results that
would have been achieved or of results which may occur in the future. The pro
forma information includes the expense for amortization of goodwill and other
intangible assets resulting from these transactions and interest expense related
to financing costs but does not reflect any synergies or operating cost
reductions that may be achieved from the combined operations. In addition, the
pro forma information for fiscal 1996 excludes the charges for restructuring,
asset impairment and merger expenses.
<TABLE>
<CAPTION>
Fiscal Year Ended
(In thousands, except per share data) May 31, 1997 May 31, 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Revenue $465,754 $442,365
Net income $ 39,011 $ 24,402
Earnings per share, fully diluted $1.39 $.92
</TABLE>
In addition to the purchase acquisitions, the Company merged with C.I.S.
Technologies, Inc. ("CIS") on May 31, 1996. CIS provides transaction processing,
consulting and outsourcing services to the health care market, primarily
hospitals and physicians. In the merger, each share of CIS Common Stock and
Series A Preferred Stock was converted into the right to receive .08682 shares
of the Company's Common Stock. The Company issued approximately 2,829,746 shares
of its Common Stock, valued at approximately $107 million, in exchange for the
outstanding CIS Common Stock and Series A Preferred Stock. The acquisition was
accounted for using the pooling-of-interests method. In accordance with the
pooling-of-interests method, the consolidated financial statements of the
Company include the financial statements of CIS for all periods presented.
In connection with the CIS combination, the Company accrued certain direct
transaction and integration costs totaling $6.4 million which were reflected as
part of restructuring, impairment and merger expenses in the Company's fiscal
1996 consolidated statement of income (loss). Such fees and expenses consist of
$3.8 million of direct transaction costs (including investment banking fees,
legal, accounting and printing costs) and $2.7 million of severance and exit
costs.
A-22
<PAGE>
NOTE 3 - RESTRUCTURING, IMPAIRMENT AND MERGER EXPENSES
In connection with the fiscal 1996 creation of Global and the merger with CIS,
the Company incurred a total charge of $44.1 million. Included in this charge
was $35.1 million for asset impairment (non-cash charge), $5.2 million for
restructuring, and $3.8 million for merger transaction costs. The restructuring
and merger transaction costs that were considered cash items were accrued at the
time the charges were incurred. As of May 31, 1997, $3.1 million and $3.5
million have been expended toward the restructuring activities and merger
transaction cost accruals, respectively.
As a result of the creation of Global and the merger with CIS, the Company
performed an evaluation to determine whether future undiscounted cash flows
impacted by these events in certain of the Company's Integrated Payment Systems
and Health Care businesses would be less than the aggregate carrying amount of
the related assets. The evaluation was performed in accordance with Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of". As a
result of the evaluation, management determined that the estimated future cash
flows would be less than the carrying amount of certain related assets, and
therefore, the related assets were impaired as defined by SFAS No. 121. Assets
impaired included intangible assets and capitalized software.
The restructuring charge reflects the anticipated severance benefits and other
related costs arising from the Company's plans to downsize personnel in areas of
redundant operations and activities. Merger transaction costs primarily consist
of investment banking and professional fees related to the CIS merger.
A-23
<PAGE>
NOTE 4 - INCOME TAXES
The provision for income taxes includes:
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(In thousands) 1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Current tax expense:
Federal $19,782 $8,981 $7,444
State 1,132 291 1,489
--------------------------------------
20,914 9,272 8,933
--------------------------------------
Deferred (prepaid) tax expense:
Federal 836 (11,824) 259
State 48 (726) (136)
--------------------------------------
884 (12,550) 123
--------------------------------------
Total $21,798 $ (3,278) $9,056
======================================
</TABLE>
The Company's effective tax rates differ from federal statutory rates as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory rate 35.0% (35.0%) 35.0%
State income taxes, net of federal
income tax benefit 1.3% (1.3%) 3.2%
Non-taxable interest income (.1%) (3.1%) (.5%)
Non-deductible amortization and
write-off of intangible assets 2.5% 23.3% (.5%)
Utilization of tax loss carry forwards - (3.0%) -
Tax credits (.6%) (3.1%) (1.2%)
Recognition of tax assets - (10.5%) (3.8%)
Other (2.1%) 4.8% .8%
---------------------------------------
Total 36.0% (27.9%) 33.0%
=======================================
</TABLE>
A-24
<PAGE>
Deferred income taxes as of May 31, 1997 and 1996 reflect the impact of
temporary differences between the amounts of assets and liabilities for
financial accounting and income tax purposes. Net deferred tax assets at May
31, 1997 and 1996 consisted of net current deferred tax assets of $2,584,000 and
$1,000,000, respectively, and net non-current deferred tax assets of $9,037,000
and $11,505,000, respectively. As of May 31, 1997 and 1996, principal
components of deferred tax items were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
------------- ------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $6,465 $7,476
Prepaid expenses 465 1,376
Other - 557
------------------------------
6,930 9,409
------------------------------
Deferred tax assets:
Net operating loss and credit
carryforwards $9,597 $13,971
Accrued expenses 3,923 1,056
Acquired intangibles 3,791 1,958
Accrued restructuring and
impairment charge 1,526 8,771
Employee benefit plans 326 565
Other 1,300 244
Valuation allowance (1,912) (4,651)
----------------------------
18,551 21,914
----------------------------
Net deferred tax asset $11,621 $12,505
============================
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Realization of
the operating loss and credit carryforwards are considered by management to be
uncertain. The Company has established valuation allowances for a portion of
these tax assets. Net operating loss and credit carryforwards expire between
the years 2001 and 2011.
A-25
<PAGE>
NOTE 5- STOCKHOLDERS' EQUITY
In June 1995, the Company completed a secondary public offering of 3,162,500
shares of its Common Stock. The stock was sold at a price of $21.25 per share.
This transaction, net of underwriting discount and expenses associated with this
offering, added approximately $63,652,000 in cash to the Company.
Stock Option Plans - The Company has an employee stock option plan, the 1987
- ------------------
Stock Option Plan ("the 1987 Plan"), that provides for the granting of options
to certain officers and key employees to purchase the Company's common stock.
Under the 1987 Plan, options may be issued at, below, or above the fair market
value of the common stock at the time of grant. All options have been issued at
or above the fair market value of the Common Stock at the time of grant.
Options granted become exercisable in various annual increments and terminate
over a period not to exceed ten years.
The Company also has a Non-employee Directors Stock Option Plan which provides
for grants of options, consisting of 5,000 shares of the Company's Common Stock
for each completed year of service, to directors who are not employees of the
Company. A maximum of five options may be granted to each such director, and
the maximum number of shares for which options may be granted is 345,000.
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.
Other Stock Plans - The Company has an Employee Stock Purchase Plan under which
- -----------------
the sale of 1,350,000 shares of its Common Stock has been authorized. Employees
may designate up to the lesser of $25,000 or 20% of their annual compensation
for the purchase of stock. The price for shares purchased under the plan is the
lower of 85% of market value on the first day or the last day of the purchase
period. At May 31, 1997, 1,023,132 shares have been issued under this plan,
with 326,868 shares reserved for future issuance.
The Company's 1983 Restricted Stock Plan ("the Restricted Plan") authorizes
750,000 shares of the Company's Common Stock to be awarded to key employees.
Shares awarded under the Restricted Plan are held in escrow and released to the
grantee upon the grantee's satisfaction of conditions of the grantee's
restricted stock agreement. Awards are recorded as deferred compensation, a
reduction of stockholders' equity based on the quoted fair market value of the
Company's Common Stock at the award date. Compensation expense is recognized
ratably during the escrow period of the award.
There were 34,132, 3,864 and 38,250 shares of the Company's Common Stock awarded
under the Restricted Plan during fiscal years 1997, 1996 and 1995, respectively.
These awards have restriction periods of one to four years. As of May 31, 1997,
43,996 shares remained in escrow. There were 451,752 shares reserved for future
issuance under this plan. The Company expensed $327,000, $233,000 and $880,000
for the years ended May 31, 1997, 1996 and 1995, respectively, in connection
with the Restricted Plan.
A-26
<PAGE>
Transactions under the Stock Option Plans are summarized as follows:
<TABLE>
<CAPTION>
1987 Plan Non-Employee Directors Plan
--------------------------------------------------------------------------
Weighted Average Weighted Average
Shares Under Option Price Per Shares Under Option Price Per
Option Share Option Share
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at May 31, 1994 2,401,654 $10.41 261,000 $11.41
Granted 962,974 16.97 7,500 13.92
Exercised (304,493) 10.01 (9,000) 6.13
Expired or terminated (243,450) 9.84 - -
- ---------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1995 2,816,685 $13.11 259,500 $11.66
Granted 682,875 22.96 25,000 25.13
Exercised (566,411) 7.98 (51,000) 10.24
Expired or terminated (244,984) 13.33 - -
- ---------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1996 2,688,165 $15.54 233,500 $13.41
Granted 214,050 36.11 25,000 41.00
Exercised (220,807) 15.48 (13,500) 15.03
Expired or terminated (211,576) 17.26 - -
- ---------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1997 2,469,832 $17.21 245,000 $16.14
- ---------------------------------------------------------------------------------------------------------
Exercisable at May 31, 1997 1,044,493 $12.80 190,500 $12.08
- ---------------------------------------------------------------------------------------------------------
Available for future grants 1,427,309 17,500
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1987 Plan Non-Employee Director Plan
------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Exercise Price Number of Average Average Number of Average Average
Range Shares Price Contractual Life Shares Price Contractual Life
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$6.17 - $9.17 555,096 $6.79 5.0 years 105,000 $7.80 4.4 years
$ 9.67 - $14.33 831,053 10.57 6.6 years 39,000 11.64 5.1 years
$15.25 - $22.54 531,094 21.01 7.9 years 51,000 20.15 2.2 years
$23.04 - $34.38 413,915 29.36 8.4 years 25,000 25.13 8.5 years
$35.99 - $53.27 102,618 42.84 7.7 years 25,000 41.00 9.4 years
$56.15 - $78.47 36,056 64.08 5.3 years - - -
</TABLE>
A-27
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
(In thousands, except per share data) As Reported Pro Forma As Reported Pro Forma
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net Income $38,753 $37,581 ($ 8,458) ($ 9,148)
Primary earnings per share $1.38 $1.36 ($ .31) ($ .34)
Fully diluted earnings per share $1.38 $1.35 ($ .31) ($ .34)
</TABLE>
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 1997 and 1996 grants, respectively: risk-free interest
rates of 6.6% and 6.1% for the 1987 Stock Option Plan, 6.5% and 6.2% for the
Non-employee Directors Plan, and 5.7% and 5.6% for the Employee Stock Purchase
Plan; expected dividend yields of 0.8% and 1.4% for the 1987 Stock Option Plan,
0.7% and 1.2% for the Non-employee Directors Plan, and 0.7% and 1.1% for the
Employee Stock Purchase Plan; expected lives of 7.0 and 6.9 years for the 1987
Stock Option Plan, 10 years for the Non-employee Directors Plan, and 1 year for
the Employee Stock Purchase Plan; expected volatility of 40% for all plans, both
years.
A-28
<PAGE>
NOTE 6 - PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering
substantially all of its United States employees who have met the eligibility
provisions of the plan. 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 sets forth the plan's funded status and amounts recognized
in the Company's consolidated financial statements at May 31, 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $18,138 and
$15,898, respectively $19,126 $16,902
Projected compensation increases 6,318 5,410
-------- --------
Projected benefit obligation for services
rendered to date 25,444 22,312
Plan assets at fair market value,
primarily stocks and bonds 21,582 18,314
-------- --------
Projected benefit obligation
in excess of plan assets (3,862) (3,998)
Unrecognized net loss from past experience
different from that assumed and effect of
changes in assumptions 2,099 2,962
Unrecognized prior service cost 467 556
Unrecognized net asset at June 1, 1985, being
amortized over 17 years (1,149) (1,385)
--------------------------
Accrued pension cost ($2,445) ($1,865)
==========================
</TABLE>
Net pension expense included the following components for the fiscal years
ending May 31:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the
period $1,672 $1,272 $1,000
Interest cost on projected benefit
obligation 1,855 1,603 1,397
Actual return on plan assets (2,846) (2,858) (1,521)
Net amortization and deferral 910 1,242 (49)
-----------------------------------
Net pension expense $1,591 $1,259 $827
===================================
</TABLE>
A-29
<PAGE>
Significant assumptions used in determining net pension expense and related
obligations were as follows:
<TABLE>
<CAPTION>
May 31,
1997 1996
---------------------------
<S> <C> <C>
Discount rate 7.75% 8.00%
Rate of increase in compensation levels 4.33% 4.33%
Expected long-term rate of return on assets 10.00% 10.00%
</TABLE>
On December 18, 1991, the Company adopted a retirement plan for non-employee
directors of the Company with five or more years of service ("the Directors'
Plan"). The Directors' Plan benefits are based on 50% of the annual director
retainer amount in effect on the date of a director's retirement plus 10% for
each year of service up to 100% of the base amount for ten years' service. The
benefits are payable upon retirement, at or after age 70, for a period equal to
the number of years of service as a director but not more than 15 years for
participants with 15 or more years of board service as of the effective date of
the Directors' Plan and not more than 10 years for all other participants. The
expense related to the Directors' Plan was immaterial in both fiscal 1997 and
1996.
Effective March 23, 1995, the board of directors amended the Directors' Plan to
provide for early retirement benefits so that a combination of age and service
(minimum 10 years service) totaling 60 will qualify the retiring participant for
benefits under the Directors' Plan. The Directors' Plan was also amended to
limit eligibility under the plan to members of the board of directors of the
Company elected prior to January 1, 1995.
A-30
<PAGE>
NOTE 7 - 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 years 1997, 1996 and 1995 was
approximately $11,133,000, $9,037,000 and $7,349,000, respectively.
As of May 31, 1997 and 1996, asset balances for property acquired under capital
leases consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
--------- ---------
<S> <C> <C>
Equipment $11,723 $16,107
Less: accumulated amortization 7,644 8,421
--------------------------
$4,079 $7,686
==========================
</TABLE>
Future minimum lease payments for all noncancelable leases at May 31, 1997 were
as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
---------- ----------
<S> <C> <C>
1998 $2,824 $8,354
1999 1,649 6,459
2000 796 3,905
2001 55 2,829
2002 28 2,323
Thereafter - 2,363
--------------------------
Total future minimum lease payments $5,352 $26,233
Less: amount representing interest 552
-----------
Present value of net minimum lease payments 4,800
Less: current portion 2,513
-----------
Long-term obligations under capital leases at
May 31, 1997 $2,287
===========
</TABLE>
A-31
<PAGE>
NOTE 8 - PROPERTY AND EQUIPMENT
As of May 31, 1997 and 1996, property and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Land $402 $402
Building 6,503 6,503
Equipment 48,850 40,465
Software 31,685 23,450
Leasehold improvements 15,507 14,709
Furniture and fixtures 9,814 7,216
Work in progress 7,228 6,358
-------------------------
119,989 99,103
Less: accumulated depreciation and amortization 74,161 57,353
-------------------------
45,828 41,750
Property acquired under capital leases, net of
accumulated amortization 4,079 7,686
-------------------------
$49,907 $49,436
=========================
</TABLE>
NOTE 9 - INTANGIBLE ASSETS
As of May 31, 1997 and 1996, intangible assets consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Customer base $152,365 $93,012
Trademarks 28,273 28,273
Goodwill and other intangibles 226,083 145,538
----------------------------
406,721 266,823
Less: accumulated amortization 58,245 43,768
----------------------------
$348,476 $223,055
============================
</TABLE>
The increase in intangible assets during fiscal 1997 is primarily due to
acquisitions (see Note 2).
A-32
<PAGE>
NOTE 10 - SOFTWARE COSTS
The following table sets forth information regarding the Company's costs
associated with software development for the years ended May 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total costs associated with software
development $18,015 $15,706 $12,545
Less: capitalization of internally
developed software 4,805 6,872 4,880
-------------------------------------
Net research and development costs $13,210 $8,834 $7,665
=====================================
</TABLE>
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.
Total unamortized capitalized software costs (purchased and internally
developed) were approximately $16,603,000, $8,840,000 and $16,681,000 as of May
31, 1997, 1996 and 1995, respectively. Total software amortization expense was
approximately $4,848,000, $5,920,000 and $4,766,000 in fiscal years 1997, 1996
and 1995, respectively. In fiscal 1996, as part of a restructuring, asset
impairment and merger charge (see Note 3), the Company recognized an impairment
loss of approximately $6.7 million to reduce the carrying value of certain
software to its net realizable value.
A-33
<PAGE>
NOTE 11 LONG-TERM DEBT
As of May 31, 1997 and 1996, long-term debt consisted of the following:
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Convertible notes $143,750 $ -
Mortgage payable - 10,936
Promissory notes issued in consideration for
acquisitions:
Electronic Data Systems Corporation 6,000 -
AMSC, Inc. - 7.5% due November 2007 - 2,000
Mercantile Systems, Inc. 3.5% due September 1997 1,026 2,054
Other notes payable:
Non-interest bearing note due May 1999 346 520
Other - 182
---------------------------
$151,122 $15,692
Less: current maturities 1,372 12,573
---------------------------
Long-term debt $149,750 $3,119
===========================
</TABLE>
On November 6, 1996, the Company issued convertible notes ("the Notes"),
providing $139,682,000 in proceeds, net of $4,068,000 in debt issuance costs.
The issuance costs are included in other assets and are being amortized over the
life of the Notes. The Notes are unsecured subordinated obligations of the
Company, $143,750,000 aggregate principal amount, and will mature on November 1,
2003. The Notes bear interest at 5% per annum and are convertible into
approximately 2,750,000 shares of common stock at $52.23 per share at any time
prior to maturity. Subsequent to November 1, 1999, the Notes are redeemable at
the option of the Company, in whole or in part, initially at 102.857% and
thereafter at prices declining to 100% at maturity, together with accrued
interest.
The note payable to Electronic Data Systems Corporation was issued in connection
with the Company's acquisition of their multi-client card processing business
(see Note 2). The note accrues interest monthly at a rate equal to that of
7.32% per annum. The principal balance and accrued interest are payable in full
on the earlier of June 30, 1999 or the occurrence of any one of certain key
events specified in the note. The note may be prepaid at any time without
penalty.
As of May 31, 1996, the Company had financing on its headquarters building
consisting of a mortgage at a 9.375% fixed rate which was paid in full in
January 1997.
A-34
<PAGE>
NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of May 31, 1997 and 1996, accounts payable and accrued liabilities consisted
of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
----------- ----------
<S> <C> <C>
Trade accounts payable $14,657 $14,959
Accrued compensation and benefits 9,503 7,532
Accrued restructuring and merger expenses 2,402 8,343
Accrued pension 2,445 1,865
Merchant processing payable 2,009 -
Other accrued liabilities 20,773 15,862
---------------------------
$51,789 $48,561
===========================
</TABLE>
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is party to a number of claims and lawsuits incidental to its
business. In the opinion of management, the ultimate outcome of such matters,
in the aggregate, will not have a material adverse impact on the Company's
financial position, liquidity or results of operations.
In fiscal 1996, the Company entered into a $50,000,000 committed line of credit
to fund the Company's acquisition requirements and a $10,000,000 uncommitted
line of credit to fund working capital requirements. The lines of credit are
not secured. In addition, the Company's Global Payment Systems subsidiary has a
$50,000,000 committed line of credit. These agreements require the Company to
maintain certain financial ratios and contain other restrictive covenants. As
of May 31, 1997, no amounts were outstanding under either line of credit and the
Company was in compliance with all restrictive covenants. The committed lines of
credit expire in 1999.
As of May 31, 1997, the Company processed credit card transactions for
approximately 90,000 direct merchant locations. The Company's merchant customers
have liability for charges disputed by cardholders. However, in the case of
merchant fraud or insolvency or bankruptcy of the merchant, the Company may be
liable for any of such charges disputed by cardholders. The Company requires
cash deposits and other types of collateral by certain merchants to minimize any
such contingent liability. In addition, the Company believes that the
diversification of its merchant portfolio among industries and geographic
regions minimizes its risk of loss. Based on its historical loss experience,
the Company has established reserves for estimated losses on transactions
processed through May 31, 1997 (See Note 15). In the opinion of management,
such reserves for losses are adequate.
A-35
<PAGE>
In connection with the Company's acquisition of merchant credit card operations
of banks, the Company has also entered into depository and processing agreements
("the Agreements") with certain of the banks. The Agreements allow the Company
to use the banks' "Bank Identification Number" ("BIN") to clear credit card
transactions through VISA and MasterCard. Certain Agreements contain financial
covenants, and the Company was in compliance with all such covenants as of May
31, 1997 or had obtained a verbal waiver of such covenants. In the event of the
termination of these Agreements, the Company would be able to obtain alternative
BIN agreements without material harm to the Company.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures and non-cash investing and financing
activities for the years ended May 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Income taxes paid, net of refunds $17,523 $9,331 $7,877
Interest paid 5,868 3,306 2,150
Supplemental Non-cash Investing and
Financing Activities:
Promissory notes entered into exchange - - 3,506
for capital stock
Capital leases entered into in exchange
for property and equipment 218 1,207 4,223
</TABLE>
In fiscal 1997, 1996 and 1995, the Company acquired various businesses that were
accounted for as purchases (see Note 2). In conjunction with these
transactions, liabilities were assumed as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired $154,153 $181,575 $54,714
Cash paid for acquisitions 133,006 140,779 42,621
Notes and deferred payments 6,000 9,392 3,506
Stock issued 5,975 - -
Liabilities assumed 9,172 31,404 8,587
</TABLE>
A-36
<PAGE>
NOTE 15 - PROVISION FOR BAD DEBT, SALES ALLOWANCES AND OPERATIONAL LOSSES
The Company establishes reserves for bad debt based on analyses of its aged
trade accounts receivable and any identified collection issues. Reserves are
established for sales returns and allowances based principally on historical and
projected experiences and any identified return issues. In fiscal 1996, CIS
recorded one-time charges in the amount of $2.8 million to adjust accounts
receivable balances to their net realizable value.
The Company processes VISA and MasterCard charges for its direct merchant
customers. The Company's customers have liability for the charges disputed by
the cardholders based on VISA and MasterCard rules and regulations. However, in
the case of merchant fraud, insolvency or bankruptcy by the merchant, the
Company may be liable for any such charges disputed by the cardholder. The
Company recognizes revenue based on a percentage of the gross amount charged and
has a potential liability for the full amount of the charge. The Company
establishes reserves for operational losses based on historical and projected
experiences concerning such charges. (See Note 13 for further description of
contingencies).
The following table details the amounts charged to expense for the above
activities:
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bad debt $1,129 $4,725 $850
Sales returns and allowances 2,764 2,650 3,888
Operation losses 912 752 774
-----------------------------------------
$4,805 $8,127 $5,512
-----------------------------------------
</TABLE>
The Company also has a check guarantee business. Similar to the credit card
business, the Company charges its merchants a percentage of the gross amount of
the check and guarantees payment of the check to the merchant in the event the
check is not honored by the checkwriter's bank. As a result, the Company
incurs operational charges in this line of business. The Company has the right
to collect the full amount of the check from the checkwriter but has not
historically recovered 100% of the guaranteed checks. The Company establishes
reserves for this activity based on historical and projected loss experiences.
Expenses of $8,061,000, $7,120,000 and $4,648,000 were recorded for fiscal 1997,
1996 and 1995, respectively, for these reserves.
A-37
<PAGE>
NOTE 16 - RELATED PARTY TRANSACTIONS
During fiscal 1996, Global Payment Systems, a subsidiary of the Company,
purchased MAPP from MasterCard International Incorporated (see Note 2). In
addition, MasterCard holds a 7.5% minority interest in Global. There are
agreements in place for MasterCard to provide certain services for the MAPP
business unit during a defined transition period. There were accounts payable
of $2,348,000 at May 31, 1997 and a net receivable of $1,328,000 at May 31,
1996. The net receivable consisted of accounts receivable of $4,763,000 less
accounts payable of $3,435,000, at May 31, 1996.
Also during fiscal 1996, National Data Payment Systems, Inc., a subsidiary of
the Company formed an alliance with Comerica Bank and purchased a 51% ownership
interest in a merchant portfolio (see Note 2). There are agreements in place
for the Company to reimburse Comerica Bank for any expenses incurred on behalf
of the alliance. At May 31, 1997, the Company had $162,000 payable to Comerica
Bank for such expenses included in its accounts payable balance.
NOTE 17 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data) Quarter Ended
Aug. 31 Nov. 30 Feb. 29 May 31
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fiscal Year 1997
Revenue $101,164 $102,575 $111,974 $118,147
Operating income 13,934 15,625 17,598 19,499
Net income 8,205 9,567 10,075 10,907
Earnings per share .30 .34 .36 .39
Fiscal Year 1996
Revenue $78,290 $78,064 $77,622 $91,827
Operating income 8,079 10,002 8,323 (38,238)
Net income 4,854 6,775 5,964 (26,051)
Earnings per share .18 .25 .22 (.94)
</TABLE>
A-38
<PAGE>
NOTE 18 SUBSEQUENT EVENTS
On August 20, 1997, the Company entered into agreements to acquire two related
health care database information management businesses based in Phoenix,
Arizona. Under the first agreement, the Company will acquire the stock of
Source Informatics Inc., a privately held company, in exchange for 1,555,556
shares of the Company's Common Stock and $31.9 million in cash. The second
agreement provides for the acquisition of the stock of a subsidiary of
Pharmaceutical Marketing Services Inc. ("PMSI"), which holds its Over-The-
Counter Physician Survey business unit as well as PMSI's interest in a joint
venture it formed with Source Informatics, Inc. PMSI will receive 1,059,829
shares of the Company's Common Stock and $6.5 million in cash for this
subsidiary.
A-39
<PAGE>
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, 1997 and
1996 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, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Data Corporation and
subsidiaries as of May 31, 1997 and 1996 and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
July 16, 1997 [except with respect to Note 18,
for which the date is August 20, 1997]
A-40
<PAGE>
NATIONAL DATA CORPORATION
CONSOLIDATED SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
(In Thousands)
Column A Column B Column C Column D Column E
1 2
Balance at Charged to Uncollectible Balance at
Beginning Cost and Acquired Accounts End
Description of Period Expenses Balances Write-off of Period
Trade Receivable
Allowances:
May 31, 1995 $1,477 $5,512 $365 $5,627 $1,722
May 31, 1996 1,722 4,475 - 3,764 $2,433
May 31, 1997 2,433 4,805 639 5,009 $2,868
A-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
financial statements included in National Data Corporation's annual report to
shareholders in this Form 10-K, and have issued our report thereon dated July
16, 1997 [except with respect to Note 18, for which the date is August 20,
1997]. 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 26 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 16, 1997
A-42
<PAGE>
NATIONAL DATA CORPORATION
FORM 10-K
INDEX TO EXHIBITS
Exhibit
Numbers Description
10(xx) Supplemental Executive Retirement Plan.
10(xxi) Amendment to 1987 Stock Option Plan.
10(xxii) Amendment to 1983 Restricted Stock Plan.
10(xxiii) Global Payment Systems 1996 Option Plan.
10 (xxiv) Employment Agreement between Registrant and Robert A. Yellowlees
effective June 1, 1997.
(21) Subsidiaries of the Registrant.
(included in Appendix A).
(23) Consent of Independent Public Accountants
(included in Appendix A).
(27) Financial Data Schedule (for SEC use only)
A-43
<PAGE>
EXHIBIT 10(xx)
NATIONAL DATA CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(ADOPTED EFFECTIVE AS OF JUNE 1, 1997)
ARTICLE ONE - INTRODUCTION
The Board of Directors of National Data Corporation ("NDC" or the
"Company") has decided that it is in the best interest of the Company and its
subsidiaries to establish a nonqualified supplemental retirement plan for
certain executives of the Company. This Plan is established for several
purposes, including the desire by the Company (i) to attract and retain key
executives, late career executives and executives whose prior employer
maintained a supplemental executive retirement plan; (ii) to facilitate early
retirement and accommodate succession planning and individual executive goals;
and (iii) to restore benefits lost as a result of the limitations imposed by the
Internal Revenue Code on benefits otherwise payable from the Company's qualified
defined benefit pension plan.
Accordingly, the Board has established the National Data Corporation
Supplemental Executive Retirement Plan effective as of June 1, 1997 (the
"Plan").
This Plan is intended to be a nonqualified, unfunded deferred
compensation plan maintained primarily for the benefit of a select group of
management or highly compensated employees, as determined under Section
401(a)(1) of ERISA.
ARTICLE TWO - PARTICIPATION
---------------------------
The only persons who are eligible to participate in this Plan are
those executives of the Company or its subsidiaries who are selected for
participation herein by the Compensation Committee of the Board of Directors of
the Company. Prior to designating an executive for participation herein, the
Board shall consult with the General Counsel of the Company to insure that such
executive constitutes a member of a select group of management or highly
compensated employees, as defined in Section 401(a)(1) of ERISA.
The Board in its sole discretion may grant additional Benefit Service
or Vesting Service to any Participant hereunder.
<PAGE>
ARTICLE THREE - SUPPLEMENTAL INCOME
-----------------------------------
3.01 Basic Retirement Formula.
-------------------------
(a) Basic Formula before Offsets. Subject to the conditions stated in
-----------------------------
this Plan, each Participant shall receive an annual Supplemental
Income equal to
(1) two and four-tenths percent (2.4%) of the Participant's Final
Average Earnings, multiplied by the Participant's Accrual
Service, up to a maximum of fifteen (15) years of Accrual
Service; plus
(2) one and one-tenth percent (1.1%) of the Participant's Final
Average Compensation, multiplied by the Participant's Accrual
Service that exceeds fifteen (15) years, but not to exceed
thirty-five (35) years.
(b) Offsets for other Retirement Benefits. Notwithstanding paragraph (a)
--------------------------------------
above, the Participant's Supplemental Income under this Plan shall be
reduced by
(1) fifty percent (50%) of the Participant's annual Social Security
Benefit (as defined in Article Ten of this Plan);
(2) the amount of annual retirement income which is payable to or for
the benefit of the Participant under any tax-qualified defined
benefit type of retirement plan that is maintained by or
contributed to at any time by the Company or any of its
affiliates (including the National Data Corporation Employees'
Retirement Plan) or any predecessor of the Company or its
affiliates, regardless of whether such plan is established before
or after the establishment of this Plan; and
(3) the amount of annual retirement income which is payable to or for
the benefit of the Participant under any non-qualified defined
benefit type of retirement plan or agreement that is maintained
by or contributed to at any time by NDC or any of its affiliates
or any predecessor of the Company or its affiliates, regardless
of whether such plan or agreement is established before or after
the establishment of this Plan.
(c) Actuarial Equivalent Conversion. If any benefit payable to the
--------------------------------
Participant under paragraph (b) immediately above is not paid at the
same time or in the same form as the Supplemental Income under this
-2-
<PAGE>
Plan, then such benefit described in paragraph (b) shall be determined
by converting, on an Actuarial Equivalent basis, such benefit to the
form of payment under this Plan and as though such benefit commenced
at the time Supplemental Income benefits commence hereunder.
3.02 Commencement of Supplemental Income.
------------------------------------
A Participant shall be eligible to have his Supplemental Income
commence under this Plan once he has terminated active employment with NDC and
all of its subsidiaries, and either
(i) has both completed five (5) years of Accrual Service and attained age
60; or
(ii) has both completed ten (10) years of Accrual Service and attained age
55, provided that in this instance the Participant's Supplemental
Income shall be reduced by .416667% for each month by which the
commencement of Supplemental Income precedes his 60th birthday.
3.03 Vesting of Benefits.
--------------------
(a) General Rule. A Participant shall vest in his Supplemental Income as
-------------
follows:
Vesting Service
(under this Plan) Vesting
at Termination of Employment Percentage
---------------------------- ----------
Less than 5 years 0%
5 Years or more 100%
(b) Disability. Notwithstanding the foregoing, a Participant who becomes
-----------
Disabled shall become 100% vested in his Supplemental Income hereunder as
of the date of his Disability regardless of whether or not the Participant
was vested in his Supplemental Income at the time of his death.
(c) Death. Notwithstanding the foregoing, if a married Participant dies
------
prior to his termination of employment with the Company and its affiliates,
then the Participant's Spouse shall be entitled to the death benefit
described in Section 4.01 of this Plan regardless of whether or not the
Participant was vested in his Supplemental Income at the time of his death.
(d) Termination for Cause.
----------------------
(1) Notwithstanding anything to the contrary in this Section 3.03, if
a Participant who is entitled to a vested Supplemental Income
-3-
<PAGE>
terminates employment and such termination is a Termination for
Cause, then such Participant shall forfeit all of his
Supplemental Income under this Plan.
(2) For this purpose, "Termination for Cause" shall mean (i) the
willful and continued failure of the Participant substantially to
perform his duties, provided, however, that termination for cause
based on the Participant's willful and continued failure
substantially to perform his duties shall not be effective unless
the Participant shall have received written notice from the Board
of such failure and demand for substantial performance thirty
(30) days prior to such termination and the Participant shall
have failed after receipt of such notice to resume the diligent
performance of his duties;(ii) action by the Participant
involving willful misfeasance or gross negligence; or (iii) the
commission of any felonious act.
(e) Violation of Noncompetition Provision.
--------------------------------------
(1) Notwithstanding any other provision herein, if a Participant
receiving or eligible to receive Supplemental Income under this
Plan commits a material breach, as determined by the Board, of
the non-competition clause contained in Section 3.03(c)(2) of
this Plan at any time, then the Company shall have no further
obligation to make Supplemental Income payments to the
Participant or his Spouse or Beneficiary.
(2) Under this noncompetition provision, Participant agrees that,
without the prior written consent of the Company, and so long as
Participant is receiving or is eligible to receive Supplemental
Income under this Plan, Participant shall not (i) with respect
to activities within the Territory, directly or indirectly, be a
proprietor, officer, manager, director, investor, partner or
stockholder of (other than a stockholder of a corporation listed
on a national securities exchange or whose stock is regularly
traded in the over-the-counter market, provided that Participant
at no time owns, directly or indirectly, in excess of one percent
of the outstanding stock of any class or any such corporation)
any person, firm, corporation or other entity then engaged in any
business competitive with the businesses of the Company as of the
date of termination of Participant's employment with the Company,
or (ii) solicit or accept any client that was a client of the
Company at any time within six months prior to the date of
termination of employment for the purpose of providing products
or services which are competitive with those of the Company. For
purposes of this Section, the Territory shall mean the United
States of America.
-4-
<PAGE>
3.04 Commencement of Benefit Following Disability.
---------------------------------------------
(a) In General. If a Participant becomes Disabled (which shall mean that
-----------
the Participant becomes disabled under the terms of the Company's
group long-term disability plan which covers the Participant), then,
notwithstanding anything to the contrary in Article Three, the
Participant's Supplemental Income shall be determined solely under
this Section 3.04.
(b) Benefit until Age 60. If the Participant becomes Disabled, then his
---------------------
Supplemental Income as determined under this Section 3.04 shall
commence as soon as practicable after it is determined that the
Participant has become Disabled. Until the Participant attains age
60, the Supplemental Income under this Section 3.04 shall be an annual
income equal to (i) sixty percent (60%) of the Participant's base pay
over the thirty-six consecutive calendar months preceding his
Disability, plus (ii) sixty percent (60%) of the average of the three
annual bonuses (and no other bonuses shall be included, whether earned
over a period of less than a year or over a period of more than a
year) received by the Participant prior to his Disability; minus (iii)
the annual benefit payable to the Participant from the Company's group
long-term disability plan that covers the Participant (but without
offsetting such benefit under the group long-term disability plan by
any disability benefit payable by Social Security).
(c) Benefit after Age 60. Once the Participant attains age 60, the
---------------------
Supplemental Income under Section 3.04(b) above shall cease, and the
sole benefit shall be determined under this Plan (other than Section
3.04(b)), but (i) determined as though the Participant continued to be
actively employed by the Company from the date of his Disability to
age 60 (using his Final Average Compensation determined as of his date
of Disability); and (ii) also reducing his Supplemental Income by the
annual benefit payable to the Participant from the Company's group
long-term disability plan that covers the Participant (but without
offsetting such benefit under the group long-term disability plan by
any disability benefit payable by Social Security).
(d) Benefit if Payments under LTD Plan Cease. If (i) the Participant
-----------------------------------------
becomes Disabled and entitled to a Supplemental Income under this
Section 3.04, and (ii) the Participant ceases to receive benefits
payments under the group long-term disability plan maintained by or
contributed to by the Company solely because (as determined by the
Committee in its sole discretion) the condition for required payments
under such LTD plan changes from an "own occupation" standard to an
"any occupation" standard, then the Supplemental Income under this
Section 3.04 shall continue, but shall not be offset by any
hypothetical LTD payment under clause (iii) of Section 3.04(c)
immediately preceding.
-5-
<PAGE>
ARTICLE FOUR - DEATH BENEFIT
----------------------------
4.01 Death of Participant Before Supplemental Income Payments Commence.
------------------------------------------------------------------
If a Participant (i) is married at the time of his death; and (ii)
dies before Supplemental Income commences hereunder, then the Participant's
Spouse shall be entitled to receive a survivor benefit which is equal to the
amount his Spouse would have received if (a) the Participant terminated
employment with the Company on the date of his death, (b) survived to age fifty-
five (55), (c) at that time elected to receive his Supplemental Income in the
form of a joint and 50% survivor annuity with his Spouse as the contingent
annuitant; and (d) died immediately thereafter; provided, however, that for this
purpose, the Participant shall be deemed to have three (3) additional years of
Accrual Service, but his actual and deemed Accrual Service shall not exceed
thirty-five (35) years. Such Supplemental Income payable to the Spouse shall
commence on the later of the date of the Participant's death or the date the
Participant would have attained age fifty-five (55). For purposes of the death
benefit under this Article Four, the five year and ten year requirements under
Section 3.02 shall not apply.
If the Participant is not married at death, and he dies before
Supplemental Income commences hereunder, then no death benefit shall be payable
under this Plan.
4.02 Death of Participant After Supplemental Income Payments Have Commenced.
-----------------------------------------------------------------------
If a Participant dies after Supplemental Income payments have begun
hereunder, then the Participant's Beneficiary shall be entitled to only that
death benefit, if any, which is payable under the form of benefit payment which
is in effect under this Plan at the time of the Participant's death.
ARTICLE FIVE - DEFAULT FORM OF PAYMENT AND OPTIONS
--------------------------------------------------
5.01 Default Form of Payment.
------------------------
The default form of payment under this Plan for both married and unmarried
Participants shall a monthly annuity for the life of the Participant.
5.02 Optional Forms of Supplemental Income.
--------------------------------------
A Participant may elect to have his Supplemental Income paid in a
monthly optional benefit form. In each case the optional form of benefit shall
be the Actuarial Equivalent of a single life annuity for the life of the
Participant. The Participant's election must be made at least six (6) months
prior to his Termination Date. The optional forms of Supplemental Income are as
follows:
-6-
<PAGE>
(a) Single Life Annuity providing for monthly payments for the life of the
Participant;
(b) Ten Year Certain and Continuous Annuity providing monthly payments for
the life of the Participant, with 120 payments guaranteed;
(c) Joint and Survivor Annuity providing for monthly payments for the life
of the Participant, with a survivor annuity payable to the
Participant's Beneficiary for the Beneficiary's life in a monthly
amount equal to either 50% or 100% of the monthly amount which was
payable to the Participant
Notwithstanding the foregoing, if a Participant's marital status
changes less than six (6) months prior to the time Supplemental Income
commences, the Participant may change his form of payment, provided that such
election is made at least thirty (30) days prior to the time Supplemental Income
commences.
ARTICLE SIX - FUNDING POLICY
----------------------------
6.01 Funding Policy.
---------------
Neither the Company nor any of its subsidiaries shall be obligated to fund
the payment of benefits hereunder. The funds necessary to pay benefits accrued
under this Plan shall be paid from the general assets of the Company and/or a
"rabbi trust" created in conjunction with this Plan. To the extent that any
Participant, Spouse or Beneficiary acquires the right to receive payments under
this Plan, such right shall be no greater than that of an unsecured general
creditor of the Company.
ARTICLE SEVEN - ADMINISTRATION OF THE PLAN
------------------------------------------
7.01 Plan Committee.
---------------
(a) The Board of Directors of the Company or the designee of the Board
shall appoint a Supplemental Executive Retirement Plan Committee (the
"Committee"), the members of which shall serve at the pleasure of the
Board or its designee and, except as otherwise provided in this Plan,
shall have complete control of the administration of the Plan with all
powers necessary to enable it to carry out properly the provisions of
the Plan. The Chief Executive Officer of the Company shall be the
Chairman of the Committee.
(b) In addition to all implied powers and responsibilities necessary to
carry out the objectives of the Plan, the Committee shall have the
power to construe the Plan and to determine all questions arising in
the administration,
-7-
<PAGE>
interpretation and operation of the Plan and to adopt such rules and
by-laws as it may find necessary for the proper administration,
interpretation and operation of the Plan provided that all
interpretations, determinations and decisions of the Committee in
respect of any matter hereunder shall be final, conclusive and binding
upon the Company, Participants, and all other persons claiming any
interest under the Plan, subject only to (i) the provisions of this
Section regarding review by the Board, and (ii) the claims procedure
described in Section 7.02.
(c) If a member of the Committee is also a Participant in this Plan, and
if an issue or action with respect to this Plan relates specifically
and uniquely to such Participant, then such Participant shall take no
part in the deliberations or decision concerning such issue or action.
(d) Each material decision or action by the Committee shall be subject to
review by the Board. Any decision or action by the Committee that
relates specifically and uniquely to the Chief Executive Officer of
the Company shall be deemed to be a material decision or action.
(e) Wherever this Plan provides that a decision or action of the Committee
(material or otherwise) shall be subject to the review of the Board,
then such decision or action shall be reported to the Board at the
Board's next regular meeting, and such decision or action may be
confirmed, overruled or modified by the Board. If the Board takes no
action with respect to any such decision or action, the decision or
action shall be deemed to be approved. Until a decision or action
subject to this paragraph has been reviewed by the Board, such
decision or action shall have no legal effect.
7.02 Claims Procedure.
-----------------
Any Participant, Spouse, Beneficiary or authorized representative
hereof, may file a claim for benefits under the Plan by submitting to the
Committee a written statement describing the nature of the claim and requesting
a determination of its validity under the terms of the Plan. Within 30 days
after the date such claim is received by the Committee, it shall issue a ruling
with respect to the claim. If the claim is wholly or partially denied, written
notice shall be furnished to the claimant, which notice shall set forth in a
manner calculated to be understood by the claimant:
(1) the specific reason or reasons for denial;
(2) specific reference to pertinent Plan provisions on which the
denial is based;
(3) a description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
-8-
<PAGE>
(4) an explanation of the claims review procedures.
Any Participant, Spouse or Beneficiary (or his authorized
representative) whose claim for benefits has been denied, may appeal such denial
by resubmitting to the Committee a written statement requesting a further review
of the decision within 60 days of the date the claimant receives notice of such
denial. Such statement shall set forth the reasons supporting the claim, the
reasons such claim should not have been denied, and any other issues or comments
which the claimant deems appropriate with respect to the claim.
If the claimant shall request in writing, the Committee shall make
copies of the Plan documents pertinent to his claim available for examination of
the claimant.
Within 60 days after the request for further review is received, the
Committee shall review its determination of benefits and the reasons therefor
and notify the claimant in writing of its final decision. Such written notice
shall include specific reasons for the decision, written in a manner calculated
to be understood by the claimant, with specific references to the pertinent Plan
provisions on which the decision is based. The Committee's decision of the
appeal may be reviewed by the Board, which shall have the right to overrule the
Committee.
ARTICLE EIGHT - MISCELLANEOUS
-----------------------------
8.01 Right to Amend and Terminate.
-----------------------------
The Board reserves the right to modify, alter, amend, or terminate the
Plan, at any time and from time to time, without notice, to any extent deemed
advisable; provided, however, that no such amendment or termination shall
(without the written consent of the Participant, if living, and if not, of any
person who is entitled to receive death benefits hereunder with respect to the
Participant's interest herein) adversely affect any retirement benefit,
disability benefit, or survivor benefit under the Plan which has accrued with
respect to the Participant or his Spouse or Beneficiary as of the date of such
amendment or termination (regardless of whether or not such benefit is vested
under Section 3.03 and regardless of whether or not such benefit is in pay
status).
8.02 Nonassignment of Benefits.
--------------------------
No Supplemental Income payable under the Plan shall be subject in any
manner to anticipation, assignment, garnishment or pledge and any attempt to
anticipate, assign, garnish or pledge the same shall be void and no such
benefits shall be in any manner liable for or subject to the debts, liabilities,
engagements or torts of any Participant, Spouse or Beneficiary.
-9-
<PAGE>
8.03 Merger Of Employer.
-------------------
If the Company and substantially all of its subsidiaries are acquired
by, merged into, or sell substantially all of their assets to any other
organization, the Plan shall not be automatically terminated, but instead shall
be continued thereafter by such successor organization. All rights to amend,
modify, suspend or terminate the Plan shall be transferred to the successor
organization, effective as of the date of combination or sale.
8.04 Release for Payment.
--------------------
Any payment to a Participant, Spouse or Beneficiary or to their legal
representatives, in accordance with the provisions of this Plan, may be delayed
by the Committee until such Participant, Spouse or Beneficiary or legal
representative executes a receipt and release therefore in such form as shall be
determined by the Committee. However, any payment which is due to a
Participant, Spouse, Beneficiary or legal representative shall be deemed
received by such person for state and federal income tax purposes when due
regardless of whether such person executes such receipt and release.
8.05 No Right to Continued Employment
--------------------------------
Nothing in this Plan shall be deemed to give any Participant the right
to be retained in the service of the Company or to deny the Company any right it
may have to discharge him at any time.
8.06 Construction
------------
To the extent not preempted by federal law, the Plan shall be governed
by and construed in accordance with the laws of the State of Georgia.
8.07 Severability.
-------------
The invalidity and unenforceability of any particular provision of
this Plan shall not affect any other provision hereof, and the Plan shall be
construed in all respects as if such invalid or unenforceable provision were
omitted or modified so as to cure such defect.
ARTICLE NINE - CHANGE IN CONTROL
--------------------------------
9.01 Definition of a Change in Control.
----------------------------------
A "Change in Control" of the Company shall be defined as a change in
control of a nature that would be required to be reported in response to current
Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended and in effect on the Effective Date of this
Plan (the "1934 Act"); provided that,
-10-
<PAGE>
without limitation, such a change in control shall be deemed to have occurred
if: (i) a third person, including a "group" as defined in Section 13(d) (3) of
the 1934 Act, becomes the beneficial owner, as defined by Rule 13d-3 under the
1934 Act as in effect on the Effective Date of this Plan, of securities of any
class or classes of the Company representing 30% or more of the voting power of
the Company's then outstanding securities; or (ii) the Company is a party to a
merger or other business combination pursuant to which the Company does not
survive or survives only as a subsidiary of another corporation; or (iii) all or
substantially all of the assets of the Company are sold or otherwise disposed
of; or (iv) at any time less than a majority of the members of the Board shall
be persons who were either nominated for election by the Board or were elected
by the Board; or (v) any combination of the foregoing occurs.
9.02 Certain Changes to Plan Upon a Change in Control.
-------------------------------------------------
If there is a Change in Control with respect to the Company (as
defined in Section 9.01), then:
(a) the Participant shall become 100% vested immediately in his
Supplemental Income, regardless of his years of Vesting Service;
(b) the Participant shall be credited immediately with three (3)
additional years of Accrual Service, provided that his maximum actual
and deemed Accrual Service shall not exceed thirty-five (35) years;
and
(c) in the sole discretion of the Compensation Committee of the Board, the
Participant's Supplemental Income may be paid to the Participant
immediately in a single lump sum, regardless of the default form of
the Participant's Supplemental Income hereunder, and regardless of any
election of optional form of benefits hereunder; and in such event
there shall be waived (i) the requirements of attaining age fifty-five
(55) and the five and ten year requirements under Section 3.02. In
such event, payment of such lump sum shall be made when determined by
the Compensation Committee. The Compensation Committee may also
provide that its determination under this Section 9.02(c) is
irrevocable and cannot be changed by the Compensation Committee,
Board, or Company thereafter.
ARTICLE TEN - DEFINITIONS
-------------------------
Annual Earnings shall mean a Participant's Annual Earnings using the
---------------
same rules and methodology for determining Annual Earnings under the National
Data Corporation Employees' Retirement Plan, as amended from time to time, but
(i) including for this purpose any deferred compensation in the year of receipt
rather than the year of deferral; and (ii) disregarding the limitations on
compensation set forth in Code Section 401(a)(17).
-11-
<PAGE>
Beneficiary shall mean any person who is entitled to receive benefits
-----------
from this Plan upon the death of a Participant as designated by the Participant
in a manner that is satisfactory to the Committee. If a Participant fails to
name a Beneficiary, or if all of the primary and alternate Beneficiaries named
by the Participant predecease the Participant, then the Beneficiary shall be the
Participant's Spouse, and if the Participant does not have a Spouse, then the
Beneficiary shall be the Participant's estate.
Benefit Service shall be determined using the same rules and
---------------
methodology for determining Benefit Service under the National Data Corporation
Employees' Retirement Plan, as amended from time to time, provided, however,
that the Board in its sole discretion may credit a Participant with additional,
deemed Benefit Service.
Actuarial Equivalent shall have the meaning assigned to the term
--------------------
"Actuarial Equivalent" in the National Data Corporation Employees' Retirement
Plan, as amended from time to time.
Code shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
Committee shall mean the National Data Corporation Supplemental
---------
Executive Retirement Plan Committee as it may be constituted from time to time.
Disabled or Disability shall mean the Participant has qualified to
----------------------
receive benefits under the Company's group long-term disability plan which
covers the Participant.
Effective Date shall mean June 1, 1997.
--------------
Company shall mean National Data Corporation or any subsidiary of NDC
-------
which employs any Participant in this Plan.
Final Average Earnings shall mean the average of the three (3)
----------------------
consecutive calendar years (or the Participant's period of employment with the
Company and its affiliates, if shorter) in which the Participant had his highest
Annual Earnings during the ten (10) calendar years immediately preceding the
Participant's Termination Date. A calendar year may be taken into account under
this Section even though the Participant was not employed for the entire
calendar year.
NDC shall mean National Data Corporation, and its corporate
---
successors.
National Data Corporation Employees' Retirement Plan shall mean the
----------------------------------------------------
National Data Corporation Employees' Retirement Plan, a tax-qualified defined
benefit pension plan, as it may be amended from time to time.
-12-
<PAGE>
Participant shall mean any employee of National Data Corporation or
-----------
any of its subsidiaries, including any limited liability company, who is
designated as a Participant under Article Two.
Plan shall mean the National Data Corporation Supplemental Executive
----
Retirement Plan as set forth in its entirety in this document.
Plan Year shall mean the calendar year.
---------
Social Security Benefit shall mean the annual primary insurance amount
-----------------------
which will become payable to the Participant at (i) the earliest date the
Participant could begin to receive old age benefits (whether or not reduced)
under the Social Security Act, if the Participant commences receipt of benefits
under this Plan prior to such date, assuming no future adjustments in benefits
or the contribution and benefit base and further assuming that the Participant's
compensation at the date of determination remains in effect thereafter; or (ii)
the date the Participant actually commences receipt of benefits under this Plan,
if the Participant commences receipt of benefits under this Plan after the
earliest date he could begin to receive Social Security old age benefits
(whether or not reduced), based on the Social Security Act in effect at the time
of determination.
Spouse shall mean the person who was married to the Participant (in a
------
civil or religious ceremony recognized under the laws of the state where the
marriage was contracted) on the date of the Participant's death.
Supplemental Income shall mean any amount payable to or on behalf of a
-------------------
Participant or his Spouse or Beneficiary under this Plan.
Termination Date shall mean the date on which the Participant
----------------
terminates active employment with the Company and all of its subsidiaries by
reason of retirement, Disability, death, or other voluntary or involuntary
termination.
Vesting Service shall have determined using the same rules and
---------------
methodology for determining Vesting Service under the National Data Corporation
Employees' Retirement Plan, as amended from time to time, provided, however,
that the Board in its sole discretion may credit a Participant with additional,
deemed Vesting Service.
Defined terms in general. A defined term, such as "Disability", will
-------------------------
normally govern the definitions of derivatives therefrom, such as "Disabled,"
even though such derivatives are not specifically defined and even if they are
or are not initially capitalized. The masculine gender, where appearing in the
Plan, shall be deemed to include the feminine gender, unless the context clearly
indicates to the contrary. Singular and plural nouns and pronouns shall be
interchangeable as the factual context may allow or require. The words
"hereof," "herein," "hereunder" and other similar compounds of the word "here"
shall mean and refer to the entire Plan and not to any particular provisions or
Section. References to "Participants," "former Participants," "Beneficiaries"
and
-13-
<PAGE>
"Spouses" shall include also those who may make claims through or on behalf
of such persons.
IN WITNESS WHEREOF, the Company has caused this Plan to be signed by its
duly authorized officers on the date shown below, but effective as of June 1,
1997.
NATIONAL DATA CORPORATION
By:
-------------------------------------
Title:
----------------------------------
Date:
-----------------------------------
Attest:
- -----------------------------------
Title:
-----------------------------
Date:
------------------------------
-14-
<PAGE>
EXHIBIT 10(xxi)
AMENDMENT TO
NATIONAL DATA CORPORATION
1987 STOCK OPTION PLAN
The Company's 1987 Stock Option Plan is amended by deleting the second
sentence of the third subparagraph of paragraph 2 of the Plan and substituting
in lieu thereof the following:
"Where applicable, unless otherwise defined, the term "subsidiary" shall be
interpreted by the Committee as including any wholly or majority owned
corporation, partnership, limited liability company or other similar legal
entity owned in whole or in majority part by the Company. All other terms
used herein shall have and shall be interpreted by the Committee as having
the meanings set forth in the applicable provisions of the Code."
<PAGE>
EXHIBIT 10(xxii)
AMENDMENT TO
NATIONAL DATA CORPORATION
1983 RESTRICTED STOCK PLAN
Effective as of December 17, 1996, the Company's 1983 restricted Stock Plan
is amended by deleting subparagraph (k) of paragraph 2 of the Plan and
substituting in lieu thereof the following:
(k) Subsidiary shall be interpreted by the Committee as including any wholly or
----------
majority owned corporation, partnership, limited liability company or other
similar legal entity owned in whole or in majority part by the Company.
<PAGE>
EXHIBIT 10(xxiii)
GLOBAL PAYMENT SYSTEMS
----------------------
1996 OPTION PLAN
----------------
1. PURPOSE. The purpose of the Global Payment Systems 1996 Option Plan (the
-------
"Plan") is to advance the interests of Global Payment Systems LLC (the
"Company") and to create value for its members by encouraging and enabling key
employees of the Company and other eligible persons to acquire a financial
interest in the Company through options to acquire membership interests in the
Company granted under the Plan. The Company also believes that the Plan will
aid in attracting and retaining outstanding key employees and in stimulating the
efforts of such employees to work for the success of the Company.
2. ADMINISTRATION.
--------------
(a) Committee. The Plan shall be administered, construed and interpreted by a
---------
compensation committee (the "Committee") consisting of members of the Board
of Directors of the Company appointed by the Board of Directors. The Board
of Directors may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may
fill vacancies, however caused, in the Committee. Business shall be
transacted by a majority vote of the members of the Committee, and any
decision or determination reduced to writing and signed by a majority of
the members of the Committee shall be as fully effective as if it had been
made by a majority vote at a meeting duly called and held.
(b) Awards. The Committee shall from time to time select the persons who shall
------
participate in the Plan and determine the extent of their participation.
The Committee also shall determine the price to be paid for Units upon the
exercise of options granted under the Plan, the period within which each
option may be exercised, and the terms and conditions of each individual
Option Agreement by and between the Company and the holder of the option.
The terms and conditions of each individual Option Agreement shall be
consistent with the provisions of the Plan, but the Committee may provide
for such additional terms and conditions, not in conflict with the
provisions of the Plan, as it deems advisable. The interpretation and
construction by the Committee of any provision of or term used in the Plan
or any option granted under the Plan and any determination by the Committee
pursuant to any provision of the Plan or any such option shall be final and
conclusive.
(c) Liability. No member of the Committee shall be liable for any action or
---------
determination made in good faith, and members of the Committee shall be
entitled to indemnification and reimbursement from time to time for
expenses incurred in defense of such good faith action or determination.
<PAGE>
3. ELIGIBILITY. Options under the Plan may be granted from time to time to key
-----------
employees of, and to independent contractors who perform services for, the
Company who, in the opinion of the Committee, are contributing significantly to
the effective management and supervision of the business of the Company. For
purposes of the Plan, a person to whom an option is granted under the Plan shall
be referred to as a "Grantee." The fact that a Grantee is a member of the Board
of Directors of the Company shall not make him ineligible for an option grant
unless he is also a member of the Committee in which event he shall not be
eligible for an option grant.
4. UNITS SUBJECT TO THE PLAN. Subject to adjustment in accordance with the
-------------------------
provisions of paragraphs 6 and 7 of the Plan, a total of 1,000,00 units of
membership interest in the Company ("Units") shall be subject to the Plan.
These Units shall be unissued Units reserve exclusively for awards under the
Plan. The adoption of the Plan by the Board of Directors and Members of the
Company shall constitute a reservation of 1,000,000 Units for issuance only upon
the exercise of options granted under the Plan. In the event that any
outstanding option granted under the Plan for any reason expires or is
terminated prior to the end of the period during which options may be granted
under the Plan, the Units allocable to the unexercised portion of such option
may again be subject in whole or in part to subsequent options granted under the
Plan.
5. TERMS AND CONDITIONS OF OPTIONS. Options granted pursuant to the Plan shall
-------------------------------
be evidenced by Option Agreements in such form as the Committee shall approve
from time to time. Such Option Agreements and the options evidenced thereby
shall comply with and be subject to the following terms and conditions:
(a) Number of Units. Each Option Agreement shall state the total number of
---------------
Units to which it pertains.
(b) Option Price. The option price for each option granted under the Plan
------------
shall be the amount determined by the Committee and set forth in the Option
Agreement. The option price may be less or more than the fair market value
(determined as provided in paragraph 5(c) of the Plan) of the Units subject
to the option as of the date of grant. The date on which the Committee
approves the granting of an option shall be considered the date on which
such option is granted.
(c) Medium and Time of Payment. The option price shall be payable upon the
--------------------------
exercise of an option in cash or by check or, if provided in the Option
Agreement, in Units already owned by the Grantee. In the event that all or
part of the option price is paid in Units, the value of the Units shall be
equal to the fair market value of such Units on the date of the exercise of
the option (determined as provided below). The Grantee shall deliver to
the Company a certificate or certificates representing such Units duly
endorsed to the Company or accompanied by a duly-executed separate
instrument of transfer satisfactory to the Committee; provided, however,
that the Committee, in its discretion, may allow the Grantee to present
satisfactory proof of ownership of such Units without delivering the
endorsed certificate(s) therefor and in such event shall cause the Company
-2-
<PAGE>
to issue to the Grantee the number of Units equal to (i) the number of
Units as to which the Grantee is exercising the option less (ii) the number
of Units used by the Grantee in payment of the option price upon the
exercise of such option. For purposes of the Plan, the "fair market value"
of a Unit of the Company shall be determined by the Committee, taking into
account those factors affecting or reflecting value as it deems
appropriate, and any such determination shall be final.
(d) Term and Exercise. Each option granted under the Plan shall be exercisable
-----------------
by the Grantee only during a term and subject to such conditions fixed by
the Committee and set forth in the Option Agreement. The Committee shall
determine whether the option shall be exercisable in full at any time
during the term or in cumulative or non-cumulative installments during the
term.
(e) Method of Exercise. All options granted under the Plan shall be exercised
------------------
by written notice directed to the officer of the Company indicated in the
Option Agreement at the Company's principal place of business. Such
written notice shall specify the form of payment as provided by paragraph
5(c) of the Plan and, except as provided in such paragraph, shall be
accompanied by payment in full of the option price for the Units for which
such option is being exercised. The Company shall make delivery of
certificates representing the Units for which an option has been exercised
within a reasonable period of time; provided, however, that if any law,
regulation or agreement requires the Company to take any action with
respect to the Units for which an option has been exercised before the
issuance thereof, then the date of delivery of such Units shall be extended
for the period necessary to take such action.
(f) Effect of Certain Events. Except as otherwise provided in this paragraph
------------------------
(f), upon the death, permanent disability, attainment of normal retirement
age, early retirement, voluntary resignation or termination of employment
of any Grantee, all options held by the Grantee under the Plan shall
immediately terminate. Subject to the limitations below, the Committee
shall provide in each Option Agreement that the Grantee (or, as applicable
and upon proof satisfactory to the Company, the Grantee's Successor as
defined below) may exercise an option during a period specified by the
Committee after the Grantee's death, permanent disability, termination
without cause, or such other event determined by the Committee and set
forth in the applicable Option Agreement ("Event"). In no event shall the
option be exercisable after the expiration of the term of the option. In
addition, exercise of the option following an Event shall be subject to the
following terms and conditions: (1) with respect to any installment of the
option that had not become exercisable at the time of such Event, the
period of extension shall not, unless otherwise approved by the Committee,
operate to permit such installment to become exercisable within such
period; (2) with respect to any installment of the option that had become
exercisable at the time of such Event, the period of extension shall not
operate to permit the exercise of such installment after the expiration of
the period within which such installment may be exercised; and (3) the
period of extension shall not operate to permit the exercise of an option
if the Event occurs prior to the term during which the option would
otherwise have been exercisable unless otherwise approved by the Committee.
-3-
<PAGE>
In addition, the Committee shall provide in each Option Agreement that upon
termination of employment following attainment of normal retirement age or
following such time as the Grantee shall have reached age 55 and have
fifteen years of service with the Company that all options shall continue
to vest in accordance with the schedule provided in said Option Agreement
and shall continue to be exercisable until the end of the term of and in
accordance with the terms of the Option Agreement.
(g) Definitions. For purposes of the Plan, (i) "normal retirement age" shall
-----------
be 65, (ii) "permanent disability" shall mean a permanent disability as
defined in Section 22(e)(3) (substituting the "Committee" for the
"Secretary" as provided therein) of the Internal Revenue Code of 1986, as
amended ("Code"), (iii) termination shall be considered "for cause" if it
occurs in conjunction with a determination by the Company that Grantee has
committed any act constituting (1) fraud, dishonesty, felony or gross
malfeasance of duty or (2) conduct with respect to Grantee's office that is
grossly inappropriate and demonstrably likely to lead to material injury to
the Company, as determined by the Committee acting reasonably and in good
faith; provided, however, that in the case of (2) a termination shall not
be "for cause" unless prior to the termination the Committee delivers to
the Grantee notice setting forth with specificity (A) the conduct involved,
(B) reasonable action that would remedy such objection, and (C) a
reasonable time (not less than thirty (30) days) within which the Grantee
may take such remedial action, and the Grantee fails to take such action
within such time. Whether military, government or other service or other
leave of absence shall constitute a voluntary resignation or a termination
without cause shall be determined in each case by the Committee in its
discretion, and any determination by the Committee shall be final and
conclusive. The "Grantee's Successor" shall refer to the Grantee's
personal representatives, heirs or legatees.
(h) Nonassignability of Option. Except as expressly provided herein or in an
--------------------------
Option Agreement, no option shall be assignable or transferable by the
Grantee.
(i) Rights as Member. Neither the Grantee nor the Grantee's Successor shall
----------------
have rights as a member or owner of the Company with respect to Units
covered by the Grantee's option until the Grantee or the Grantee's
Successor becomes the owner of such Units.
(j) Miscellaneous Provisions. The Option Agreements authorized under this Plan
------------------------
may contain such other provisions, not inconsistent with the Plan, as the
Committee shall deem advisable.
6. ADJUSTMENTS.
-----------
(a) Recapitalizations, Reclassifications, Splits, Combinations, Etc. Except as
---------------------------------------------------------------
provided in Section 7, in the event that, after the effective date of the
Plan (i) prior to a Conversion, the number of outstanding Units of the
Company are increased, decreased, or changed without a corresponding change
in one or more of the members' respective percentage ownership interests in
the Company, or (ii) after a Conversion, the outstanding number of Units of
-4-
<PAGE>
the Company are increased or decreased or changed into or exchanged for a
different number or kind of Units of the Company by reason of a
recapitalization, reclassification, split, combination, stock dividend or
similar transaction, appropriate adjustments shall be made by the Committee
in the number and kind of Units for which options may be granted under the
Plan. In addition, the Committee upon the occurrence of such an event
shall make appropriate adjustments in the number and kind of Units as to
which outstanding options, or portions thereof then unexercised, shall be
exercisable, so that each Grantee's proportionate interest shall be
maintained as before the occurrence of such event. Such adjustments shall
be made without change in the total price applicable to the unexercised
portion of each option and with a corresponding adjustment in the option
price per Unit (or share). Any fractional Units resulting from any of the
foregoing adjustments under this subparagraph (a) shall be disregarded and
eliminated. All adjustments made by the Committee under this subparagraph
(a) shall be final and conclusive.
(b) Reorganizations; Business Combinations. If the Company is a party to a
--------------------------------------
Change in Control all options granted under the Plan that have not yet
become vested or exercisable shall become vested and exercisable
immediately notwithstanding the provisions of the Option Agreements.
Thereafter, the Committee may provide (A) that all options granted under
the Plan shall terminate upon the expiration of a period specified by the
Committee after the Committee gives written notice to all Grantees of their
immediate right to exercise all options then outstanding and of the
Committee's decision to terminate all options not exercised within such
period; provided, however, that such period may not begin earlier than
thirty (30) days after the Committee gives such written notice to all
Grantees; or (B) notify all Grantees that all options granted under the
Plan shall apply with appropriate adjustments as determined by the
Committee to the ownership interests of the resulting entity to which
holders of the number of Units subject to the options would have been
entitled; or (C) some combination of (A) and (B).
For purposes hereof, a Change in Control shall be a reorganization or
business combination (other than a transaction constituting a Conversion)
that is (i) a merger or consolidation involving the Company and in which it
is not the surviving entity, (ii) an acquisition of all or substantially
all of the assets of the Company, or (iii) an acquisition or change in
ownership during any twelve month period constituting fifty percent or more
of the ownership interests of the Company.
(c) Liquidation. The adoption of a plan of liquidation and dissolution by the
-----------
Board of Directors and the members of the Company (other than in connection
with a Conversion) shall cause every option outstanding under the Plan to
terminate to the extent not exercised prior to the adoption of the plan of
liquidation and dissolution by the members; provided, however, that the
Committee, in its discretion, may declare that all options granted under
the Plan shall become exercisable immediately notwithstanding the
provisions of the respective Option Agreements regarding exercisability;
provided further that in the event of the adoption of such a plan in
-5-
<PAGE>
connection with a reorganization or business combination as described in
subparagraph (b), outstanding options shall be governed by and be subject
to the provisions of such subparagraph.
(d) Rights. If any rights to subscribe for additional Units are given pro rata
------
to holders of outstanding Units, each Grantee under the Plan shall be
entitled to the same rights on the same basis as holders of the outstanding
Units with respect to such portion of the Grantee's option that may be
exercised on or prior to the date of the expiration of such rights.
(e) Acceleration Event. If in the opinion of the Board of Directors, based on
------------------
circumstances known to it, the Board of Directors believes an event is
likely to lead to a Change in Control (as defined in the Operating
Agreement), whether or not any such Change in Control actually occurs, the
Board of Directors may direct the Committee to declare that all options
granted under the Plan shall become exercisable immediately notwithstanding
the provisions of the respective Option Agreements regarding
exercisability.
7. CONVERSION. A "Conversion" is the change in the legal status of the Company
----------
from a limited liability company into a business corporation (the "Converted
Company"), in such form and manner (including, without limitation, by merger,
reorganization, liquidation, transfer of ownership interests or assets of the
Company, or by any other means permissible under applicable law) and pursuant to
such terms as provided in the Operating Agreement. At the time of a Conversion
and without any action on the part of the Grantee, the Company shall have the
option to (a) make appropriate provision for each option (or portion thereof
then unexercised) to be assumed by the Converted Company and converted
automatically into a nonqualified option to acquire an amount of stock of the
Converted Company representing an equal percentage of the outstanding equity of
the Converted Company as the percentage of the outstanding equity of the Company
represented by the Units subject to the option represented immediately prior to
the Conversion; or (b) terminate said options as of the effective date of the
Conversion so long as Grantees have been informed of their immediate right to
exercise all options, whether vested or nonvested, and whether or not otherwise
exercisable, then outstanding for a period of at least thirty (30) days. In the
event that alternative (a) is chosen, such assumption of the options shall be
made without a change in the total price applicable to the unexercised portion
of each option and with a corresponding adjustment in the option price per share
of the Converted Company stock. Any fractional shares resulting from the
Conversion shall be disregarded and eliminated. The remaining term of the
option (and the period during which the option is exercisable) shall remain
unaffected as a result of the Conversion.
8. EFFECTIVE DATE AND TERMINATION OF PLAN.
--------------------------------------
(a) Effective Date. The effective date of the Plan shall be the date of its
--------------
adoption by the Board of Directors of the Company.
-6-
<PAGE>
(b) Termination. The Plan shall terminate at such time as determined by the
-----------
Board of Directors. Termination of the Plan shall not alter or impair any
of the rights or obligations under any option already granted under the
Plan unless the Grantee shall so consent.
9. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of
--------------------
Units pursuant to options granted under the Plan will be used for general
corporate purposes.
10. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall impose
--------------------------------
no obligation upon the Grantee to exercise such option.
11. AMENDMENT. The Board of Directors of the Company may at any time and from
---------
time to time amend the Plan in such respects as it shall deem advisable;
provided, however, that without the written approval of a Grantee, no such
amendment adversely affecting the rights of the Grantee under the Option
Agreement or this Plan shall be effective with respect to such Grantee.
-7-
<PAGE>
EXHIBIT 10(xxiv)
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into effective
as of the 1st day of June, 1997, by and between ROBERT A. YELLOWLEES, an
individual resident of the State of Georgia (hereinafter referred to as
"Employee"), and NATIONAL DATA CORPORATION, a Delaware corporation (hereinafter
referred to as the "Company").
W I T N E S E T H:
------------------
WHEREAS, the Company desires to continue to employ Employee in an executive
capacity, and Employee desires to continue to be employed by the Company, on the
terms and conditions hereinafter set forth; and
WHEREAS, the Employee's First Renewal Employment Agreement ("Renewal Agreement")
provides for extension on or before May 17, 1997; and
WHEREAS, it is agreed that the Renewal Agreement is hereby terminated as of May
31, 1997, without affecting the stock options granted under such Renewal
Agreement or incentive compensation payable for the fiscal year ended May 31,
1997.
NOW, THEREFORE, in consideration of the premises and the mutual promises and
agreements contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
Section 1. Employment; Position as Director.
---------------------------------------------
1.1 Officer Positions. Subject to the terms and conditions hereof, the Company
------------------
hereby extends the employment of Employee and Employee hereby accepts such
extension of employment. Employee shall continue to serve as President, Chief
Executive Officer and Chief Operating Officer and Chairman of the Board of the
Company and shall perform such duties as are assigned to him from time to time
by the Board of Directors. The Board of Directors shall have the right
subsequently to elect as President of the Company an individual other than
Employee, but at all times during the term of this Agreement Employee shall
serve as Chief Executive Officer and at all times during the term of this
Agreement shall serve as Chairman of the Board. Employee shall devote his full
business time and best efforts to rendering services on behalf of the Company.
It is understood that the Employee will continue to serve as a member of the
boards of directors of certain outside companies.
1.2 Position as Director. During the term of this Agreement, the Company shall
---------------------
use its best efforts to cause Employee to continue to be nominated and elected
1
<PAGE>
as a member of the Board of Directors of the Company. Employee shall not be
entitled to additional compensation for his service as a Director.
Section 2. Term.
---------- -----
The employment of Employee hereunder shall continue pursuant to the term of this
Agreement effective as of June 1, 1997, and, unless sooner terminated pursuant
to Section 5 of this Agreement with the consequences of termination set forth in
such Section 5 and unless extended as provided below, shall continue through May
31, 2000. The employment of Employee hereunder may be further extended
thereafter upon the mutual agreement of Employee and the Company to so extend on
or before the date one year prior to the expiration of any such term.
Section 3. Compensation; Bonuses; Expenses.
---------- --------------------------------
3.1 Salary. Employee shall be paid a salary during the term of his
-------
employment hereunder at the initial rate of $540,000 per annum. Such salary
shall be subject to periodic review and possible increase by the Board of
Directors but shall not be decreased during the term of this Agreement.
3.2 Incentive Programs.
-------------------
Employee shall be eligible to participate in all incentive programs offered by
the Company. These include, but are not limited to, stock options, restricted
stock grants and bonus deferral plan.
3.3 Annual Bonuses. The Company, upon recommendation by the Compensation
---------------
Committee of the Board of Directors and approval by the Board of Directors,
shall establish additional bonus arrangements for Employee with respect to the
Company's fiscal years beginning on June 1, 1997 and thereafter during the term
of this Agreement. The target amount for each such bonus shall be equal to
Employee's base salary for the fiscal year for which the bonus is to be paid.
Such bonuses shall be based upon specific performance objectives agreed upon by
the Employee and the compensation committee of the Company's board of directors.
The bonuses under this Section 3.3 may range from none to 150% of the target
amounts established as provided above. The bonuses under this Section 3.3
shall, at Employee's request, be paid in whole or in part in shares of Common
Stock. The Company agrees that in the event all or any portion of any such
bonus shall be paid in shares of Common Stock, the Company shall take any
reasonable actions necessary to enable Employee to dispose of such shares
without limitation under the Securities Act of 1933, as amended. In the event
of (i) a Change in Control of the Company (as defined in Section 5.2 hereof),
2
<PAGE>
(ii) the death or physical or mental incapacity (as defined in Section 5.1
hereof) of Employee or (iii) the termination of employment of Employee to the
extent and as provided in Section 5 hereof, the Company shall immediately pay to
Employee or his successor in interest 75% of the target amount of the bonus
under this Section 3.3 for the fiscal year in which such event occurs.
3.4 Expenses. The Company shall reimburse Employee for all reasonable
---------
expenses incurred by Employee in connection with performance of Employee's
duties hereunder and vouched to the reasonable satisfaction of the Company
pursuant to its standard procedures.
Section 4. Additional Employment Benefits.
---------- -------------------------------
Employee shall have the right to participate in such medical, dental,
disability, hospitalization, life insurance and other benefit plans (such as
supplemental executive retirement, pension and profit sharing plans) and
perquisites as the Company shall maintain from time to time for the benefit of
executive employees of the Company, on the terms and subject to the conditions
set forth in such plans. In addition, the Company shall maintain on behalf of
Employee, or reimburse Employee for the premiums paid for, term and whole life
insurance policies in the face amount of $3.8 million, currently maintained as
term and whole life insurance by and on the life of Employee. Such policies
shall be payable to a beneficiary or beneficiaries designated by Employee, and
the cash values and other benefits associated with such policies shall be paid
to or otherwise enjoyed by such beneficiary or beneficiaries, or otherwise
Employee. The Company shall also pay for disability income insurance for
Employee currently paid by the Employee, in addition to the amounts paid
pursuant to the Company's existing disability insurance plan.
Section 5. Termination; Effect of Termination.
---------- -----------------------------------
5.1 Termination. Anything in this Agreement to the contrary notwithstanding,
------------
this Agreement and the employment of Employee pursuant hereto shall terminate
upon the first to occur of the following events:
(i) The death of Employee;
(ii) The lapse of thirty (30) days following the date on which the
Company shall give written notice to Employee of termination of his employment
hereunder by reason of his physical or mental incapacity. Employee shall be
deemed to be physically or mentally incapacitated for purposes of this Agreement
if by reason of any physical or mental
3
<PAGE>
incapacity he has been unable, or it is reasonably expected that he will be
unable, for a period of at least one hundred eighty (180) substantially
continuous days to perform his regular duties and responsibilities hereunder in
a reasonably satisfactory manner. In the event of any disagreement between
Employee and the Company as to whether Employee is physically or mentally
incapacitated such as to permit the Company to terminate his employment pursuant
to this paragraph (ii), the question of such incapacity shall be submitted to an
impartial and reputable physician for determination, selected by mutual
agreement of Employee and the Company or, failing such agreement, selected by
two physicians (one of which shall be selected by the Company and the other by
Employee), and such determination of the question of such incapacity by such
physician shall be final and binding on Employee and the Company. The Company
shall pay the reasonable fees and expenses of such physician; or
(iii) The lapse of fifteen (15) days following written notice by the
Company to Employee of termination for "cause," which notice shall reasonably
describe the cause for which Employee's employment is being terminated. For
purposes of this Agreement, "cause" shall mean:
(A) Continued neglect of duties for which Employee is employed after
receipt of initial notice thereof from the Board of Directors and failure
to remedy such neglect of duties after agreement by the Company and
Employee to a reasonable plan and schedule for remediation of such neglect
of duties;
(B) Misconduct involving moral turpitude in the performance of duties
for which Employee is employed, including, without limitation, the
commission of fraud, misappropriation or embezzlement by Employee; or
(C) Employee's conviction for, or plea of guilty in connection with,
the commission of any felony in the performance of Employee's duties.
5.2 Effect.
-------
(a) Upon termination of this Agreement and Employee's employment for any
reason, Employee shall be entitled to receive the compensation pursuant to
Section 3 hereof owed to Employee but unpaid for performance rendered under this
Agreement as of the date of termination ("Employee's Termination Date") and any
additional compensation he may be entitled to receive under the terms of any
employee benefit plan of the Company.
(b) In addition to the compensation under paragraph (a) above, upon
4
<PAGE>
termination of this Agreement and Employee's employment prior to the expiration
of the initial term of this Agreement as provided by Section 2 hereof, or prior
to the expiration of any renewal term as provided by such Section if this
Agreement is renewed, (i) upon the physical or mental incapacity of Employee,
(ii) by the Company other than pursuant to Section 5.1(iii)(B) or 5.1(iii)(C)
above or (iii) by Employee following an Employee Status Change (as defined
below) within three years after a Change in Control of the Company (as defined
below):
(A) The Company shall pay Employee the Severance Benefit (as defined
and in the manner described below);
(B) All Restricted Stock awarded to Employee at any time during his
employment with the Company shall be immediately and fully vested as of
Employee's Termination Date;
(C) All stock options awarded to Employee under any employee stock
option plan at any time during his employment with the Company shall be fully
vested as of Employee's Termination Date; and
(D) The Company shall pay Employee 75% of the target amount of the
bonus provided under Section 3.3 hereof for the fiscal year in which the
employment of Employee terminates.
Also upon termination of this Agreement (i) by the Company other than pursuant
to Section 5.1(iii)(B) or 5.1(iii)(C) above or (ii) by Employee following an
Employee Status Change within three years after a Change in Control of the
Company, the Company shall maintain in full force and effect, for Employee's
benefit until the earlier of (1) three years after Employee's Termination Date
or (2) commencement of Employee's full-time employment with a new employer, all
Benefit Plans (as defined below) in which Employee was entitled to participate
immediately prior to Employee's Termination Date, provided that Employee's
continued participation is possible under the general terms and provisions of
such Benefit Plans.
(c) In addition to the compensation under paragraph (a) above, upon
termination of this Agreement and the employment of Employee upon the death of
Employee:
(A) All Restricted Stock awarded to Employee at any time during his
employment with the Company shall be immediately and fully vested as of
Employee's Termination Date; and
(B) All stock options awarded to Employee under any employee stock
5
<PAGE>
option plan at any time during his employment with the Company shall be fully
vested as of Employee's Termination Date.
For purposes of this Agreement:
(x) A "Change in Control" of the Company shall mean a change in control of
a nature that would be required to be reported in response to current Item 5(f)
of Schedule 14A of Regulation 14A promulgated under the Securities Act of 1934,
as amended and as in effect on the date of this Agreement (the "1934 Act");
provided that, without limitation, such a change in control shall be deemed to
have occurred if: (i) a third person, including a "group" as defined in Section
13(d)(3) of the 1934 Act, becomes the beneficial owner, as defined by Rule
13(d)(3) under the 1934 Act as in effect on the date of this Agreement, of
securities of any class or classes of the Company representing 30% or more of
the voting power of the Company's then outstanding securities; or (ii) the
Company is a party to a merger or other business combination pursuant to which
the Company does not survive or survives only as a subsidiary of another
corporation or otherwise does not remain an independent corporation; or (iii)
all or substantially all of the assets of the Company are sold or otherwise
disposed of; or (iv) at any time less than a majority of the members of the
Board of Directors of the Company shall be persons who were either nominated for
election by the Board or were elected by the Board, or otherwise less than a
majority of the Board of Directors of the Company shall be persons who are
independent of any third person referred to in subparagraph (i) above of this
paragraph (x); or (v) any combination of the foregoing occurs.
(y) An "Employee Status Change" shall mean the happening of any one or more
of the following events after a Change in Control of the Company;
(i) Without the express written consent of Employee, the Company's
assignment of Employee to any duties inconsistent with his positions,
duties, responsibilities or status with the Company immediately prior to
the Change in Control or a substantial reduction of his duties or
responsibilities, in each case as reasonably determined by Employee; or
(ii) A reduction by the Company in Employee's salary or bonus
compensation provisions in effect immediately prior to the change in
Control; or
(iii) Any failure by the Company to continue in effect any benefit plan
or arrangement (including, without limitation, the Company's group life,
medical, accident and disability plans and perquisites afforded executive
6
<PAGE>
employees) in which Employee is participating at the time of a Change in
Control (or any other plans or arrangements provided Employee with
substantially similar benefits) (referred to in this Agreement as "Benefit
Plans"), or the taking of any action by the Company which would adversely
affect Employee's participation in or materially reduce his benefits under
any Benefit Plan or deprive him of any material fringe benefit enjoyed by
him at the time of a Change in Control; or
(iv) Any failure by the Company to continue in effect any plan or
arrangement to receive securities of the Company (including, without
limitation, the Company's Stock Option Plans, Employee Stock Purchase Plan
and Restricted Stock Plan, and any other plan or arrangement to receive and
exercise stock options, stock appreciation rights, restricted stock or
grants thereof) in which Employee is participating at the time of a Change
in Control (or any other plans or arrangements providing Employee with
substantially similar benefits) (referred to in this Agreement as
"Securities Plans") or the taking of any action by the Company which would
adversely affect Employee's participation in or materially reduce his
benefits under any such Securities Plan as his participation therein is in
effect at the time of a Change in Control; or
(v) Any failure by the Company's Board or stockholders, as the case may
be, to re-elect Employee to the corporate office or position held by him
immediately prior to the Change in Control or his removal from any such
office including any seat held at such time on the Company's Board of
Directors; or
(vi) Any breach by the Company of any of the provisions of this
Agreement or any failure by the Company to carry out any of its obligations
hereunder.
(z) The "Severance Benefit" shall mean an amount equal to three (3) times
the greater of (i) the average of Employee's average annual taxable
compensation, including bonuses, from the Company as reported on Internal
Revenue Service Form W-2 during the three-year period immediately preceding
Employee's Termination Date or (ii) Employee's current year compensation plus a
bonus amount assumed to equal 75% of such current year salary; provided,
however, that if such Severance Benefit, either alone or together with any other
payments or benefits which Employee has the right to receive from the Company,
would constitute a "parachute payment" (as defined in Section 280G of the Code),
such Severance Benefit shall be reduced to the largest amount as will result in
no portion of the Severance Benefit being subject to the excise tax imposed by
Section 4999 of the Code. The Severance Benefit shall be payable in thirty-six
7
<PAGE>
(36) equal monthly installments commencing on the first day of the month
following Employee's Termination Date.
Section 6. Confidentiality Agreement. Upon execution of this Agreement,
---------- --------------------------
Employee has entered into and agrees to abide by the terms of the agreement in
the form attached hereto as Exhibit A relating to confidentiality, non-
disclosure and related obligations of Employee to the Company.
Section 7. Additional Provisions Relating to Change in Control.
---------- ---------------------------------------------------
(a) In the event that a third person commences a tender or exchange offer or a
proxy solicitation to elect directors of the Company with a view to effecting a
Change in Control of the Company, Employee agrees that he shall not voluntarily
leave the employ of the Company, and shall render the services contemplated in
this Agreement, until the third person has abandoned or terminated such efforts
to effect a Change in Control of the Company or until after such a Change in
Control of the Company has been effected.
(b) In order to ensure the payment of the Severance Benefit provided for in
this Agreement, immediately following the commencement of any action by a third
party with the aim of effecting a Change in Control of the Company, or the
publicly-announced threat by a third party to commence any such action, the
Company shall establish an irrevocable standby Letter of Credit issued by a
national banking association in favor of Employee in the amount of the Severance
Benefit that would have been paid to Employee under this Agreement if Employee's
Termination Date had occurred on the date of commencement, or publicly-announced
threat of commencement, of such action by the third party. Such Letter of Credit
shall provide that the issuer thereof, subject only to Employee's written
certification to such issuer that Employee is entitled to payment of the
Severance Benefit pursuant to this Agreement and that the Company shall have
failed to commence payment of such benefit to Employee, shall have the
unconditional obligation to pay the amount of such Letter of Credit to Employee
in thirty-six (36) equal monthly installments commencing on the first day of the
month following Employee's Termination Date. In the event that subsequent to
commencement of such installment payments to Employee pursuant to such Letter of
Credit (i) the Company and Employee shall mutually agree that Employee shall not
have been entitled to payment of the Severance Benefit pursuant to this
Agreement or (ii) a court of competent jurisdiction shall finally adjudge
Employee not to have been entitled to payment of such Severance Benefit and such
judgment shall have been affirmed on appeal or shall not have been appealed
within any time period specified for the filing of an appeal, Employee shall
8
<PAGE>
promptly pay to the Company the total amount previously paid to Employee by the
issuer of such Letter of Credit and no further payment shall be made to Employee
pursuant to such Letter of Credit.
Section 8. Miscellaneous.
---------- --------------
8.1 Withholding. Notwithstanding any of the terms or provisions of this
------------
Agreement, all amounts payable by the Company to Employee hereunder shall be
subject to withholding of such sums related to taxes as the Company may be
required to withhold pursuant to applicable law or regulation.
8.2 No Obligation to Mitigate Damages; No Effect on Other Contractual Rights.
-------------------------------------------------------------------------
(a) Employee shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for under this Agreement
be reduced by any compensation earned by Employee as a result of employment by
another employer after Employee's Termination Date or otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish Employee's existing rights, or rights which would accrue solely as a
result of the passage of time, under any Benefit Plan, Securities Plan,
employment agreement or other contract, plan or arrangement.
8.3 Payment of Certain Costs of Employee. If a dispute arises regarding the
-------------------------------------
interpretation or enforcement of this Agreement, and if Employee shall prevail
in such dispute, all legal fees and expenses incurred by Employee in contesting
or disputing any such termination or seeking to obtain or enforce any right or
benefit provided for in this Agreement or in otherwise pursuing his claim shall
be paid by the Company. The Company further agrees to pay Employee pre-judgment
interest on any money judgment obtained by Employee in such a proceeding
calculated at the prime rate quoted by The Wall Street Journal as in effect from
-----------------------
time to time from the date that payment(s) to Employee should have been made
under this Agreement.
8.4 Binding Effect.
---------------
(a) This Agreement shall inure to the benefit of and shall be binding
upon Employee and his executor, administrator, heirs, personal representative
and assigns, and the Company and its successors and assigns; provided, however,
that Employee shall not be entitled to assign or delegate any of his rights or
obligations hereunder without the prior written consent of the Company.
9
<PAGE>
(b) The Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Employee to payment of the Severance Benefit from the Company hereunder in the
same amount and on the same terms as Employee would be entitled hereunder if he
were to terminate his employment pursuant to this Agreement, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed Employee's Termination Date. As used in this
Agreement, the "Company" shall mean the Company as defined in the recitals to
this Agreement and any successor to its business and/or assets as provided above
in this Section 8.4 which executes and delivers the agreement provided for in
this Section 8.4 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.
8.5 Governing Law. This Agreement shall be deemed to be made in, and in all
--------------
respects shall be interpreted, construed and governed by and in accordance with,
the laws of the State of Georgia.
8.6 Headings. The section and paragraph headings contained in this Agreement
---------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.7 Notices. Unless otherwise agreed to in writing by the parties hereto,
--------
all communications provided for hereunder shall be in writing and shall be
deemed to be given when delivered in person or when deposited in the United
States mail, registered or certified mail, postage prepaid, addressed as
follows:
(a) If to Employee:
Mr. Robert A. Yellowlees
2696 Habersham Road, N.W.
Atlanta, Georgia 30305
(b) If to the Company, addressed to:
National Data Corporation
National Data Plaza
Atlanta, Georgia 30329-2010
Attention: Office of Corporate Secretary
10
<PAGE>
or to such other person or address as shall be furnished in writing by either
party to the other prior to the giving of the applicable notice or
communication.
8.8 Arbitration. Any dispute or controversy arising under or in connection
------------
with this Agreement shall be settled exclusively by arbitration before a panel
of three arbitrators in Atlanta, Georgia in accordance with the rules of the
American Arbitration Association then in effect. In connection with any such
arbitration proceeding, the Company shall select one arbitrator, Employee shall
select one arbitrator and the two arbitrators so selected shall select the third
arbitrator, and the decision of any two arbitrators shall be binding upon the
parties. Upon default in the selection of the third arbitrator as provided
above, the American Arbitration Association shall designate such third
arbitrator upon application of either party. Judgment may be entered on the
award of the arbitrators in any court of competent jurisdiction.
8.9 Separability. The invalidity or unenforceability of any provision of
-------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
8.10 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
8.11 Entire Agreement. This Agreement (together with the agreements attached
-----------------
hereto and entered into concurrently herewith) is intended by the parties hereto
to be the final expression of their agreement with respect to the subject matter
hereof and is the complete and exclusive statement of the terms thereof,
notwithstanding any representations, statements or agreements to the contrary
heretofore made. This Agreement may be modified only by a written instrument
signed by each of the parties hereto.
[SIGNATURES CONTINUED ON NEXT PAGE]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement
as of the date first above written.
NATIONAL DATA CORPORATION
By: /s/ Don W. Sands
-----------------
Don W. Sands
Title: Chairman, Compensation Committee
Board of Directors of
National Data Corporation
EMPLOYEE
/s/ Robert A. Yellowlees
-------------------------
Robert A. Yellowlees
12
<PAGE>
Exhibit 21 Subsidiaries of the Registrant
The Registrant had the following subsidiaries at May 31, 1997, each of which
was wholly-owned by the Registrant, except as noted below:
Jurisdiction of
Name Incorporation
- --------------------------------------------------------------------------------
National Data Payment Systems, Inc. New York
Modular Data, Inc. Delaware
NDC Federal Systems, Inc. Delaware
NDC International, Ltd. Georgia
National Data Realty, Inc. Georgia
National Data Corporation of Canada, Ltd. Canada
NDC/Yes Check, Inc. (Note 1) Georgia
NDC Check Services, Inc. Illinois
Zadall Systems Group, Inc. Texas
NDPS Comerica Alliance, LLC (Note 2) Delaware
Global Payment Systems LLC (Note 3) Georgia
Global Payment Holding Company Delaware
GPS Holding Limited Partnership Georgia
Global Payment Systems of Canada, Ltd. Canada
C.I.S. Technologies, Inc. Delaware
C.I.S., Inc. Oklahoma
AMSC, Inc. Florida
AMSC Midwest, Inc. Florida
ClinLab, Inc. Florida
NDC Healthcare EDI Services, Inc. Georgia
Health Communication Services, Inc. Virginia
Health Communication Services International, Inc. Virginia
Computerized Medical Communications, Inc. Illinois
Health Communication Services (Bermuda) Ltd. Bermuda
Merchant Services U.S.A., Inc. North Carolina
Note 1. NDC/Yes Check, Inc. is 80% owned by the Registrant
Note 2. NDPS Comerica Alliance, LLC is 51% owned by the Registrant.
Note 3. Global Payment Systems LLC is 92.5% owned by the Registrant.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Registrant's previously filed
Registration Statements, File Numbers 2-81717, 2-86961, 2-92193, 33-25635, 33-
43005, 33-44858, 33-58622, 33-58624, 33-59717, 33-55057, 333-05449, 333-05451
and 333-05427.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 19,240
<SECURITIES> 0
<RECEIVABLES> 78,269
<ALLOWANCES> 2,868
<INVENTORY> 2,260
<CURRENT-ASSETS> 108,624
<PP&E> 119,989
<DEPRECIATION> 74,161
<TOTAL-ASSETS> 521,683
<CURRENT-LIABILITIES> 67,345
<BONDS> 143,750
0
0
<COMMON> 3,321
<OTHER-SE> 274,149
<TOTAL-LIABILITY-AND-EQUITY> 521,683
<SALES> 433,860
<TOTAL-REVENUES> 433,860
<CGS> 207,754
<TOTAL-COSTS> 367,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,814
<INCOME-PRETAX> 60,551
<INCOME-TAX> 21,798
<INCOME-CONTINUING> 38,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,753
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.38
</TABLE>
