-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wt/AYT8+eTCMaCQggeKuG2ugXT410pDZgHVVmSS35YTWwatYuDn3ihpmRiiiGufC K6EzXkravg/0OSmrgY7YXA== 0000931763-97-001475.txt : 19970912 0000931763-97-001475.hdr.sgml : 19970912 ACCESSION NUMBER: 0000931763-97-001475 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970829 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL DATA CORP CENTRAL INDEX KEY: 0000070033 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 580977458 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12392 FILM NUMBER: 97673219 BUSINESS ADDRESS: STREET 1: NATIONAL DATA COPRORATION STREET 2: NATIONAL DATA PLAZA CITY: ATLANTA STATE: GA ZIP: 30329 BUSINESS PHONE: 4047282000 MAIL ADDRESS: STREET 1: NATIONAL DATA PLZ CITY: ATLANTA STATE: GA ZIP: 30329-2010 10-K405 1 FORM 10-K ANNUAL REPORT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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) --------------- DELAWARE 58-0977458 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) NATIONAL DATA PLAZA ATLANTA, GEORGIA 30329-2010 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 728-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ 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.
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
DOCUMENT FORM 10-K -------- --------- 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
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NATIONAL DATA CORPORATION 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS -----------------
PART I. - ------- 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
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. 2 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 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 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 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 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 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. 8 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 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 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 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 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. 13 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. 14 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 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 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 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 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 (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 (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 (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 (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 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 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 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 Selected Consolidated Financial Data (In thousands, except per share data)
1997 1996 1995 1994 1993 ----------------------------------------------------------------- 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
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 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:
Dividend Per High Low Share - -------------------------------------------------------------------------- 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
The number of shareholders of record as of July 31, 1997 was 3,544. A-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For an understanding of the significant factors that influenced the Company's results during the past three years, the following discussion should be read in conjunction with the consolidated financial statements of the Company and related notes appearing elsewhere in this report. Results of Operations 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)
1996 ------------------------------------------------------ 1997 As Reported Restructuring CIS NDC Operations ---------- ------------- --------------- --------- -------------- 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
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 REVENUE (In millions)
1997 1996 Increase ---------------------- ----------------------- ------------ 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% ======================== ======================== ============
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 COSTS AND EXPENSES The following table represents the primary components of cost of service as a percentage of total revenue:
1996 1996 ---- ---- 1997 As Reported Excluding CIS ----------------- ------------------ ----------------- Cost of Service: Operations 37% 38% 39% Depreciation and Amortization 7% 8% 7% Hardware Sales 4% 4% 4% ------------------------------------------------------------ 48% 50% 50% ============================================================
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 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 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)
1996 ----------------------------------------------------------------- As Reported Restructuring CIS NDC Operations --------------- --------------- ---------- ------------------- 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
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 REVENUE (In millions)
1996 1995 Increase ------------------------ ------------------------ ------------ 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% ======================== ======================== ============
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 COSTS AND EXPENSES The following table represents the primary components of cost of service as a percentage of total revenue:
As Reported Excluding CIS ---------------------------------------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- 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% ==========================================================
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 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 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 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 CONSOLIDATED STATEMENTS OF INCOME (LOSS) NATIONAL DATA CORPORATION
(In thousands, except per share data) - -------------------------------------------------------------------------------- Year Ended May 31, 1997 1996 1995 ---- ---- ---- 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 ====================================
The accompanying notes are an integral part of these consolidated statements. A-13 CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL DATA CORPORATION (In thousands) - --------------------------------------------------------------------------------
Year Ended May 31, 1997 1996 1995 --------- ---------- --------- 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 ====================================
The accompanying notes are an integral part of these consolidated statements. A-14 CONSOLIDATED BALANCE SHEETS NATIONAL DATA CORPORATION
(In thousands, except share data) - -------------------------------------------------------------------------------- May 31, 1997 1996 ---- ---- 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 ======== ========
The accompanying notes are an integral part of these consolidated statements. A-15 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY NATIONAL DATA CORPORATION - -------------------------------------------------------------------------------- (In thousands, except per share data)
Common Stock -------------------- Capital in Cumulative Deferred Number Excess of Retained Translation Compen- of Shares Amount Par Value Earnings Adjustment sation ------------------------------------------------------------------------ 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) ======================================================================================================================
The accompanying notes are an integral part of these consolidated statements. A-16 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 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 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:
Year Ended May 31, ------------------ (In thousands) 1997 1996 1995 ---------- ---------- ---------- Primary 27,995 27,189 23,065 Fully Diluted 28,039 27,189 23,481
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 NOTE 2 - BUSINESS ACQUISITIONS During fiscal 1997, 1996 and 1995, the Company completed the following purchase acquisitions:
Date Ownership Business Acquired Percentage - --------------------------------------------------------------------------- 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%
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 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 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.
Fiscal Year Ended (In thousands, except per share data) May 31, 1997 May 31, 1996 - ---------------------------------------------------------------------- Revenue $465,754 $442,365 Net income $ 39,011 $ 24,402 Earnings per share, fully diluted $1.39 $.92
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 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 NOTE 4 - INCOME TAXES The provision for income taxes includes:
Fiscal Year Ended May 31, (In thousands) 1997 1996 1995 ---------- ---------- --------- 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 ======================================
The Company's effective tax rates differ from federal statutory rates as follows:
Fiscal Year Ended May 31, 1997 1996 1995 ---------- ---------- ---------- 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% =======================================
A-24 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:
(In thousands) 1997 1996 ------------- ------------ 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 ============================
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 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 Transactions under the Stock Option Plans are summarized as follows:
1987 Plan Non-Employee Directors Plan -------------------------------------------------------------------------- Weighted Average Weighted Average Shares Under Option Price Per Shares Under Option Price Per Option Share Option Share ---------------------------------------------------------------------------- Outstanding at May 31, 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 - ---------------------------------------------------------------------------------------------------------
The following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual lives by groups of similar price and grant dates:
1987 Plan Non-Employee Director Plan ------------------------------------------------------------------------------------------ Weighted Weighted Weighted Weighted Exercise Price Number of Average Average Number of Average Average Range Shares Price Contractual Life Shares Price Contractual Life - ----------------------------------------------------------------------------------------------------------- $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 - - -
A-27 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:
1997 1996 (In thousands, except per share data) As Reported Pro Forma As Reported Pro Forma ------------- ----------- ------------- ------------ 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)
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 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:
(In thousands) 1997 1996 ---------- ---------- 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) ==========================
Net pension expense included the following components for the fiscal years ending May 31:
(In thousands) 1997 1996 1995 ---------- ---------- -------- 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 ===================================
A-29 Significant assumptions used in determining net pension expense and related obligations were as follows:
May 31, 1997 1996 --------------------------- 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%
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 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:
(In thousands) 1997 1996 --------- --------- Equipment $11,723 $16,107 Less: accumulated amortization 7,644 8,421 -------------------------- $4,079 $7,686 ==========================
Future minimum lease payments for all noncancelable leases at May 31, 1997 were as follows:
Capital Operating (In thousands) Leases Leases ---------- ---------- 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 ===========
A-31 NOTE 8 - PROPERTY AND EQUIPMENT As of May 31, 1997 and 1996, property and equipment consisted of the following:
(In thousands) 1997 1996 - ---------------------------------------------------------------------------------- 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 =========================
NOTE 9 - INTANGIBLE ASSETS As of May 31, 1997 and 1996, intangible assets consisted of the following:
(In thousands) 1997 1996 - ----------------------------------------------------------------------------- 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 ============================
The increase in intangible assets during fiscal 1997 is primarily due to acquisitions (see Note 2). A-32 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:
(In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------- 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 =====================================
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 NOTE 11 LONG-TERM DEBT As of May 31, 1997 and 1996, long-term debt consisted of the following: (In thousands)
1997 1996 --------- --------- 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 ===========================
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 NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES As of May 31, 1997 and 1996, accounts payable and accrued liabilities consisted of the following:
(In thousands) 1997 1996 ----------- ---------- 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 ===========================
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 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:
(In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------- 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
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:
(In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------- 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
A-36 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:
Fiscal Year Ended May 31, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------- 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 -----------------------------------------
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 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)
(In thousands, except per share data) Quarter Ended Aug. 31 Nov. 30 Feb. 29 May 31 -------------- -------------- -------------- -------------- 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)
A-38 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 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 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 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 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 EX-10.(XX) 2 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 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. 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- 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- 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- 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- 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- (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- 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- (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- 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- 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- 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- 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- "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- EX-10.(XXI) 3 AMENDMENT TO 1987 STOCK OPTION PLAN 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." EX-10.(XXII) 4 AMENDMENT TO 1983 RESTRICTED STOCK PLAN 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. EX-10.(XXIII) 5 GLOBAL PAYMENT SYSTEMS 1996 OPTION PLAN 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. 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- 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- 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- 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- 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- (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- EX-10.(XXIV) 6 EMPLOYMENT AGREEMENT: ROBERT A. YELLOWLEES 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 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 (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 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 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 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 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 (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 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 (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 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 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 EX-21 7 SUBSIDIARIES OF REGISTRANT 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. EX-23 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Registrant's previously filed Registration Statements, File Numbers 2-81717, 2-86961, 2-92193, 33-25635, 33- 43005, 33-44858, 33-58622, 33-58624, 33-59717, 33-55057, 333-05449, 333-05451 and 333-05427. /s/ Arthur Andersen LLP Atlanta, Georgia August 29, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 YEAR MAY-31-1997 MAY-31-1997 19,240 0 78,269 2,868 2,260 108,624 119,989 74,161 521,683 67,345 143,750 0 0 3,321 274,149 521,683 433,860 433,860 207,754 367,204 0 0 6,814 60,551 21,798 38,753 0 0 0 38,753 1.38 1.38
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