<PAGE>
Pursuant to Rule
424(b)(1)
Registration Numbers
333-1788
333-03287
3,500,000 Shares
[LOGO OF NOVA CORPORATION APPEARS HERE]
Common Stock
-----------
Of the 3,500,000 shares of Common Stock being sold hereby, 3,268,415 shares
are being sold by NOVA Corporation ("NOVA" or the "Company") and 231,585
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for the factors considered in determining
the initial public offering price. Executive officers and directors of the
Company, together with their affiliates, will beneficially own approximately
86.3% of the Common Stock outstanding after this offering. In addition,
certain affiliates of the Company will receive immediate and substantial
financial benefits as a result of the offering. The Common Stock has been
approved for listing on the New York Stock Exchange under the symbol "NIS."
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $19.00 $1.33 $17.67 $17.67
- --------------------------------------------------------------------------------
Total(2).................... $66,500,000 $4,655,000 $57,752,893 $4,092,107
</TABLE>
================================================================================
(1) Before deducting expenses of the offering payable by the Company estimated
at $1,310,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $76,475,000,
$5,353,250 and $67,029,643, respectively. See "Underwriting."
---------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It
is expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
May 13, 1996.
Alex. Brown & Sons
INCORPORATED
Smith Barney Inc.
Montgomery Securities
The Robinson-Humphrey Company, Inc.
THE DATE OF THIS PROSPECTUS IS MAY 7, 1996
<PAGE>
[GRAPHIC OF COMPUTER SCREEN DISPLAYING ICONS OF THE
COMPANY'S AUTOMATED CUSTOMER SERVICE FUNCTIONS AND
REPORTS APPEARS HERE]
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and an opinion thereon expressed by
independent auditors and with quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
THE COMPANY
NOVA Corporation (the "Company" or "NOVA") is an integrated provider of
transaction processing services, related software application products and
value-added services primarily to small-to-medium sized merchants. The Company
believes that at December 31, 1995 it was the nation's eighth largest bankcard
processor. The Company provides transaction processing support for all major
credit and charge cards, including VISA, MasterCard, American Express,
Discover, Diner's Club and JCB, and also provides access to debit card
processing and check verification services. The Company provides merchants with
a broad range of transaction processing services, including authorizing card
transactions at the point-of-sale, capturing and transmitting transaction data,
effecting the settlement of payments and assisting merchants in resolving
billing disputes with their customers. In addition, the Company has developed
several value-added software applications that can be delivered to its
customers and updated via its proprietary telecommunications network (the "NOVA
Network"). The NOVA Network was developed in conjunction with WorldCom, Inc.
("WorldCom"), the nation's fourth-largest long-distance telecommunications
provider, and is the principal conduit through which the Company provides its
services. The capabilities of the NOVA Network result in rapid response time
and its substantial bandwidth facilitates the delivery of sophisticated value-
added services. The Company's ability to effectively employ technology,
together with the capabilities of the NOVA Network, enable the Company to
respond quickly and effectively to the changing and diverse needs of its
merchant customers.
The Company's objective is to maintain its leadership in the transaction
processing industry by delivering transaction processing services and related
software application products and services to its merchant customers on a cost-
effective basis and by increasing the size of its customer base through its
marketing and acquisition programs. The Company seeks to accomplish this
objective through the following strategies: (i) focusing on small-to-medium
sized merchants; (ii) leveraging available technologies to develop and deliver
software application products and value-added services; (iii) providing high-
quality, reliable service and support; (iv) utilizing multiple channels to
cost-effectively market its services; and (v) pursuing acquisitions to create
greater economies of scale. Management believes the quality and reliability of
its products and services enhance the Company's ability to attract and retain
merchant customers.
Card-based payment processing for merchants has emerged as one of the fastest
growing segments of the transaction processing industry. The proliferation in
the uses and types of credit, charge and debit cards, rapid technological
advances in transaction processing and financial incentives offered by credit
card associations and issuers have contributed greatly to wider merchant
acceptance and increased consumer use of such cards. For example, industry
sources indicate that consumer usage of VISA and MasterCard credit cards for
purchases and cash advances in the United States was approximately $440.7
billion in 1994 compared to approximately $351.7 billion in 1993, an increase
of approximately 25.3%. From 1984 to 1994, charge volume of VISA and MasterCard
credit cards has grown at a compounded annual growth rate of approximately
15.6%. This growth in card transactions, combined with the transition from
paper-based to electronic transaction processing, has caused small-to-medium
sized merchants increasingly to demand the same level of sophisticated
transaction processing and information services historically provided only to
large merchants.
In addition to experiencing growth in the dollar volume of transactions
processed, the industry has undergone rapid consolidation over the last several
years because of the increased demand for
3
<PAGE>
sophisticated products and services and the requirements for capital
expenditures necessary to support the technical infrastructure to deliver these
products and services. According to industry sources, the ten largest bankcard
processors accounted for approximately 69% of the total charge volume processed
in 1994, and the Company processed approximately 3% of the total charge volume
for the same period. Two of the three largest bankcard processors merged in
1995 and, according to industry sources, the combined entity would have
processed approximately 25% of total charge volume in 1994. Despite this
ongoing consolidation, the industry remains fragmented with over 400 registered
service providers as well as regional and community banks marketing and selling
transaction processing services. Accordingly, acquisition and other
consolidation opportunities continue to be numerous. Management believes that
continuing technological advances, together with increased merchant demand for
more sophisticated transaction processing, related information services and
more responsive and capable customer service, will cause many service providers
to exit the transaction processing business or seek alliance partners to
provide transaction processing for their customers.
Since inception, the Company has consummated 58 transactions consisting of 54
merchant portfolio acquisitions, three operating business acquisitions and a
transaction with First Union Corporation and each of its principal banking
subsidiaries (collectively, the "First Union Banks") (First Union Corporation
and the First Union Banks are collectively referred to herein as "First
Union"). The transaction with First Union (the "First Union Alliance"), which
was effective as of December 1, 1995, is the Company's most significant
transaction to date and represented approximately $4.6 billion in 1995 credit
card charge volume. The First Union Alliance resulted in the transfer by First
Union of its transaction processing assets to the Company, increasing the
Company's merchant customer base by 66.9% and increasing the annual credit card
charge volume processed by the Company by 71.8%. In addition, the First Union
Alliance enhanced significantly the Company's ability to further its market
penetration and increase the size of its customer base through the marketing
assistance, support and exclusive merchant referrals provided by the First
Union Banks. The First Union Alliance also may create additional acquisition
opportunities for the Company, as the Company and First Union have agreed that
the Company generally may, at its option, purchase from First Union any
merchant portfolios acquired by First Union through whole-bank or other
acquisitions. First Union became a significant shareholder of the Company in
connection with the First Union Alliance and currently owns 9,149,209 shares of
the Company's Common Stock. At January 1, 1996, First Union was the nation's
sixth largest bank in terms of total assets. See "Business--The First Union
Alliance."
The Company generates revenues principally by charging a fee based on a
percentage of the dollar volume of each transaction processed and by charging
fees for related credit card services. In calendar 1995, the aggregate dollar
volume of VISA and MasterCard credit card transactions processed by the Company
and First Union was approximately $11.0 billion. At January 31, 1996, the
Company provided transaction processing services to approximately 80,000
merchant locations nationwide.
Executive officers and directors of the Company, together with their
affiliates, will beneficially own approximately 86.3% of the Common Stock
outstanding after this offering. See "Principal and Selling Shareholders." In
addition, certain affiliates of the Company will receive immediate and
substantial financial benefits as a result of this offering. See "Risk
Factors--Offering Benefits to Certain Affiliates" and "Use of Proceeds."
NOVA Corporation was incorporated in Georgia in December 1995 in connection
with the First Union Alliance. NOVA Information Systems, Inc., a wholly-owned
subsidiary and predecessor to the Company ("NOVA Information Systems"), was
incorporated in Georgia in February 1991. Unless the context otherwise
requires, references in this Prospectus to "NOVA" and the "Company" refer to
NOVA Corporation and its subsidiaries. The Company's executive offices are
located at Five Concourse Parkway, Suite 700, Atlanta, Georgia 30328, and its
telephone number is (770) 396-1456.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............. 3,268,415 shares
Common Stock offered by the Selling Sharehold-
ers............................................ 231,585 shares
Common Stock to be outstanding after the offer-
ing............................................ 28,150,401 shares(1)
Use of proceeds................................. Total gross proceeds
estimated at $62,099,885 to
be used to pay accrued
dividends on outstanding
shares of preferred stock and
to redeem outstanding shares
of a series of preferred
stock (including $15,169,938
to be paid to Warburg, Pincus
Investors, L.P., an affiliate
of the Company), to repay
indebtedness, to pay
underwriting discounts and
commissions and offering
expenses payable by the
Company, and for general
corporate purposes including
future merchant portfolio
acquisitions and working
capital. See "Use of
Proceeds."
NYSE symbol..................................... NIS
</TABLE>
- --------
(1) Includes 11,876,218 shares of Common Stock that will be issued upon the
conversion of all outstanding shares of Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock concurrent with the closing of this offering. See "Certain
Relationships and Related Transactions." Excludes 1,258,620 shares of
Common Stock issuable upon the exercise of stock options as of April 25,
1996 at a weighted average exercise price of $1.20 per share, of which
options for 72,763 shares were exercisable. Also excludes options
exercisable for up to 600,000 shares of Common Stock that the Company
anticipates granting to its employees prior to or shortly following the
completion of this offering at the price to public appearing on the cover
page of this Prospectus. See "Management--1991 Employees' Stock Option and
Stock Appreciation Rights Plan," "Management--1996 Employees Stock
Incentive Program" and "Shares Eligible for Future Sale--Options."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
TEN MONTH
YEAR ENDED FEBRUARY 28, YEAR ENDED
---------------------------------------------- DECEMBER 31,
1993 1994 1995 1995 (1)
-------------- -------------- -------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AND MERCHANT LOCATION DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ 37,230 $ 68,213 $ 93,592 $ 129,035
Operating income
(loss)................ (5,421) (3,931) (245) 2,789
Net income (loss)(2)... (6,417) (4,142) (1,213) 4,887
Pro forma net income
(loss) per common and
common equivalent
share(3).............. $ (0.13) $ 0.24
Pro forma weighted av-
erage common and com-
mon equivalent shares
outstanding(4)........ 13,603 18,024
OTHER DATA:
Merchant sales volume
processed............. $ 1,409,861 $ 2,871,793 $ 4,131,071 $ 5,975,013
Merchant locations at
period end............ 19,179 24,838 43,980 77,884
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
ACTUAL AS ADJUSTED(5)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets........................................... $58,118 $79,706
Long-term obligations, less current portion............ 17,738 1,272
Total shareholders' equity............................. 26,017 67,257
</TABLE>
- --------
(1) The Company changed its fiscal year end from the last day of February to
December 31, effective December 31, 1995. For financial reporting purposes,
the ten month period ended December 31, 1995 is considered an annual
period. Revenues and net income for the 12 months ended December 31, 1995
were $147.8 million and $3.6 million, respectively.
(2) Net income for the ten month year ended December 31, 1995 reflects the
reduction of valuation allowance against deferred taxes of $5.0 million,
the benefits of which have been recognized in the provision for income
taxes. See Note 4 to the Company's Consolidated Financial Statements.
(3) Pro forma net income per share gives effect to the Preferred Stock
Transaction (as defined below) as if it had occurred as of March 1, 1994.
See Note 12 to the Company's Consolidated Financial Statements.
(4) See Note 12 to the Company's Consolidated Financial Statements.
(5) Adjusted to reflect the sale of 3,268,415 shares of Common Stock offered by
the Company hereby (at an initial public offering price of $19.00 per
share), after deducting estimated underwriting discounts and commissions
and offering expenses and the application of the net proceeds therefrom.
See "Use of Proceeds."
6
<PAGE>
Except as otherwise specified, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." All
information in this Prospectus has been adjusted to give effect to the
conversion of all outstanding shares of Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock
(collectively, the "Convertible Preferred Stock") into Common Stock and the
redemption of all outstanding shares of Series D Preferred Stock, concurrent
with the completion of this offering. The conversion of the Convertible
Preferred Stock and redemption of all outstanding shares of Series D Preferred
Stock are collectively referred to herein as the "Preferred Stock Transaction."
See "Certain Relationships and Related Transactions." All information in this
Prospectus has been adjusted to give effect to a 10-for-1 split of the Common
Stock and a 2.56-for-1 split of the Common Stock, each effected in the form of
a stock dividend on May 31, 1995 and February 27, 1996, respectively.
References in this Prospectus to the dollar volume of transactions processed
reflect only VISA and MasterCard transactions.
This Prospectus contains forward-looking statements that are set forth under
the captions "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Actual results may differ
significantly from those projected as discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those factors discussed in "Risk Factors."
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the
Common Stock offered by this Prospectus.
VISA and MasterCard Registration Termination. The Company, along with all
other nonbank transaction processors, must be sponsored by a financial
institution that is a principal member of the VISA and MasterCard credit card
associations in order to process bankcard transactions. Through each of First
Alabama Bank, Bank of the West and Mellon Bank, N.A. ("Mellon Bank"), which
serve as member clearing banks for the Company, the Company is registered with
VISA and MasterCard as a certified processor and member service provider.
First Union National Bank of North Carolina ("FUNB-NC") also serves as a
clearing bank for the Company, but currently does not sponsor the Company as a
member service provider. The Company's designation as a certified processor
and its status as a member service provider are dependent upon the Company's
continuing adherence to the standards of the VISA and MasterCard credit card
associations. In the event the Company fails to comply with these standards,
the Company's designation as a certified processor or status as a member
service provider could be suspended or terminated. While the Company attempts
to adhere to the standards of the VISA and MasterCard associations, as they
may be amended from time to time, there can be no assurance that VISA and
MasterCard will maintain the Company's registrations or that the current VISA
and MasterCard rules allowing the Company and other nonbank transaction
processors to market and provide transaction processing services will remain
in effect. Moreover, VISA and MasterCard rules are set by the respective
member financial institutions of VISA and MasterCard, some of which are
competitors of the Company. The termination of the Company's member service
provider registrations or the Company's status as a certified processor, or
any changes in the VISA or MasterCard rules that prevent the Company's
registration or otherwise limit the Company's ability to provide transaction
processing and marketing services for VISA or MasterCard, would have a
material adverse effect on the Company's financial condition and results of
operations. See "Business--Merchant Accounting and Clearing Bank
Relationships."
Competition. The market for credit, charge and debit card transaction
processing services is highly competitive. The level of competition has
increased significantly in recent years and this trend is expected to
continue. According to industry sources, the ten largest bankcard processors
accounted for approximately 69% of the total charge volume processed in 1994,
and the Company processed approximately 3% of the total charge volume for the
same period. Two of the three largest bankcard processors merged in 1995 and,
according to industry sources, this entity would have processed approximately
25% of total charge volume in 1994. The Company's principal competitors in its
primary market segment are other smaller vertically integrated transaction
processors, community and regional banks, and independent sales organizations
("ISOs") and, increasingly, the ten largest bankcard processors. ISOs are
independent agents that typically market and sell the full range of
transaction processing services to merchants, with such services primarily
being outsourced on a non-exclusive basis. Several of the Company's
competitors and potential competitors have greater financial, technological,
marketing and personnel resources than the Company, and there can be no
assurance that the Company will continue to be able to compete successfully
with such entities. In addition, the competitive pricing pressures that would
result from any increase in competition would adversely affect the Company's
margins and may have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Competition."
Dependence on Merchant Accounting Relationships. The Company outsources
certain merchant accounting services to Total System Services, Inc. ("Total
System Services") and Mellon Bank. These services consist of reorganizing and
accumulating daily transaction data on a merchant-by-merchant and card issuer-
by-card issuer basis, and forwarding this data to the credit card associations
for ultimate payment. The failure of Total System Services and Mellon Bank to
continue to perform these services efficiently and effectively may adversely
affect the Company's relationships with its merchant customers
8
<PAGE>
and may result in the termination by merchants of their agreements with the
Company. Termination of its agreements with Total System Services and Mellon
Bank, which are scheduled to expire April 30, 1997 and May 31, 1997,
respectively, would require the Company either to seek alternative outsourcing
arrangements or to make significant capital expenditures to develop internal
systems to provide these merchant accounting services. Although management
believes that in the event of termination of either or both of these
agreements the Company could locate alternative outsourcing arrangements,
there can be no assurance that such arrangements will be available on terms at
least as favorable to the Company as the existing contracts. Accordingly,
either event may have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Merchant Accounting and
Clearing Bank Relationships."
Risks Associated with Acquisition Strategy. The Company's growth strategy
includes the acquisition of additional merchant portfolios, operating
businesses and transaction processing assets in order to achieve greater
economies of scale. The Company faces increasing competition from other
transaction processors for available acquisition opportunities. In addition,
community and regional banks, whose transaction processing businesses have
been the Company's primary source of acquisition opportunities, have in recent
years been undergoing extensive consolidation reflective of underlying trends
in the financial institutions industry and unrelated to their transaction
processing businesses. As a result, smaller banks that may have sought to
divest themselves of their transaction processing businesses may be acquired
by a competitor of the Company, thus depriving the Company of an acquisition
opportunity. There can be no assurance that the current level of acquisition
opportunities will continue to exist, that the Company will be able to acquire
merchant portfolios, operating businesses and transaction processing assets
that satisfy the Company's criteria, or that any such acquisition will be on
terms favorable to the Company.
In evaluating any potential acquisition, the Company conducts a due
diligence review of the merchant portfolio it proposes to acquire. The review
process includes analyzing the composition of the merchant portfolio, applying
uniform standards and underwriting guidelines developed by the Company to the
merchant portfolio and attempting to identify high-risk merchants contained in
the merchant portfolio. Notwithstanding these due diligence efforts, however,
there can be no assurance that the Company will assess properly the risk
attributes associated with an acquired portfolio or otherwise identify high-
risk merchants, which may cause the Company to experience excessive losses
from chargebacks or merchant fraud in connection with any acquired portfolio.
At the time of consummation of acquisitions, merchants in an acquired
portfolio typically are not operating on the NOVA Network and may not use the
merchant accounting processors used by the Company. Until the Company converts
each newly-acquired merchant to the NOVA Network and the Company's merchant
accounting processors, the Company has little, if any, control over the
performance of such other networks and processors and typically is unable to
apply fully its risk management and fraud avoidance practices to such
merchants. Moreover, the merchant customers that comprise an acquired
portfolio may have been sold transaction processing services by ISOs and
financial institutions sponsored by a principal member of the VISA and
MasterCard credit card associations. Certain of these ISOs and financial
institutions may be unwilling to assist the Company in converting the
merchants to the NOVA Network and the Company's merchant accounting processors
and, in some cases, may solicit these merchants on behalf of a competing
processor. Further, the conversion of merchants may require that merchants
learn new operating procedures and could result in problems causing merchants
to seek verbal authorization of credit and debit card transactions. As a
condition to conversion, merchants also may seek to negotiate lower fees.
Finally, because the Company's acquisitions often involve the hiring by the
Company of certain management and sales personnel affiliated with the acquired
portfolio, the failure to integrate successfully such personnel into the
Company's operations and business culture may affect adversely the conversion
process and the realization of the economic benefits associated with the
acquired portfolio. The foregoing factors could lead to merchant attrition
following an acquisition, managerial or other operational difficulties
relative to an acquired portfolio, or result in lower than expected revenues
9
<PAGE>
being generated by the acquired portfolio. As a result of any of these events,
the Company may not realize the expected economic benefits associated with its
acquisitions, which may have a material adverse effect on the Company's
financial condition and results of operations.
The conversion and integration of the First Union transaction processing
assets (the "First Union Conversion") are expected to be completed in the Fall
of 1997 at a cost of approximately $7.0 million. The magnitude, scope,
duration and expense of the First Union Conversion will be much greater than
any conversion previously undertaken by the Company, and there can be no
assurance that the Company can successfully complete this conversion. Failure
to successfully complete the First Union Conversion would have a material
adverse effect on the Company's financial condition and result of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
There can be no assurance that future acquisitions will not have an adverse
effect upon the Company's operating results, particularly in the fiscal
quarters immediately following the completion of such transactions, while the
operations of the acquired entities are converted and integrated into the
Company's operations. The Company's acquisition strategy will require
substantial capital resources, and is likely to result in the Company
incurring additional indebtedness. There can be no assurance that financing
for future acquisitions will be available or will be obtained on terms
favorable to the Company. Further, the Company's acquisition strategy and the
growth resulting therefrom will require that the Company continue to hire,
train and retain qualified personnel, while concurrently expanding its
managerial and operational infrastructure. There can be no assurance that the
Company will be able to hire and retain qualified personnel or that the
Company will be able to expand successfully its infrastructure as appropriate
to accommodate future acquisitions or growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Business--The First Union Alliance" and "Business--
Acquisition Strategy."
Merchant Attrition. The Company experiences attrition of its merchant base
in the ordinary course of business due to several factors, including business
closures, losses to competition and conversion-related losses. In addition,
substantially all of the Company's contracts with its merchants may be
terminated by either party upon 30 days' prior notice. There can be no
assurance that the Company will not experience higher rates of attrition in
the future, particularly in connection with acquired merchant portfolios.
Increased merchant attrition may have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Customer Base" and "Business--Risk Management."
Chargeback Risk. In the event a billing dispute between a cardholder and a
merchant is not resolved in favor of the merchant, the transaction is "charged
back" to the merchant and that amount is credited or otherwise refunded to the
cardholder. If the Company or its clearing banks are unable to collect such
amounts from the merchant's account, and if the merchant refuses or is unable
due to bankruptcy or other reasons to reimburse the Company for the
chargeback, the Company bears the loss for the amount of the refund paid to
the cardholder. The risk of chargebacks is greater with certain merchants that
do not deliver goods or render services at the time of payment, but promise
future delivery of such goods or services. If a merchant fails to deliver
satisfactorily the goods or services promised, the Company ultimately is
liable to the cardholder for a chargeback. There can be no assurance that the
Company will not experience significant losses from chargebacks in the future.
Increases in chargebacks not paid by merchants may have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Risk Management."
Merchant Fraud. The Company is responsible for fraudulent credit card
transactions initiated by its merchant customers in the event the Company is
unable to collect such amounts from the merchant. Examples of merchant fraud
include inputting false sales transactions or false credits. The Company
monitors merchant transactions against a series of standards it has developed
to detect merchant fraud. Notwithstanding these measures, however, there can
be no assurance that the Company will not experience significant amounts of
merchant fraud in the future, which may have a material adverse effect
10
<PAGE>
on the Company's financial condition and results of operations. See
"Business--Customer Base" and "Business--Risk Management."
Telecommunications Network. The Company has developed a proprietary
telecommunications network, the NOVA Network, and maintains an operating
relationship with WorldCom. Pursuant to its agreement with the Company,
WorldCom provides long-distance and local telecommunications access, as well
as technical support, to the Company in connection with the NOVA Network. This
agreement expires February 28, 1999, subject to earlier termination by the
Company if WorldCom fails to meet certain agreed-upon performance objectives.
If the WorldCom agreement is terminated or not renewed, the Company would be
required to utilize the long-distance and local telecommunications access of
another long-distance provider, which may increase the Company's expenses for
network services, resulting in a material adverse effect on the financial
condition and results of operations of the Company. WorldCom will own
approximately 8.4% of the Company's outstanding Common Stock upon completion
of the offering (approximately 8.3% if the Underwriters' over-allotment option
is exercised in full) and has a designee on the Company's Board of Directors.
There can be no assurance that conflicts of interests between WorldCom and the
Company will not arise or that any such conflicts will be resolved in a manner
favorable to the Company. See "Business--Technology" and "Certain
Relationships and Related Transactions."
Limited History of Profitability; Certain State Tax Issues. From the
Company's inception through fiscal 1994, the Company incurred losses as the
expenditures for the development of its infrastructure combined with the cost
of providing service exceeded revenues from its merchant portfolio. In
addition, the Company developed the marketing, customer support and managerial
expertise necessary to execute its business strategy. The Company's ongoing
expansion of its merchant customer base resulted in the Company achieving
profitability for the first time in the ten month year ended December 31,
1995. There can be no assurance, however, that the Company will continue to
operate profitably. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Transaction processing companies like the Company may be subject to state
taxation of certain portions of their fees charged to merchants for their
services. Application of this tax is an emerging issue in the industry and the
states have not yet adopted uniform guidelines implementing these regulations.
In the event the Company is required to bear all or a portion of these costs,
and is unable to pass such costs through to its merchant customers, the
financial condition and results of operations of the Company could be
adversely affected.
Development and Market Acceptance of New Products. The market for
transaction processing and related software application products and value-
added services has been characterized by rapidly changing technology, the
improvement of services and products, and the development of new services and
products for merchant customers. Because of continual changes in this market,
management believes that the future success of the Company will depend, in
part, on the Company's ability to continue to improve its products and
services and to offer its merchant customers new products and services. The
Company has recently introduced a number of new products, including NOVA
Perks, NOVA Time and NOVA Shadow Pay. To date, only a small number of the
Company's merchant customers have subscribed to these products. There can be
no assurance that NOVA Perks, NOVA Time, NOVA Shadow Pay and the Company's
other newly-developed products and services will perform satisfactorily or be
widely accepted in the marketplace. See "Business--Software Application
Products and Value-Added Services."
Fluctuation in Quarterly Operating Results. The Company has experienced and
expects to continue to experience significant seasonality in its business. The
Company typically realizes higher revenues in the third calendar quarter and
lower revenues in the first calendar quarter, reflecting increased
11
<PAGE>
transaction volumes during the Summer months and a significant decrease in
transaction volume during the period immediately following the holiday season.
Quarterly results are also affected by the timing of acquisitions and the
timing and magnitude of expenses for merchant portfolio conversions.
Fluctuations in operating results may result in volatility in the price of the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Results."
Dependence on Key Management. The development of the Company's business and
its operations have been materially dependent upon the active participation of
its executive officers and other key employees. The loss of one or more of the
Company's executive officers or other key employees may have a material
adverse effect on the Company's financial conditions and results of
operations. See "Management."
Significant Intangible Assets. A substantial portion of the Company's assets
are intangible assets related to acquired merchant portfolios or business
operations. In the event of a material decline in revenues generated from any
of such merchant portfolios or business operations which would not be
recovered from future cash flows, the carrying value of the related intangible
asset will be reduced to fair value.
Banking and Territorial Restrictions. First Union currently beneficially
owns 9,149,209 shares of Common Stock of the Company. To facilitate First
Union's compliance with applicable banking laws, regulations and orders
(collectively, the "Banking Laws"), and to allow First Union to obtain any
required consents or approvals, the Company has agreed to notify First Union
before it enters into any business activities substantially different from the
business activities the Company currently conducts. If the required consents
and approvals are not received, the Company may not engage in the new business
activity (such restrictions being collectively referred to herein as the
"Banking Restrictions"). The First Union Alliance also generally provides that
the Company may not, without the prior consent of First Union, enter into
certain marketing agreements with third parties generally located in specified
areas where First Union currently maintains a significant banking presence
(such restrictions being collectively referred to herein as the "Territorial
Restrictions"). The effect of the Banking Restrictions and the Territorial
Restrictions is to limit in certain respects the Company's ability to seek or
take advantage of certain business or marketing opportunities, which may have
a material adverse effect on the Company's financial condition and results of
operations. See "Business--The First Union Alliance" and "Business--Banking
Regulation."
Certain Anti-Takeover Provisions. The Company's Articles of Incorporation
authorize the Company to issue up to 5,000,000 shares of preferred stock with
such designations, powers, preferences and rights as may be fixed by the Board
of Directors, without any further vote or action by the shareholders. The
issuance of Preferred Stock could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Description of Capital
Stock--Preferred Stock" and "Description of Capital Stock--Certain Charter and
Bylaw Provisions."
Controlling Shareholders. After giving effect to the Preferred Stock
Transaction and the sale of the shares of Common Stock offered hereby,
Warburg, Pincus Investors, L.P. and its affiliates ("Warburg"), First Union,
executive officers and directors of the Company and their affiliates, and
WorldCom beneficially will own 39.4%, 32.5%, 86.3%, and 8.4%, respectively, of
the Company's outstanding Common Stock (38.7%, 31.9%, 84.8%, and 8.3%,
respectively, if the Underwriters' over-allotment option is exercised in
full). See "Management" and "Principal and Selling Shareholders." As a result
of such stock ownership, these shareholders, if acting together or in certain
combinations, would be able to control most matters requiring approval by the
Company's shareholders, including the election of directors. See "Management,"
"Certain Relationships and Related Transactions" and "Principal and Selling
Shareholders." Under the terms of a Shareholders Agreement dated January 31,
1996 (the "Shareholders Agreement"), during the six months following the
consummation of this offering, (i) each of Warburg, WorldCom and First Union
has the right to designate a specified number of director nominees, depending
upon such shareholder's percentage ownership of the Company's Common Stock,
and (ii) the chief executive officer of the Company has the right to designate
two nominees for director. Each party to the Shareholders Agreement has agreed
to vote such shareholder's shares of capital stock of the Company entitled to
vote in the election of directors in favor of such director nominees. Such
voting provisions
12
<PAGE>
expire automatically six months after an initial public offering of Common
Stock of the Company. See "Management" and "Description of Capital Stock--
Agreements and Restrictions Relating to Stock--The Shareholders Agreement."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock. The Common
Stock has been approved for listing on the New York Stock Exchange.
Nevertheless, there can be no assurance that an active public trading market
for the Common Stock will develop or be sustained. The initial public offering
price was determined solely by negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters and may not be
indicative of the market price for the Common Stock after this offering. This
price was based upon several factors, including prevailing market conditions,
the results of operations of the Company in recent periods, the capital
structure of the Company, the market capitalization and stages of development
of other companies which the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, an assessment of the Company's management,
the present state of the Company's development, the demand for similar
securities of companies comparable to the Company and other factors deemed
relevant. The stock market has from time to time experienced extreme price and
volume fluctuations, which often have been unrelated to the operating
performance of particular companies. Any announcement with respect to any
variance in the Company's revenue or earnings from levels generally expected
by securities analysts for a given period could have an immediate and
significant effect on the trading price of the Common Stock. See
"Underwriting."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the prevailing market price of the Common Stock and could impair the
Company's ability to raise additional equity capital. Upon completion of this
offering, the Company will have outstanding 28,150,401 shares of Common Stock.
Of these shares, the 3,500,000 shares offered hereby (4,025,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 under the Securities Act
("Rule 144"). The remaining 24,650,401 shares of Common Stock outstanding upon
completion of this offering are "restricted securities" as that term is
defined in Rule 144. Beginning 180 days after the date of this Prospectus no
shares of Common Stock will become eligible for immediate sale in the public
market upon expiration of lock-up agreements and subject to the provisions of
Rule 144. The Company intends to register for offer and sale under the
Securities Act a total of approximately 5,100,000 shares of Common Stock
issued or reserved for issuance under the Company's various stock option
plans, of which 71,960 shares are held by or issuable to persons not subject
to lock-up agreements, and of which 1,628,451 shares are held by or issuable
to persons that are subject to lock-up agreements and that may be sold 180
days after the date of this Prospectus (or earlier with the consent of Alex.
Brown & Sons Incorporated). In addition, upon completion of this offering, the
holders of a total of 24,279,016 shares of Common Stock have the right under
certain circumstances to require the Company to register under the Securities
Act their shares for resale to the public. See "Shares Eligible for Future
Sale."
Dilution. The Company had a pro forma deficit of $24,677,000 in net tangible
book value at December 31, 1995. Investors in the offering will experience
immediate and substantial dilution in the pro forma net tangible book value of
their investment, and current shareholders will receive a substantial increase
in the pro forma net tangible book value of their shares. At an initial public
offering price of $19.00 per share and assuming the application of the
estimated net proceeds therefrom, the pro forma net tangible book value to
existing shareholders will increase by $2.26 per share to $1.20 and pro forma
net tangible book value to purchasers of Common Stock in the offering will
decrease $17.80 per share. See "Dilution."
Offering Benefits to Certain Affiliates. As a result of this offering,
Warburg, an affiliate of the Company, will receive $15,169,938, consisting of
$10,169,938 as payment of accrued and unpaid dividends on outstanding shares
of preferred stock of the Company owned by Warburg and $5,000,000 for the
redemption of all outstanding shares of Series D Preferred Stock.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, at an initial public offering price of $19.00
per share and after deducting estimated underwriting discounts and commissions
and expenses payable by the Company, are estimated to be approximately
$56,442,893 (approximately $65,719,643 if the Underwriters' over-allotment
option is exercised in full). The Company anticipates that the net proceeds of
this offering will be used (i) to pay all accrued and unpaid dividends
($11,553,493 at May 1, 1996) on the outstanding shares of preferred stock of
the Company held by Warburg and WorldCom ($10,169,938 and $1,383,555,
respectively), (ii) to redeem all outstanding shares of Series D Preferred
Stock (an aggregate of $5,000,000) held by Warburg, (iii) to repay all of the
Company's outstanding debt (the "Bank Debt") under the Company's credit
agreement dated as of December 8, 1994, as amended and restated January 31,
1996 and as further amended effective as of April 1, 1996, with Bank of
America (the "Credit Agreement") ($15,704,222 principal and accrued and unpaid
interest thereon at May 1, 1996), and (iv) for general corporate purposes
including future merchant portfolio acquisitions and working capital. The Bank
Debt bears interest at a floating rate, which at May 1, 1996 was 8.25% per
annum, and is due in quarterly installments through June 30, 1999. The Company
incurred $6,450,000 principal amount since December 31, 1994, of which
$4,500,000 was incurred to finance the acquisition of merchant portfolios. The
Convertible Preferred Stock and Series D Preferred Stock currently accrue
dividends, compounded quarterly, at 9.0% and 10.0% per annum, respectively.
See "Certain Relationships and Related Transactions" regarding the beneficial
ownership of the Convertible Preferred Stock and the Series D Preferred Stock.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders.
As described above, the Company expects to use a portion of the net proceeds
of the offering to acquire merchant portfolios in the ordinary course of its
business. The Company continues to evaluate potential acquisitions of merchant
portfolios and to negotiate with several third parties that may be seeking
purchasers of their merchant portfolios, although the Company currently is not
a party to any agreements or understandings with respect to any material
acquisitions.
Pending such uses, the net proceeds of the offering will be invested in U.S.
Treasury securities, certificates of deposit, commercial paper and/or
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The current policy of the Company's Board of Directors is to retain any
available earnings for use in the operation and expansion of the Company's
business. Therefore, no payment of cash dividends on the Common Stock is
likely in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will depend
upon the Company's earnings, capital requirements, financial condition, the
ability of the Company's subsidiaries to pay cash dividends to the Company and
any other factors deemed relevant by the Board of Directors. The Credit
Agreement also restricts the payment of cash dividends by the Company and its
subsidiaries. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and Note 6 to the
Company's Consolidated Financial Statements.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995, pro forma to reflect the Preferred Stock Transaction, and
as adjusted to reflect the sale by the Company of 3,268,415 shares of Common
Stock in the offering (at an offering price of $19.00 per share) and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements and related notes thereto included elsewhere in this
Prospectus:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED
-------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion:
Bank notes payable........................ $ 16,466 $16,466 $ --
Other notes payable....................... 547 547 547
Capital lease obligations, less current por-
tion....................................... 725 725 725
-------- -------- --------
$ 17,738 $17,738 $ 1,272
======== ======== ========
Shareholders' equity:
Preferred Stock, without par value,
5,000,000 shares authorized, 33,571.34
shares, $1,000 stated value per share,
issued and outstanding; none issued and
outstanding pro forma and as adjusted.... $ 33,571 $ -- $ --
Common Stock, $.01 par value, 50,000,000
shares authorized, 11,378,120 issued and
outstanding; 23,254,338 shares issued and
outstanding pro forma and 26,522,753 as
adjusted(1).............................. 114 233 265
Additional paid-in capital................ 2,615 31,067 87,477
Accumulated deficit....................... (10,283) (20,485) (20,485)
-------- -------- --------
Total shareholders' equity.............. 26,017 10,815 67,257
-------- -------- --------
Total capitalization.................. $ 43,755 $ 28,553 $ 68,529
======== ======== ========
</TABLE>
- --------
(1) Excludes 2,911,869 shares of Common Stock issuable upon the exercise of
stock options at a weighted average exercise price of $1.20 per share, of
which options for 1,183,434 shares were exercisable as of December 31,
1995. Also excludes options exercisable for up to 600,000 shares of Common
Stock that the Company anticipates granting to its employees prior to or
shortly following the completion of this offering at the price to public
appearing on the cover page of this Prospectus. See "Management--1991
Employees' Stock Option and Stock Appreciation Rights Plan," "Management--
1996 Employees Stock Incentive Plan" and "Management--Director
Compensation."
(2) Pro forma includes the conversion of Series A, B and C Convertible
Preferred Stock into 11,876,218 shares of Common Stock, the payment of
$10,202,000 of accrued dividends and the redemption of Series D Preferred
Stock for $5,000,000.
15
<PAGE>
DILUTION
The pro forma deficit in net tangible book value of the Company at December
31, 1995 was $24,677,000, or $(1.06) per share. Pro forma deficit in net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding (assuming the completion of the Preferred Stock Transaction and
the payment of the accumulated dividends on all series of Preferred Stock).
After giving effect to the sale by the Company of 3,268,415 shares of Common
Stock (at an offering price of $19.00 per share) and application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company at December 31, 1995 would have been $31,765,000 or $1.20 per share.
This represents an immediate increase in pro forma net tangible book value of
$2.26 per share to existing shareholders and an immediate dilution in pro
forma net tangible book value of $17.80 per share to purchasers of Common
Stock in the offering. The following table illustrates the dilution in pro
forma net tangible book value per share to new investors:
<TABLE>
<S> <C> <C>
Assumed price to public.......................................... $19.00
Pro forma deficit in net tangible book value before offering... $(1.06)
Increase attributable to new investors......................... 2.26
------
Pro forma net tangible book value after the offering............. 1.20
------
Dilution to new investors........................................ $17.80
======
</TABLE>
The following table sets forth, as of April 25, 1996, the number of shares
of Common Stock purchased from the Company, the total consideration paid to
the Company, and the average price paid per share by existing shareholders and
by purchasers of shares offered by the Company hereby:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)(2)... 24,881,986 88.4% $33,228,048 34.9% $ 1.34
New investors................. 3,268,415 11.6 62,099,885 65.1 19.00
---------- ----- ----------- -----
Total....................... 28,150,401 100.0% $95,327,933 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Assumes the completion of the Preferred Stock Transaction. Excludes
1,258,620 shares of Common Stock issuable upon the exercise of stock
options at a weighted average exercise price per share of $1.20, of which
options for 72,763 shares were exercisable as of April 25, 1996. Also
excludes options exercisable for up to 600,000 shares of Common Stock that
the Company anticipates granting to its employees prior to or shortly
following the completion of this offering at the price to public appearing
on the cover page of this Prospectus. See "Management--1991 Employees'
Stock Option and Stock Appreciation Rights Plan."
(2) Total consideration paid by First Union for its shares of Common Stock was
based on the historical cost of the First Union Assets. See Note 1 to the
Company's Consolidated Financial Statements.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company as of and for the four years ended February 28 or 29, 1995 and the ten
month year ended December 31, 1995. Such selected consolidated financial data
have been derived from the Company's Consolidated Financial Statements and
notes thereto, which have been audited by Ernst & Young LLP, independent
auditors. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto appearing elsewhere in
this Prospectus. The Company changed its fiscal year end from the last day of
February to December 31, effective December 31, 1995. For financial reporting
purposes, the ten month period ended December 31, 1995 is considered an annual
period.
<TABLE>
<CAPTION>
TEN MONTH
YEAR ENDED FEBRUARY 28 OR 29, YEAR ENDED
--------------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1995(1)
---------- ------------ ------------ ------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AND MERCHANT LOCATION DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ 2,586 $ 37,230 $ 68,213 $ 93,592 $ 129,035
Cost of service........ 2,104 30,206 54,984 74,032 100,375
Conversion costs....... -- 1,472 2,080 1,827 3,441
Selling, general and
administrative........ 2,731 9,327 12,419 14,091 17,795
Depreciation and
amortization.......... 280 1,646 2,661 3,887 4,635
--------- ------------ ------------ ------------ ------------
Operating income
(loss)................ (2,529) (5,421) (3,931) (245) 2,789
Interest expense, net.. 292 996 211 968 1,959
--------- ------------ ------------ ------------ ------------
Income (loss) before
provision for income
taxes................. (2,821) (6,417) (4,142) (1,213) 830
Provision (benefit) for
income taxes.......... -- -- -- -- (4,057)
--------- ------------ ------------ ------------ ------------
Net income (loss)(2)... $ (2,821) $ (6,417) $ (4,142) $ (1,213) $ 4,887
========= ============ ============ ============ ============
Pro forma net income
(loss) per common and
common equivalent
share(3).............. $ (0.13) $ 0.24
============ ============
Pro forma weighted
average common and
common equivalent
shares
outstanding(4)........ 13,603 18,024
============ ============
OTHER DATA:
Merchant sales volume
processed............. $ 74,256 $ 1,409,861 $ 2,871,793 $ 4,131,071 $ 5,975,013
Merchant locations at
period end............ 4,036 19,179 24,838 43,980 77,884
BALANCE SHEET DATA (AT
PERIOD END):
Total assets........... $ 9,353 $ 27,879 $ 26,437 $ 47,823 $ 58,118
Long-term debt and
capital lease
obligations, less
current portion....... -- 2,339 1,950 16,694 17,738
Total shareholders'
equity (deficit)...... (1,237) 19,079 18,783 18,719 26,017
</TABLE>
- --------
(1) Revenues and net income for the 12 months ended December 31, 1995 were
$147.8 million and $3.6 million, respectively.
(2) Net income for the ten month year ended December 31, 1995 reflects the
reduction of valuation allowance against deferred taxes of $5.0 million,
the benefits of which have been recognized in the provision for income
taxes. See Note 4 to the Company's Consolidated Financial Statements.
(3) Pro forma net income per share gives effect to the Preferred Stock
Transaction as if it had occurred as of March 1, 1994. See Note 12 to the
Company's Consolidated Financial Statements.
(4) See Note 12 to the Company's Consolidated Financial Statements.
17
<PAGE>
The following table sets forth selected consolidated statement of operations
data for the ten month year ended December 31, 1995 and the ten months ended
December 31, 1994. The selected consolidated statement of operations data for
the ten month year ended December 31, 1995 are derived from the Company's
Consolidated Financial Statements and notes thereto, which have been audited
by Ernst & Young LLP, independent auditors. The information for the ten months
ended December 31, 1994 is unaudited, but in the opinion of management
reflects all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results for such period.
<TABLE>
<CAPTION>
TEN MONTH
PERIOD/YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- ---------
(IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 74.8 $129.0
Cost of service............................................ 59.0 100.4
Conversion costs........................................... 0.9 3.4
Selling, general and administrative........................ 11.2 17.8
Depreciation and amortization.............................. 2.9 4.6
-------- ---------
Operating income........................................... 0.8 2.8
Interest expense, net...................................... 0.6 2.0
-------- ---------
Income before provision for income taxes................... 0.2 0.8
Provision (benefit) for income taxes....................... -- (4.1)
-------- ---------
Net income................................................. $ 0.2 $ 4.9
======== =========
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through its predecessor NOVA Information Systems, was formed in
February 1991 to provide sophisticated and cost-effective transaction
processing and related services to small-to-medium sized merchants by
effectively employing the latest advances in transaction processing and
telecommunications technology. The Company has focused on increasing the size
of its customer base through its marketing and acquisition programs,
initiatives that continued with the acquisition of the merchant service
business of The Bank of Boulder, effective as of November 1, 1994 (the
"Boulder Acquisition"), and the consummation of the First Union Alliance,
effective as of December 1, 1995.
Since inception, the Company has invested significant capital to develop an
integrated operating platform consisting of hardware, software and network
architecture to process large volumes of card transactions. In addition, the
Company continues to develop the marketing, customer support and managerial
expertise necessary to execute its business strategy. Through the fiscal year
ended February 28, 1995, the Company incurred losses as the expenditures for
the development of this infrastructure and the cost to convert acquired
portfolios, combined with the cost of providing service, exceeded revenues
from its merchant portfolio. The Company's ongoing expansion of its merchant
and customer base resulted in the Company achieving profitability for the
first time in the ten month year ended December 31, 1995.
The Company has grown its merchant and customer base through a combination
of its own marketing programs and through a series of acquisitions that have
produced significant additional revenue in each year since formation. Since
inception, the Company has consummated 58 transactions consisting of 54
merchant portfolio acquisitions, three operating business acquisitions and the
First Union Alliance. The Boulder Acquisition was the largest of the operating
business acquisitions and added approximately 19,000 new merchant locations to
the Company's merchant base, while the First Union Alliance added
approximately 31,000 new merchant locations to the Company's merchant base.
The Company accounted for the First Union Alliance as a transfer of
nonmonetary assets, which was accounted for at the historical cost of the
assets transferred.
Other than with respect to the Boulder Acquisition and the First Union
Alliance, the Company has consolidated substantially all of its previous
transactions. The consolidation of the Boulder, Colorado operating center
(acquired in the Boulder Acquisition), into the Company's Knoxville, Tennessee
facility, is substantially complete. In addition, the majority of the merchant
terminals resulting from the Boulder Acquisition have been converted to the
NOVA Network and all of these merchants have been converted to the Company's
merchant accounting systems. The Company has commenced the conversion and
integration of the First Union transaction processing assets into the
Company's operations, which is expected to be completed in the Fall of 1997.
Historically, the Company has achieved savings through economies of scale and
operating efficiencies derived from the conversion and integration of its
transactions. Similarly, the Company anticipates savings in cost of service
and selling, general and administrative expenses from the remaining
conversions relating to the Boulder Acquisition and the First Union Alliance.
The costs of these conversion activities are expensed as incurred.
The Company changed its fiscal year end from the last day of February to
December 31, effective December 31, 1995. Accordingly, the following
discussion of results of operations includes a comparison of the ten month
year ended December 31, 1995 with the ten months ended December 31, 1994.
COMPONENTS OF REVENUES AND EXPENSES
Revenues. The Company derives revenues principally from processing credit,
charge and debit card transactions that are authorized and captured through
the NOVA Network. The Company typically charges
19
<PAGE>
merchants for these card processing services at a bundled rate that is a
percentage of the dollar amount of each transaction and in some instances an
additional fee per transaction. These charges, referred to as "discount fees,"
are individually negotiated with each merchant and, in the aggregate,
represented approximately 91.4% and 93.7% of the Company's revenues for the
fiscal year ended February 28, 1995 and the ten month year ended December 31,
1995, respectively. Certain of the Company's merchant customers are charged a
flat fee per transaction, while others are also charged miscellaneous fees,
including fees assessed by the Company for handling chargebacks, monthly
minimums, equipment leases, rentals and sales, and other miscellaneous
services. The Company's revenues are reported net of amounts paid to ISOs and
agent banks under revenue sharing agreements pursuant to which such parties
receive payments based primarily on processing volume for particular groups of
merchants.
Expenses. Cost of service includes all costs directly attributable to the
Company's provision of services to its merchant customers. The most
significant component of cost of service includes interchange and assessment
fees, which are amounts charged by the credit card associations for clearing
services, advertising and other expenses. Interchange and assessment fees are
billed primarily as a percent of dollar volume processed and, to a lesser
extent, as a per-transaction fee. Cost of service also includes charges paid
to third parties for point-of-sale network service (for merchant customers
acquired but not yet converted to the NOVA Network), merchant accounting and
settlement fees paid to third party vendors, cost of equipment leased, rented
or sold, NOVA Network costs, and other operating expenses.
Conversion costs include costs incurred to convert the acquired portfolios
to the NOVA Network and operating systems. These costs include expenses
related to reprogramming POS terminals at merchant locations, duplicate costs
to process transactions, unfavorable contract payments for transaction
authorizations and independent contractor fees.
Selling, general and administrative expenses include salaries, commissions
and benefits, travel and entertainment, telephone, and other operating costs
of the Company's operations and marketing centers and its corporate office.
Also included in this category are systems and product development expenses,
which represent the internal costs of developing and implementing the NOVA
Network and its processing and point-of-sale systems. The Company has not
capitalized any internal expenditures with respect to these items.
Depreciation and amortization is related to the Company's capital
expenditures and merchant portfolio and business acquisitions. Depreciation of
property and equipment is recognized on a straight-line basis over periods of
three to seven years for equipment and 30 years for buildings. The acquisition
of merchant portfolios results in the capitalization of merchant and customer
contract values, which are amortized over ten years based upon the Company's
merchant attrition experience and projected revenue streams. Excess cost of
businesses acquired is amortized over 30 years.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items on the Company's consolidated statements
of operations:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------------
TEN MONTH
PERIOD/YEAR
YEAR ENDED ENDED
FEBRUARY 28, DECEMBER 31,
---------------- ----------------
1994 1995 1994 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues................................. 100.0% 100.0% 100.0% 100.0%
Cost of service.......................... 80.6 79.1 78.9 77.8
Conversion costs......................... 3.0 2.0 1.2 2.7
Selling, general and administrative...... 18.3 15.0 15.0 13.8
Depreciation and amortization............ 3.9 4.2 3.9 3.6
------- ------- ------- -------
105.8 100.3 99.0 97.9
Operating income (loss).................. (5.8) (0.3) 1.0 2.1
Interest expense, net.................... 0.3 1.0 0.8 1.5
------- ------- ------- -------
Income (loss) before provision for income
taxes................................... (6.1) (1.3) 0.2 0.6
Provision (benefit) for income taxes..... -- -- -- (3.1)
------- ------- ------- -------
Net income (loss)........................ (6.1)% (1.3)% 0.2% 3.7%
======= ======= ======= =======
</TABLE>
TEN MONTH YEAR ENDED DECEMBER 31, 1995 COMPARED WITH TEN MONTHS ENDED DECEMBER
31, 1994
Revenues. Revenue increased 72.5% to $129.0 million for the ten month year
ended December 31, 1995 compared with $74.8 million for the same period in
1994. This increase resulted from an 81.8% increase in merchant sales volume
processed to $6.0 billion for 1995, compared to $3.3 billion in 1994. This
increased sales volume was primarily attributable to $1.7 billion from the
Boulder Acquisition, $426 million from the First Union Alliance, and new
merchants added as a result of Company sales efforts.
Cost of Service. Cost of service increased 70.2% to $100.4 million for the
ten month year ended December 31, 1995 compared with $59.0 million for the
same period in 1994. The increase resulted from additional interchange and
assessment fees and other operating costs associated with the higher volume of
merchant sales. Cost of service as a percent of revenues declined from 78.9%
to 77.8%, reflecting continuing cost efficiencies realized from the
consolidation of the operations relating to the Boulder Acquisition.
Conversion Costs. Conversion costs increased 270.8% to $3.4 million for the
ten month period ended December 31, 1995 compared with $0.9 million for the
same period in 1994. The increase resulted primarily from the acquisition and
conversion of the Boulder portfolio.
Selling, General and Administrative. Selling, general and administrative
expenses increased 58.9% to $17.8 million for the ten month year ended
December 31, 1995 compared with $11.2 million for the same period in 1994.
Higher expenses in 1995 resulted from the addition of personnel in the
Company's operations center to support the increased merchant sales volume and
the addition of approximately 34,000 merchant locations served. Additionally,
sales and marketing expenses increased to support the Company's growing number
of merchants and bank alliance relationships. Selling, general and
administrative expense declined to 13.8% of revenues for the ten month year
ended December 31, 1995 compared with 15.0% for the same period in 1994,
reflecting operational efficiencies.
21
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased 60.2%
to $4.6 million for the ten month year ended December 31, 1995 compared with
$2.9 million for the same period in 1994. The increase was principally due to
additional amortization of certain intangible assets related to the
acquisition of merchant portfolios and the Boulder Acquisition. To a lesser
extent this expense increased because of greater depreciation for point-of-
sale and systems equipment purchased in the ten month period ended December
31, 1994 compared with the ten month year ended December 31, 1995.
Operating Income. For the foregoing reasons, operating income for the ten
month year ended December 31, 1995 increased 298.4% to $2.8 million compared
with $800,000 in 1994.
Interest Expense. Interest expense increased to $2.0 million for the ten
month year ended December 31, 1995 compared with $600,000 for the same period
in 1994, due to interest related to the Bank Debt and purchase note
obligations incurred principally in connection with the Boulder Acquisition.
Income Taxes. For the ten month year ended December 31, 1995, the income tax
provision reflects the reduction of valuation allowance against deferred taxes
of $5.0 million, the benefits of which have been recognized in the provision
for income taxes.
Net Income. Net income increased $4.7 million to $4.9 million for the ten
month year ended December 31, 1995 compared with net income of $200,000 for
the same period in 1994, due to the factors discussed above.
FISCAL YEAR ENDED FEBRUARY 28, 1995 COMPARED WITH FISCAL YEAR ENDED FEBRUARY
28, 1994
Revenues. Revenues increased 37.2% to $93.6 million in fiscal 1995 from
$68.2 million in fiscal 1994. Approximately $18.5 million of the increase was
attributable to revenues related to merchant service contracts acquired during
the year (including approximately $16.5 million attributable to the Boulder
Acquisition). In addition, revenues increased due to higher sales volume at
existing merchant locations and the addition of new merchants through the
Company's alliance and direct marketing programs, partially offset by normal
merchant attrition.
Cost of Service. Cost of service increased 34.6% to $74.0 million in fiscal
1995 from $55.0 million in fiscal 1994, although as a percentage of revenues,
these costs declined from 80.6% to 79.1%. Greater efficiencies realized by
converting new merchants to the NOVA Network and the Company's merchant
accounting processors resulted in improved telecommunications network and data
capture costs relative to revenues. These improvements were partially offset
by an increase in interchange expense as a percentage of revenues primarily
due to the effect of the pricing of acquired merchant portfolios and the
addition of certain new merchants.
Conversion Costs. Conversion costs decreased 12.2% to $1.8 million in fiscal
1995 from $2.1 million in fiscal 1994. The decrease resulted primarily from
the completion of substantially all of two major portfolio conversions which
were acquired in fiscal 1993 and 1994.
Selling, General and Administrative. Selling, general and administrative
expenses increased 13.5% to $14.1 million in fiscal 1995 from $12.4 million in
fiscal 1994, of which $1.4 million of this increase resulted from the Boulder
Acquisition. In addition, marketing and product management expenditures
increased to support the growing number of merchant and alliance relationships
and the introduction of new and enhanced products. Additional personnel were
employed at the Company's operations center to service the greater number of
merchant customers and perform customer service functions previously
outsourced. Selling, general and administrative expenses as a percentage of
revenues declined to 15.1% in fiscal 1995 from 18.2% in fiscal 1994 primarily
due to operational efficiencies. In February of 1994, the Company incurred a
$528,000 reorganization expense associated with certain management changes.
22
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased 46.1%
to $3.9 million in fiscal 1995 from $2.7 million in fiscal 1994 principally
due to additional amortization of certain intangible assets related to the
acquisition of merchant portfolios and the Boulder Acquisition. To a lesser
extent, this expense increased because of greater depreciation expense for
point-of-sale and systems equipment purchased in fiscal 1994 compared with
fiscal 1995. As a percentage of revenues, depreciation and amortization
remained relatively constant throughout the period.
Operating Loss. For the foregoing reasons, the operating loss in fiscal 1995
was $200,000 as compared to a loss of $3.9 million in fiscal 1994.
Interest Expense. Interest expense increased to $1.0 million in fiscal 1995
from $200,000 in fiscal 1994 due to interest related to the Bank Debt and
purchase note obligations incurred in connection with the Boulder Acquisition.
Net Loss. Net loss decreased $2.9 million to $1.2 million in fiscal 1995
compared with a loss of $4.1 million in fiscal 1994, due to the factors
discussed above.
QUARTERLY RESULTS
The following tables set forth certain unaudited financial data for each of
the Company's last eight calendar quarters and such data expressed as a
percentage of the Company's revenues for the respective quarters. The
information has been derived from unaudited combined financial statements
that, in the opinion of management, reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of such
quarterly information. The operating results for any quarter are not
necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
1994 CALENDAR QUARTER ENDED 1995 CALENDAR QUARTER ENDED
----------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31(2) MAR. 31 JUNE 30 SEPT. 30 DEC. 31(3)
------- ------- -------- ---------- ------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $16,286 $19,449 $20,795 $28,576 $29,841 $34,170 $37,554 $46,259
Cost of service......... 13,191 15,499 16,240 22,602 23,754 26,724 29,162 35,660
Conversion costs........ 315 91 92 567 1,281 998 969 1,092
Selling, general and
administrative......... 3,455(1) 3,112 3,149 3,943 4,500 4,950 5,067 6,207
Depreciation and
amortization........... 774 772 798 1,061 1,315 1,346 1,346 1,567
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. $(1,449)(1) $ (25) $ 516 $ 403 $(1,009) $ 152 $ 1,010 $ 1,733
<CAPTION>
1994 CALENDAR QUARTER ENDED 1995 CALENDAR QUARTER ENDED
----------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31(2) MAR. 31 JUNE 30 SEPT. 30 DEC. 31(3)
------- ------- -------- ---------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of service......... 81.0 79.7 78.1 79.1 79.6 78.2 77.7 77.1
Conversion costs........ 1.9 0.5 0.4 2.0 4.3 2.9 2.6 2.4
Selling, general and
administrative......... 21.2(1) 16.0 15.2 13.8 15.1 14.5 13.5 13.4
Depreciation and
amortization........... 4.8 4.0 3.8 3.7 4.4 3.9 3.6 3.4
Operating income
(loss)................. (8.9)(1) (0.1) 2.5 1.4 (3.4) 0.4 2.7 3.7
</TABLE>
- --------
(1) Includes a $528,000 reorganization expense associated with certain
management changes.
(2) Includes revenues and operating income from the Boulder Acquisition of
$9.0 million and $324,000, respectively.
(3) Includes revenues related to the December 1995 processing of the First
Union Alliance merchant portfolios aggregating approximately $9.5 million,
together with related First Union costs reimbursed by the Company derived
from the transaction processing assets transferred to the Company.
23
<PAGE>
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues in the third calendar quarter and lower revenues in the first
calendar quarter, reflecting increased transaction volumes during the Summer
months and a significant decrease in transaction volume during the period
immediately following the holiday season. Quarterly results are also affected
by the timing of acquisitions and the timing and magnitude of expenses for
merchant portfolio conversions. Therefore, the results reported in the table
above do not necessarily indicate the Company's normal seasonal trends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of its capital resources include debt service,
acquisitions of merchant portfolios, capital expenditures and working capital.
The Company's Credit Agreement with Bank of America includes an
approximately $11.1 million term loan and a $25.0 million acquisition, working
capital and letter of credit commitment. The Company incurred $17.8 million to
fund the Boulder Acquisition and at May 1, 1996, the Company had approximately
$15.7 million outstanding under the Credit Agreement. The Company's future
debt service requirements consist primarily of interest and principal payments
related to the Credit Agreement. The Company expects to repay all outstanding
amounts under the Credit Agreement out of the net proceeds of this offering.
See "Use of Proceeds." All outstanding amounts over $10.0 million will convert
June 30, 1997 to a term loan bearing interest at amounts based on the
Eurodollar rate or the bank's "base rate," at the option of the Company,
maturing June 30, 1999.
The Company's capital expenditure requirements include point-of-sale
terminals ("POS Terminals") that are leased and rented to merchants and
computer hardware and software necessary to support the NOVA Network and the
systems at the Company's operations center. For the fiscal years ended
February 28, 1994 and 1995 and the ten month year ended December 31, 1995, the
Company's capital expenditures totaled approximately $806,000, $828,000 and
$1.6 million, respectively. Management anticipates that normal capital
expenditures (not associated with acquisitions) will not exceed depreciation
expense and will be funded from operating cash flow. Capital requirements
related to all currently planned conversion activity are estimated to be
approximately $7.76 million (including approximately $7.0 million related to
the First Union Conversion) and are expected to be funded from operating cash
flow.
The Company typically has relatively low working capital requirements
because discount fees charged to merchants are collected in an average of 15
days, while normal payables are paid in 30 days or longer in the case of POS
Terminal purchases. In addition, increasing acquisition activity may cause
variations in working capital due to conversion-period operating costs.
Because of the seasonality of the Company's business, capital requirements may
be greater in certain months.
The Company expects that cash generated from operations will be the
principal source of funds for its cash requirements. The Company intends to
use the $25.0 million acquisition commitment included in the Credit Agreement,
net proceeds from this offering and cash generated from operations to fund
future merchant portfolio acquisitions and working capital requirements for
the foreseeable future.
24
<PAGE>
BUSINESS
The Company is an integrated provider of transaction processing services,
related software application products and value-added services primarily to
small-to-medium sized merchants. The Company believes that at December 31,
1995 it was the nation's eighth largest bankcard processor. The Company
provides transaction processing support for all major credit and charge cards,
including VISA, MasterCard, American Express, Discover, Diner's Club and JCB,
and also provides access to debit card processing and check verification
services. The Company provides merchants with a broad range of transaction
processing services, including authorizing card transactions at the point-of-
sale, capturing and transmitting transaction data, effecting the settlement of
payments and assisting merchants in resolving billing disputes with their
customers. In addition, the Company has developed several value-added software
applications that can be delivered to its customers and updated via the NOVA
Network. The NOVA Network was developed in conjunction with WorldCom and is
the principal conduit through which the Company provides its services. The
capabilities of the NOVA Network result in rapid response time and its
substantial bandwidth facilitates the delivery of sophisticated value-added
services. The Company's ability to effectively employ technology, together
with the capabilities of the NOVA Network, allow the Company to respond
quickly and effectively to the changing and diverse needs of its merchant
customers. The Company's alliance with First Union, effective December 1,
1995, resulted in the transfer by First Union of all of its transaction
processing assets to the Company, increasing the Company's customer base by
66.9% and increasing the annual credit card charge volume processed by the
Company by 71.8%. In addition, the First Union Alliance enhanced significantly
the Company's ability to further its market penetration and increase the size
of its customer base through the marketing assistance, support and exclusive
merchant referrals provided by the First Union Banks. The First Union Alliance
may also create additional acquisition opportunities for the Company, as the
Company and First Union have agreed that the Company generally may, at its
option, purchase from First Union any merchant portfolios acquired by First
Union through whole-bank or other acquisitions.
INDUSTRY OVERVIEW
The transaction processing industry provides merchants with credit, charge
and debit card and other payment processing services, as well as related
information services. This industry has grown rapidly in recent years as a
result of wider merchant acceptance and increased consumer use of such cards,
and advances in transaction processing and telecommunications technology.
These factors, together with the efficiencies derived from economies of scale,
are causing the consolidation of transaction processing providers and the
availability of more sophisticated products and services to all market
segments.
Increased Growth in Card Use. The proliferation in the uses and types of
credit, charge and debit cards, rapid technological advances in transaction
processing and financial incentives offered by credit card associations and
issuers have contributed greatly to wider merchant acceptance and increased
consumer use of such cards. For example, industry sources indicate that
consumer usage of VISA and MasterCard credit cards for purchases and cash
advances in the United States was approximately $440.7 billion in 1994
compared to approximately $351.7 billion in 1993, an increase of approximately
25.3%. From 1984 to 1994, charge volume of VISA and MasterCard credit cards
has grown at a compounded annual growth rate of approximately 15.6%. The
following chart sets forth consumer usage of VISA and MasterCard credit cards
for purchases and cash advances in the United States from 1984 to 1994:
25
<PAGE>
[GRAPHIC OF U.S. CHARGE VOLUME FOR VISA AND
MASTERCARD 1984-1994 APPEARS HERE]
($ in billions)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
$103.4 $125.7 $141.4 $165.7 $189.7 $210.1 $242.9 $260.2 $291.3 $351.7 $440.7
</TABLE>
The growth in charge volume and the increase in the acceptance of credit
cards are expected to continue as consumers expand their use of such cards as
an alternative to cash and checks. VISA and MasterCard charge volume is
projected to exceed $950.0 billion by the year 2000 (the Nilson Report--
January 1995).
Technology. Rapid technological advances in transaction processing,
particularly the transition from paper-based to electronic processing, have
contributed greatly to wider merchant acceptance and increased consumer use of
such cards. Electronic processing provides greater convenience to merchants
and consumers, reduces fees charged to merchants, and facilitates faster and
more accurate settlement of payments. According to industry sources,
approximately 87% of the dollar volume of credit card transactions was
processed electronically or by voice automation in 1995, up from approximately
77% in 1990. Increased card acceptance and usage, coupled with technological
advances in electronic processing, have created an opportunity for service
providers to offer a variety of sophisticated processing and information
services to merchants.
At present, many large transaction processors continue to provide customer
service and applications via mainframe-based legacy systems that are difficult
and costly to alter or otherwise customize. Accordingly, transaction
processors that continue to utilize these systems for customer service and
applications find it difficult to meet the increasing demands of small-to-
medium sized merchants for more sophisticated products and services tailored
to their diverse and changing needs. In contrast to more
26
<PAGE>
expensive and less flexible mainframe-based systems, recent advances in less
costly, scalable and networked computer systems, including distributed
client/server architecture and relational database management systems, afford
transaction processors greatly improved flexibility and responsiveness in
providing customer service and applications. In addition, the use of fiber
optic cables and advanced switching technology in telecommunications networks
and competition among long-distance carriers further enhance the ability of
processors to provide faster and more reliable service at lower per-
transaction costs than previously possible.
Advances in PC and POS Terminal technology have increasingly allowed access
to a greater array and level of sophisticated services at the point-of-sale
and contributed to the demand for such services. In addition, more
sophisticated uses of integrated cash registers and networked systems at the
merchant site create further demand for comparably advanced and sophisticated
products and services accessible at the point-of-sale. These trends have
created the opportunity for transaction processors to leverage technologies by
developing business management and other software application products and
services.
Segmentation of Merchants and Service Providers. The transaction processing
industry is characterized by a small number of large transaction processors
that primarily focus on servicing large merchants and by many smaller
transaction processors that provide a limited range of services to small-to-
medium sized merchants. Large merchants (i.e. those with multiple locations
and high volumes of card transactions) typically demand and receive the full
range of transaction processing services as well as customized information
services at low per-transaction costs. By contrast, small-to-medium sized
merchants historically have not been offered the same level of services as
large merchants and have incurred relatively higher per-transaction costs. The
growth in card transactions and the transition from paper-based to electronic
transaction processing have, however, caused small-to-medium sized merchants
increasingly to demand sophisticated transaction processing and information
services similar to those provided to large merchants.
Transaction processing services are marketed and sold to the small-to-medium
sized merchant market segment primarily by community and regional banks and
ISOs that outsource all or a portion of the transaction processing services
they offer. It is difficult, however, for banks and ISOs to customize
transaction processing services for the small-to-medium sized merchant on a
cost-effective basis or to provide sophisticated value-added services.
Accordingly, the small-to-medium sized merchant market segment historically
has been characterized by basic transaction processing without the
availability of the more sophisticated processing, information based services
or customer service offered to large merchants.
Consolidation. The transaction processing industry has undergone rapid
consolidation over the last several years. The costs to convert from paper-
based to electronic processing, merchant requirements for improved customer
service, and the demands for additional customer applications have made it
difficult for community and regional banks and ISOs to remain competitive.
Many of these providers are unwilling or unable to invest the capital required
to meet these evolving demands, and are increasingly exiting the transaction
processing business or otherwise seeking alliance partners to provide
transaction processing for their customers. Despite this ongoing
consolidation, the industry remains fragmented with respect to the number of
entities providing merchant services. Industry sources indicate that in 1994,
although the ten largest bankcard processors accounted for approximately 69%
of the total charge volume processed, there were over 400 additional
registered service providers marketing and selling transaction processing
services to merchants. Management believes that these factors will result in
continuing industry consolidation over the next several years.
COMPANY STRATEGY
The Company's objective is to maintain its leadership in the transaction
processing industry by delivering transaction processing services and related
software application products and services to its merchant customers on a
cost-effective basis and by increasing the size of its customer base through
its
27
<PAGE>
marketing and acquisition programs. The Company seeks to accomplish this
objective through the following strategies:
Focus on Small-to-Medium Sized Merchants. Since inception, the Company has
focused its strategy on delivering to small-to-medium sized merchants the
variety and sophistication of products and services previously available only
to large merchants. The Company believes that its use of technology and
focused marketing strategy enable it to effectively compete for merchant
customers in this market segment. See "Business--Customer Base."
Leverage Available Technologies. One of the Company's principal strategies
is to maximize the benefits of available technologies to deliver transaction
processing services and related software application products and services on
a cost-effective basis. The ability to achieve this strategy is facilitated by
the Company's flexible systems architecture and the capabilities of the NOVA
Network. While the NOVA Network is a fast, efficient, reliable and
technologically advanced telecommunications network, the Company continues to
develop and pursue enhancements to its telecommunications network in order to
allow the Company to maintain the advantages derived from its network
technology. The Company continues to enhance its ability to provide customized
and sophisticated software application products and services through the
ongoing development of software for POS Terminals and PC applications. See
"Business--Technology" and "Business--Software Application Products and Value-
Added Services."
Provide High-Quality, Reliable Service. The Company is dedicated to
providing reliable transaction processing services and effective customer
service and support. The Company maintains a 24-hours-a-day, seven-days-a-week
helpline staffed by full-time customer service representatives. The ability of
these customer service representatives to serve effectively and efficiently
the needs of the Company's merchants is enhanced greatly by the use of
networked systems that provide access to real-time customer transaction
information, a capability historically available only to large merchants. In
addition, the switching capabilities of the NOVA Network result in rapid
electronic transaction authorizations. See "Business--Merchant Services
Provided by the Company," "Business--Customer Service and Support" and
"Business--Technology."
Utilize Multiple Marketing Channels. To reach its target market segment in a
cost-effective manner and to further its market penetration, the Company
markets its services through three principal channels: (i) bank alliances
through which the Company offers its services to merchants in cooperation with
community and regional banks, allowing the Company to capitalize on the
presence of those banks in particular geographic markets; (ii) partnering with
ISOs that market and sell the Company's services to merchants, typically in
areas where the Company does not have bank alliances; and (iii) direct sales
to allow cost-effective access to small-to-medium sized merchants dispersed
throughout the United States and otherwise to supplement the bank alliance and
ISO partnering channels. The First Union Alliance enhanced significantly the
Company's ability to further its market penetration and increase the size of
its customer base through the marketing assistance, support and exclusive
merchant referrals provided by the First Union Banks. In addition, the Company
engages in marketing efforts that include marketing agreements with various
trade and other associations and marketing through value-added resellers that
integrate the Company's transaction processing services with specialized
business management software. See "Business--Marketing" and "Business--The
First Union Alliance."
Develop and Provide Value-Added Products and Services. In comparison to
large merchants, small-to-medium sized merchants historically have not been
offered the same variety and sophistication of products and services and are
less capable of developing their own software application products and related
informational systems (for example, frequent shopper programs). In response to
the needs of its
28
<PAGE>
target market segment, the Company continues to develop software application
products and value-added services that it can deliver directly to the merchant
at the point-of-sale through the NOVA Network. In addition, the Company works
with a variety of value-added resellers to integrate the Company's transaction
processing services with specialized business management software written for
specific industries. Management believes that these software application
products and value-added services allow the Company to strengthen its
relationships with existing customers and attract additional merchants.
Further, the terms of the First Union Alliance provide that, when feasible,
the Company will assist First Union in developing new products or services
relating to transaction processing or in otherwise supporting new business
ventures. The Company also is pursuing, in some instances through cooperation
with First Union, initiatives relating to transaction processing via the
Internet, wireless transaction processing and procurement and purchasing
cards. Management believes that these and other efforts may result in the
development of additional software application products and value-added
services. See "Business--Technology," "Business--Software Application Products
and Value-Added Services" and "Business--The First Union Alliance."
Pursue Portfolio Acquisitions. The Company will continue to pursue
acquisitions of merchant portfolios as a principal component of its growth
strategy in order to achieve greater economies of scale. This acquisition
strategy focuses on the merchant portfolios of banks and ISOs that no longer
desire or are unable to provide efficient and cost-effective transaction
processing services. The Company attempts to structure its acquisition of
merchant portfolios both to increase its merchant base and to expand its
distribution and marketing capabilities. The Company accomplishes this
objective principally by entering into an exclusive marketing agreement or
alliance with a bank that sells its merchant portfolio to the Company. These
alliances offer banks the opportunity to transfer management and operational
responsibility for their merchant portfolios to the Company, while continuing
to offer transaction processing services on a co-branded basis in cooperation
with the Company. Banks are therefore able to view the acquisition of their
merchant portfolio by the Company as a way to maintain a full-service
relationship with their merchant depositors. Since inception, the Company has
consummated 58 transactions consisting of 54 merchant portfolio acquisitions,
three operating business acquisitions and the First Union Alliance. The First
Union Alliance may create additional acquisition opportunities for the
Company, as the Company and First Union have agreed that the Company generally
may, at its option, purchase from First Union any merchant portfolios acquired
by First Union through whole-bank or other acquisitions. See "Business--
Industry Overview--Consolidation," "Business--Acquisition Strategy,"
"Business--Marketing" and "Business--The First Union Alliance."
29
<PAGE>
MERCHANT SERVICES PROVIDED BY THE COMPANY
The following diagram (which is referenced in the text below) summarizes the
flow of information and services among the Company, the merchant, and certain
other parties involved in the Company's provision of services to its merchant
customers with respect to a typical credit card transaction:
[GRAPHIC OF FLOW OF INFORMATION SERVICES WITH RESPECT
TO A TYPICAL CREDIT CARD TRANSACTION APPEARS HERE]
[F]
Clearing Bank
[E]
MERCHANT
[A] [B]
PC POS NOVA Credit Card
Terminal Association
[G] [C] [D]
Merchant Accounting
[K] NOVA
DATABASE
[H]
[J]
NOVA
[I] CUSTOMER
SERVICE
Authorization Services. The Company provides electronic transaction
authorization services for all major credit and charge cards. Authorization
generally involves approving a cardholder's purchase at the point-of-sale
after verifying that the card is not lost or stolen and that the purchase
amount is within the cardholder's credit or account limit. The electronic
authorization process for a credit card transaction begins when the merchant
"swipes" the card through its POS Terminal and enters the dollar amount of the
purchase. After capturing the data, the POS Terminal transmits the
authorization request via the NOVA Network to the Company's switching center,
where the data is routed to the appropriate credit card association for
authorization (see paths "A" and "B" of the above diagram). The transaction is
approved or declined by the credit card association, and the response is
transmitted back to the Company's switching center, where it is routed to the
appropriate merchant (paths "B" and "A").
Data Capture and Reporting Services. At the time of authorization, data
relating to the transaction, such as the purchase price and card number, is
recorded electronically both at the merchant's POS Terminal and by the
Company. This redundancy maximizes accurate transaction reconciliation with
each merchant and protects against potential loss of data. On a periodic basis
throughout the day, the merchant aggregates and organizes this transaction
data, using a software application that the Company has programmed into the
merchant's POS Terminal, and transmits this information to the Company (path
"A")
30
<PAGE>
where it is organized into two files. One file is transmitted to either Total
System Services or Mellon Bank for merchant accounting as described below
(path "C"). The other file is maintained by the Company in its database to
allow the Company to run its proprietary fraud detection software program
against each of the day's transactions processed via the NOVA Network (path
"G"). This information also allows the Company to provide merchants with
information services such as specialized management reports and to assist in
its other customer service operations (path "H"). Merchants can access this
archived information through customer service representatives (path "I") or
through applications such as NOVA ACS and NOVA Perks which allow the merchant
direct access to the Company's database through a PC (path "K"). See
"Business--Risk Management" and "Business--Customer Service and Support."
Settlement, Accounting and Clearing Services. Merchant accounting services
are performed on the Company's behalf by Total System Services and Mellon
Bank, with each of the Company's merchant customers assigned to one of these
processors. No less often than once each day, the Company forwards to Total
System Services and Mellon Bank, respectively, transaction data regarding the
Company's merchant customers (path "C"). Total System Services and Mellon Bank
reorganize and accumulate this data on a merchant-by-merchant and card issuer-
by-card issuer basis and forward this data to the credit card associations for
ultimate payment (path "D"). On a monthly basis, Total System Services and
Mellon Bank send statements to the Company's merchant customers for whom they
provide settlement and accounting services, detailing the previous month's
transaction activity.
Through each of First Alabama Bank, Bank of the West and Mellon Bank, which
serve as member clearing banks for the Company, the Company is registered with
VISA and MasterCard as a certified processor and member service provider.
FUNB-NC also serves as a clearing bank for the Company, but currently does not
sponsor the Company as a member service provider. The Company's clearing banks
receive payment for merchant transactions from credit card associations (net
of fees payable to the credit card associations and card issuing banks), from
which the clearing banks remit payment to the merchant for the gross amount of
the merchant's transactions (paths "E" and "F"). Once each month, the Company
collects applicable merchant discount and other fees from each merchant for
transactions effected and services provided during the preceding month. See
"Business--Merchant Accounting and Clearing Bank Relationships."
Chargeback Services. In the event of a billing dispute between a cardholder
and a merchant, the Company assists the merchant in investigating and
resolving the dispute. These billing disputes include, among others: (i)
nonreceipt of merchandise; (ii) unauthorized use of a credit card; and (iii)
general disputes between a customer and a merchant as to the quality of the
goods purchased or the services rendered by that merchant. The Company
provides a sophisticated chargeback control system for its merchants that
includes actively prescreening disputes and the use of proprietary software
programs to automate chargeback controls. These chargeback control systems are
designed to reduce the time and expense that the Company and merchants spend
on cardholder requests for chargebacks. In the event a billing dispute between
a cardholder and a merchant is not resolved in favor of the merchant, the
transaction is "charged back" to the merchant and that amount is credited or
otherwise refunded to the cardholder. If the Company or its clearing banks are
unable to collect such amounts from the merchant's account, and if the
merchant refuses or is unable due to bankruptcy or other reasons to reimburse
the Company for the chargeback, the Company bears the loss for the amount of
the refund paid to the cardholder. See "Business--Risk Management."
Customer Service and Support. The Company provides its merchant customers
with a variety of customer services and support. These services include
leasing, renting or selling POS Terminals, downloading software application
products and services to POS Terminals (path "J"), maintaining POS Terminals,
and customizing software for merchant applications. In addition, the Company
maintains a 24-hours-a-day, seven-days-a-week helpline staffed by full-time
customer service representatives (path "I"). See "Business--Software
Application Products and Value-Added Services" and "Business--Customer Service
and Support."
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TECHNOLOGY
One of the Company's principal strategies is to maximize the benefits of
available technologies to deliver transaction processing and related software
application products and services on a cost-effective basis. Accordingly, the
Company regularly uses and adapts technologies developed for applications
outside the transaction processing industry. In particular, technologies
developed for networked PCs and the telecommunications market have been
important to the NOVA Network and the Company's service capabilities.
The Company employs a development team concept in its approach to the use,
adaptation and development of technology. Pursuant to this concept, the
Company organizes development teams typically consisting of at least one
representative from each of the Company's sales, marketing, operations,
finance, customer service and technology departments. These teams coordinate
their efforts to use technology in such a way that it will be responsive to
the Company's and the customers' needs, supportable and serviceable by the
Company's personnel, and technologically feasible and efficient. The Company
currently has four development teams focusing on technology relating to the
following areas: (i) core business operations, including POS Terminals and
PCs; (ii) software application products and value-added services; (iii) the
NOVA Network, and (iv) corporate MIS.
The Company exercises significant control over the development and
enhancement of the combination of hardware, software and network services that
comprise NOVA's transaction processing and information delivery system. This
provides the Company with greater control over the functionality, quality,
reliability, cost and efficiency of its transaction processing services and
related software application products and services.
The NOVA Network. The NOVA Network, developed in conjunction with WorldCom,
is the Company's proprietary telecommunications network and the principal
conduit through which the Company provides its services. The design of the
NOVA Network provides efficient switching capabilities, resulting in rapid
response time for transaction authorizations. Fiber optic communications are
employed throughout the NOVA Network, providing the substantial bandwidth
capable of supporting sophisticated value-added services. In working with
WorldCom, the Company was able to design a network specifically tailored to
the services the Company desired to provide, the equipment the Company
intended to use in providing those services, and the functionality those
services were designed to achieve. As customer needs change and as technology
improves, management believes that it will be able to adapt and customize the
NOVA Network as necessary to achieve the functionality it desires. Pursuant to
its agreement with the Company, WorldCom provides long-distance and local
telecommunication access, as well as technical support, to the Company in
connection with the NOVA Network. This agreement expires February 28, 1999,
subject to earlier termination by the Company if WorldCom fails to meet
certain agreed-upon performance objectives.
The NOVA Network is the result of combining WorldCom's Common Channel
Signaling Specification Number Seven, commonly referred to as an "SS7"
switching system, with the use of advanced Integrated Services Digital Network
("ISDN") and Non-Facilities Associated Signaling ("NFAS") features. SS7 is
high-speed call-switching technology utilized in telecommunications networks
and originally intended only for carrier-to-carrier use, such as a regional
phone company switching long-distance calls to WorldCom for transmission, as
opposed to use by end-users such as the Company and its merchants. With the
use of ISDN technology, however, end-users such as the Company can utilize an
SS7 switching system without sacrificing any of the enhanced performance
attributes derived from SS7 technology. Although significant hardware and
software obstacles currently are inherent to end-user utilization of an SS7
switching system, the Company developed a proprietary ISDN interface enabling
it effectively to employ SS7 technology as part of the NOVA Network. Further,
the NFAS features of the NOVA Network allow for a greater portability of the
NOVA Network to long-distance and local telecommunications access providers
other than WorldCom, significantly reducing the Company's historical
dependence on WorldCom. The Company has developed and tested a network
interface with AT&T and management believes that, if
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necessary or convenient, the Company could utilize the telecommunications
access of AT&T in connection with the NOVA Network. Management believes that
transferring the NOVA Network to AT&T, or another telecommunications access
provider, can be done without sacrificing any significant performance or
operational attributes of the NOVA Network, although such a move may increase
the Company's expenses for network services.
The reliability of the NOVA Network is enhanced by the backup service
provided by AT&T. The existence and maintenance of this backup system, which
is designed so no single element is shared with the principal WorldCom system,
enhances the Company's ability to provide a high level of reliability in its
network service. Through an agreement with Electronic Data Systems
Corporation, the Company maintains a voice authorization backup system. This
backup system allows merchants to receive voice authorization of transactions
in the event of a POS Terminal malfunction, network outage or other similar
circumstances.
Software Development for POS Terminals and PCs. The Company is continuously
developing new software applications for POS Terminals and PCs in an effort to
improve existing and create additional product and service offerings. This
software development capability is critical to the Company's ability to
respond flexibly to changing customer needs and improving technologies. Most
of the POS Terminals utilized by the Company's merchant customers have been
programmed by the Company with specific applications. By programming POS
Terminals, the Company can avoid the limitations of the preexisting
applications programmed into POS Terminals, which are designed for broad
applicability to a wide range of users, and can provide its merchant customers
with specifically tailored applications at an increased level of
functionality. Distribution of software application products designed for use
through POS Terminals generally is accomplished by downloading such
applications over the NOVA Network, enabling a merchant to utilize the
Company's products and services quickly and inexpensively.
As the use of PCs by merchants grows, and as merchants continue to move
toward fully-integrated cash registers and payment systems, the Company
continues its efforts to extend its POS Terminal software application product
and service offerings to PCs. For instance, NOVA ACS, NOVA Perks, PC
TransactIt, and NOVA Shadow Pay are PC-based applications, and the Company
intends to expand the number of its products and services available for PC use
or that otherwise allow the POS Terminal to interface with a PC. While
merchant use of such products and services currently is limited, and there can
be no assurance that such products and services will be widely accepted, the
Company expects such use to increase. Further, the terms of the First Union
Alliance provide that, when feasible, the Company will assist First Union in
developing new products or services relating to transaction processing or in
otherwise supporting new business ventures. The Company and First Union are
actively pursuing initiatives relating to transaction processing via the
Internet and procurement and purchasing cards, and management believes that
these and other efforts may result in the development of additional software
application products and value-added services. See "Business--Software
Application Products and Value--Added Services."
The Company actively encourages third party software developers to write
applications to the Company's specifications and network protocols. These
applications, once certified by the Company, allow integration of the
Company's transaction processing services with the business management
software created by such developers for use at the merchant's point-of-sale.
These developers often function as value-added resellers ("VARs") for the
Company as they frequently market their business management software in
connection with the Company's services. For example, Squirrel Restaurant
Products ("Squirrel"), one of the leading VARs, provides software applications
to accommodate the specialized business management needs of the restaurant
industry. Squirrel, in cooperation with the Company, has modified its software
to allow full integration of the Company's transaction processing services. In
this way, VARs such as Squirrel indirectly perform a marketing function for
the Company since their software is often offered on a fully-integrated basis
with the Company's transaction processing
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services, creating additional opportunities for the Company to reach small-to-
medium sized merchants. The Company has certified in excess of 25 VARs,
including Squirrel, ICL Supermarket Systems, Computer Golf Club Systems and IC
Verify.
Use of Networked Systems for Customer Service. The information access and
retrieval capabilities of networked systems, where real-time information is
available to any of the Company's customer service representatives, allow the
Company to provide a level of customer service and support to small-to-medium
sized merchants previously available only to much larger merchants. For
example, any of the Company's customer service representatives may access, on
a real-time basis, all of the relevant information pertaining to any
particular merchant that may call and ask for assistance. The Company also
recently implemented an on-line, informational database that provides the
Company's customer services representatives user-friendly access to an array
of additional information relative to the Company's services, products and
systems, which often allows the Company to more quickly and effectively
resolve customer service inquires. In addition to their customer service
capabilities, the Company's networked systems are highly automated and require
minimal staffing, which allows the Company to contain costs and achieve
greater operating efficiencies.
SOFTWARE APPLICATION PRODUCTS AND VALUE-ADDED SERVICES
In addition to card transaction processing, the Company offers related
software application products and value-added services to its merchant
customers. These products and services are designed to run on existing POS
Terminals and DOS- and Windows-based PCs. Offering a broad range of products
and services historically unavailable to small-to-medium sized merchants is an
integral part of the Company's strategy of focusing on these merchants and
differentiating itself among the banks and ISOs serving this market segment.
Management believes that the quality and reliability of its products and
services enhance the Company's ability to attract and retain merchant
customers.
The Company currently offers a variety of products and services, each with a
differing application, including the following:
Encompass. Encompass is the latest generation of the Company's user
interface. In addition to the Company's core transaction processing services,
Encompass enables merchants to access the Company's software application
products and value-added services such as NOVA Perks and NOVA Time. Encompass
also allows the merchant to access other business management applications,
including customized end-of-day processing (allowing, for instance, the
performance by the merchant of daily audit functions) and other review and
reporting features (e.g., summary report generation). Designed as a flexible
"modular" system, Encompass allows the merchant to add features and capability
as its business needs evolve. Generally available since July 1994, Encompass
is a POS Terminal application currently used by approximately 13,500
merchants. The Company presently provides Encompass to all new merchant
customers, and generally charges a one-time fee to upgrade existing merchants
to Encompass.
NOVA ACS and NOVA Remote ACS. NOVA ACS (Automated Customer Service) is a PC-
based system that allows the Company's bank alliance and ISO partners access
to the Company's databases in order to track and compile the transaction
processing activity of their respective merchant customers. Through such
access and related information retrieval capabilities, NOVA ACS expands
greatly the banks' and ISOs' ability to design and obtain customized
informational reports and to perform for their merchant customers a variety of
customer service related activities. Available since 1991, NOVA ACS currently
is used by approximately 100 of the Company's bank alliance and ISO partners.
NOVA Remote ACS is a variation of NOVA ACS that is used by the Company's
larger merchant customers. In a manner similar to NOVA ACS, NOVA Remote ACS
allows a merchant specified access to the Company's databases to review and
retrieve transaction information. Unlike NOVA ACS, however, NOVA Remote ACS
does not afford the merchant the ability to design and obtain customized
informational reports. A PC-based application, NOVA Remote ACS has been
available since 1993 and currently is utilized by approximately 100 merchants.
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NOVA Perks. NOVA Perks is a Company-developed PC-based application that
allows a subscribing merchant to design and operate a customized frequent
shopper program. This program enables the merchant to promote sales and to
track, store and retrieve detailed information about its customers and all of
their purchases regardless of the method of payment. NOVA Perks can be
utilized by merchants who do not use the Company for transaction processing
services. Implementation of a customized frequent shopper program begins with
the merchant designing a customer enrollment form specifically tailored to
allow the merchant to collect information (e.g., name, address and other
demographic information) about the customer. In addition, the merchant
determines point accrual and prize award aspects of the frequent shopper
program, deciding how points will accrue and what prizes and awards will be
available. As an alternative to designing a customized frequent shopper
program, the merchant can select one of several standardized programs
developed and provided by the Company. Once a customer has completed an
enrollment form, the resulting information is entered into a database
maintained by the Company and accessible by the merchant, and a "frequent
shopper card," typically a magnetically-encoded plastic card with the
merchant's name and logo, is issued to the customer. Every time the customer
makes a purchase in one of the merchant's locations, regardless of whether
payment is cash, check, credit or debit, the frequent shopper card is swiped
through the POS Terminal, the transaction information is captured and stored
by NOVA, and the customer accrues points to be redeemed for designated prizes
and awards. The Company began test marketing of NOVA Perks in January 1995 and
NOVA Perks was first made available, on a limited basis, in April 1995, but
has not yet achieved significant market acceptance. The Company charges a one-
time license fee for the NOVA Perks software, and thereafter charges the
merchant a monthly maintenance fee as well as a flat fee on a per-transaction
basis.
SCAN Check Verification Services. Through an agreement with Electronic
Transaction Corporation ("ETC"), the Company offers check verification
services to its customers. Specifically, the Company can provide its customers
with direct access via the NOVA Network to the "SCAN" database managed by ETC.
The SCAN database is composed of information relating to checks returned to
subscribers of the SCAN database for insufficient funds. This access allows
merchants to compare the information included in the database against any
check presented to the merchant for payment. This service is accessible to the
merchant through the merchant's POS Terminal and was introduced in May 1995,
with significant telemarketing of SCAN to existing NOVA merchants commencing
in January 1996. Merchants pay per-transaction fees for access to such
service.
NOVA Shadow Pay. NOVA Shadow Pay, introduced by the Company in February
1996, is the Company's most recent software application product offering.
Developed to address the increasing use by merchants of integrated and modem-
enabled cash registers and PCs, NOVA Shadow Pay eliminates the necessity of a
traditional, stand-alone POS Terminal. Typically, merchants accepting cards
for payment key-in or input transaction data at their cash register and then
key-in certain redundant transaction data to their POS Terminal for
authorization and processing. This redundant keying of data increases both the
probability of human error as well as the amount of time it takes a merchant
to process a transaction. NOVA Shadow Pay is a DOS-based PC application that
allows the merchant's modem-enabled cash register or PC to capture the
transaction data that is keyed or otherwise input into the cash register or
PC, and transmits such data for authorization and processing, eliminating both
the need for a stand-alone POS Terminal and the redundant keying of
transaction data associated therewith. In addition, NOVA Shadow Pay provides
the merchant access to certain review and reporting features allowing, for
instance, the merchant to more easily reconcile transaction activity for any
given period with the data captured and stored by the merchant's cash register
or PC. The Company charges a one-time license fee for access to NOVA Shadow
Pay.
Mass Transact and PC Transact_It. Mass Transact is a mainframe-to-mainframe
transaction processing application that the Company developed specifically for
businesses utilizing mainframe technology and processing large numbers of
credit card transactions on a batch basis. A merchant using Mass Transact
(typically one that accepts a large number of credit card transactions by
telephone or mail)
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assembles a batch file of transactions and the merchant's mainframe transmits
that information to the Company for processing. Insurance companies and
magazine publishers, each of which process large numbers of transactions for
recurring payments such as insurance premiums and subscription renewals,
respectively, are examples of the Company's merchant customers who currently
utilize Mass Transact. Available since September 1994, Mass Transact currently
is used by approximately 20 of the Company's merchants. PC Transact_It is a
similar application that allows PCs, rather than mainframes, to process
transactions on a batch basis. Available since October 1994, PC Transact_It
currently is used by approximately 500 of the Company's merchants. Merchants
who subscribe to Mass Transact or PC Transact_It pay a one-time license fee and
a percentage of the dollar amount of each transaction processed.
NOVA Time and NOVA Clock. NOVA Time enables merchants to replace the
traditional employee time clock and reduce the bookkeeping costs associated
therewith. Using the merchant's existing POS Terminal or PC, NOVA Time allows
the merchant to track the hours worked by each employee. To implement NOVA
Time, a merchant issues a magnetically encoded plastic card to each employee.
The employee swipes the card through a designated POS Terminal to "clock-in"
and "clock-out." This information is stored at the POS Terminal or the
merchant's PC and can be accessed by the merchant to print a detailed report
of the hours worked by each employee as necessary for management purposes and
payroll processing. In addition, NOVA Time can be configured to allow the
merchant to send payroll information directly to payroll processors such as
ADP. The Company licenses the software for NOVA Time from a third party. NOVA
Time was introduced, on a limited basis, in April 1995, but has not yet
achieved significant market acceptance. The Company charges a one-time license
fee and subsequent monthly fees for access to NOVA Time. NOVA Clock is a time
and attendance application similar to NOVA Time. Developed by the Company and
available since July 1994, NOVA Clock provides basic time clock functionality
but does not allow the merchant to transmit payroll information directly to
payroll processors. NOVA Clock is provided to each merchant, at no additional
charge, as part of the Encompass operating platform.
In addition to its currently available software application product and
value-added services, the Company continues to develop technology-enabled
product and service offerings. The principal initiatives that the Company
currently is pursuing are as follows:
Cellular Digit Packet Data. The use of Cellular Digit Packet Data ("CDPD")
allows the Company to process transactions utilizing cellular airwaves, as
opposed to traditional phone lines, enabling wireless transaction
authorization and processing. The Company currently has an agreement with
McCaw Wireless Data, Inc. (doing business as AT&T Wireless Services), as well
as with GTE, to provide cellular transmission services. In February 1996, in
cooperation with AT&T Wireless Services, the Company commenced a pilot CDPD
program with San Francisco Yellow Cab. CDPD enables transaction authorization
and processing in environments where traditional phone lines are unavailable,
inconvenient and/or prohibitively expensive, affording merchants increased
flexibility, mobility and security in processing card transactions. Further,
CDPD will allow merchants that have relied on paper-based processing, where
the ability to check if a card is stolen or credit limits exceeded is
generally unavailable or inconvenient, to convert to electronic processing. In
so doing, such merchants can also avoid the higher rates imposed by each of
VISA and MasterCard for paper-based transactions.
Internet Processing. The Company is actively pursuing development
initiatives relating to transaction processing services on the Internet and
other forms of electronic commerce. The Company is exploring with First Union
and other third parties several Internet-related opportunities, which include
processing transactions via the Internet, accepting merchant applications via
the Internet and developing, on behalf of merchants, "home-pages" on the
Internet. In addition, the Company recently has entered into an agreement with
CyberCash Inc. pursuant to which CyberCash will provide to the Company
encryption services (a security measure) for transactions processed via the
Internet. While these Internet-related initiatives are still in their
formative stages, where security is perhaps the prevailing issue and obstacle,
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the Company is active in the development process and management believes that
the Internet may, ultimately, become another distribution channel for the
Company's products and services.
Procurement and Purchasing Cards. Corporate procurement and purchasing cards
are growing in popularity and flexibility of use, and the Company is exploring
opportunities intended to take advantage of this emergence. Procurement and
purchasing cards, although very similar in most respects to bank and charge
cards, are tailored to a specific business and functionality. Purchasing cards
may be used, for example, to replace the traditional use of paper-based
purchase orders, confirmations and invoices with electronically authorized,
processed and recorded transactions. Another illustrative use of a purchasing
card is an insurance company that issues purchasing cards to its policy
holders for the purchase by such policy holders of medical supplies,
prescriptions and services from certain health care providers, all of whom
have agreed, in advance, to accept the insurance company's purchasing cards.
Purchasing cards can be used effectively in these and other capacities to
reduce the costs, human error and security issues associated with paper-based
transactions, while concurrently offering the benefits of increased
flexibility and functionality, including specialized review, reporting and
accounting functions.
CUSTOMER BASE
The Company's merchant customer base consists primarily of small-to-medium
sized merchants, with a particular concentration in the restaurant, specialty
retail, furniture, automobile repair and lodging industries. In addition,
banks also are customers of the Company insofar as those banks accept credit
card cash advance transactions. While the Company's merchants vary
significantly in size, a typical NOVA merchant generates approximately
$140,000 in annual charge volume. Although the Company focuses on small-to-
medium sized merchants, the Company also serves a significant number of large
merchants and has in place the technical, operational and management
infrastructure necessary to continue to serve large merchants. For the ten
month year ended December 31, 1995, no merchant customer accounted for more
than 2.5% of the Company's revenues. At January 31, 1996, the Company provided
transaction processing services to approximately 80,000 merchant locations
nationwide.
The Company enters into direct contractual relationships with its merchants,
which minimize the financial risks to the Company in the event any of the
Company's bank alliance partners no longer desire to utilize the Company's
services. In contrast to the Company's approach, the typical transaction
processor/bank relationship involves a processor negotiating with a bank to
serve all of the bank's merchants, with the bank maintaining direct control
over each merchant relationship. Such a structure exposes the processor to the
risk that each of the merchant relationships, and the revenues from those
relationships, easily could be jeopardized if, for example, the bank were to
sell its merchant business portfolio to an acquiror that provided its own
transaction processing services.
MARKETING
To reach its target market segment in a cost-effective manner and to further
its market penetration, the Company markets its services through three
principal channels: (i) bank alliances through which the Company offers its
services to merchants in cooperation with community and regional banks,
allowing the Company to capitalize on the presence of those banks in
particular geographic markets; (ii) partnering with ISOs that market and sell
the Company's services to merchants, typically in areas where the Company does
not have bank alliances; and (iii) direct sales, to allow cost-effective
access to small-to-medium sized merchants dispersed throughout the United
States and otherwise to supplement the bank alliance and ISO partnering
channels. In addition, the Company engages in marketing efforts that include
marketing agreements with various trade and other associations and marketing
through VARs that integrate the Company's transaction processing services with
specialized business management software. The Company's ability to market its
services through ISOs and to increase its ISO partnering presence were
expanded greatly as a result of the 24 marketing agreements with ISOs that
were included as part of the Boulder Acquisition. The First Union Alliance is
the Company's most significant example of marketing
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through bank alliances, and enhanced significantly the Company's ability to
further its market penetration and increase the size of its customer base
through the marketing assistance, support and exclusive merchant referrals
provided by the First Union Banks.
Bank Alliances. The Company's principal marketing efforts are directed at
forming bank alliances. Through these relationships, the Company offers its
services to merchants in cooperation with community and regional banks,
allowing the Company to capitalize on the presence of those banks in
particular geographic markets. The Company's bank alliances consist of three
types of relationships: (i) relationships created as a result of the Company's
acquisition of a bank's merchant portfolio, pursuant to which the Company
provides transaction processing services on a co-branded basis with such bank
("Acquisition Alliances"); (ii) agent bank relationships where the bank
purchases the Company's services and markets and resells those services
directly to merchants ("Agent Bank Alliances"); and (iii) bank referral
relationships where the bank refers to the Company merchants who desire or
otherwise inquire about transaction processing services ("Bank Referral
Alliances").
Acquisition Alliances are an integral part of the Company's overall
acquisition strategy pursuant to which the Company offers banks the
opportunity to transfer management and operational responsibility for their
merchant portfolios to the Company, while continuing to offer transaction
processing services on a co-branded basis in cooperation with the Company.
Because an Acquisition Alliance may involve the Company hiring the banks'
transaction processing salespersons and keeping them on-site at the bank
branch to service existing merchant customers and to market and sell the
Company's processing services to new merchant customers, the Company can often
effect a nondisruptive transition of services from the merchants' perspective.
To ease further this transition process and to assist its Acquisition Alliance
partners, the Company has created an intensive training program whereby the
Company's personnel train and educate its Acquisition Alliance partners in all
aspects of the Company's transaction processing services, software application
products and value-added services.
The Company compensates its bank alliance partners through varying means.
Acquisition Alliance partners typically are compensated by the Company
remitting to them a residual for each transaction processed by the Company for
merchants attributable to the alliance. The Company compensates its Bank
Referral Alliance partners typically by paying them a one-time referral fee.
Agent Bank Alliance partners are not directly compensated by the Company;
rather, they derive revenue by reselling the Company's services to merchants
at a price determined by the Agent Bank. The Company is assisted in its
alliance efforts through a marketing agreement with Kessler Financial Services
L.P. ("Kessler"), an independent marketing organization. Pursuant to this
agreement, Kessler identifies potential alliance or acquisition prospects for
the Company. The Company's agreement with Kessler is scheduled to expire June
30, 1999.
ISO Partnering. With the Boulder Acquisition, which included 24 marketing
agreements with ISOs, the Company made its first significant entry into the
ISO marketing channel. Generally, ISO partnering involves engaging an ISO to
market and sell the Company's products and services on a non-exclusive basis.
An ISO that desires to refer a merchant customer to the Company will procure
the merchant's application and submit it to the Company on the merchant's
behalf. Thereafter, if the application is approved, the ISO will sell or lease
POS Terminals and related hardware and software to such merchant. The Company
compensates ISOs by paying them a residual for each transaction processed by
the Company for merchants referred to the Company by the ISO. The ISO's
determination of whether to refer a particular merchant to the Company depends
on a variety of factors, including the terms of the residual offered by the
Company and the industry in which the merchant conducts its business.
Direct Sales, Including Telemarketing. The Company continues to expand its
direct sales activities. The Company intends to deploy a telemarketing sales
force to generate further internal growth from existing relationships with
regional and community banks, ISOs and merchant trade and other
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associations. Management believes that its direct sales and telemarketing
efforts constitute a significant opportunity to augment its bank alliance and
ISO partnering efforts.
Other Marketing Efforts. In addition to bank alliances, ISO partnering and
direct sales and telemarketing, the Company engages in other marketing efforts
that management believes complement and diversify further the Company's
overall marketing strategy:
Association Marketing. Through its association marketing program, the
Company negotiates and enters into marketing agreements with various trade and
other associations. Pursuant to these relationships, associations endorse and
promote to their membership the transaction processing services provided by
the Company, creating additional opportunities for the Company to reach small-
to-medium sized merchants. The Company currently has agreements with 62
associations, including the American Hotel & Motel Association and the
National AAMCO Dealers Association.
Marketing Through VARs. The Company's marketing efforts are diversified
further through the integration of its transaction processing services with
the specialized business management software of a growing number of VARs. VARs
perform a marketing function for the Company since their software often is
offered on a fully-integrated basis with the Company's transaction processing
services, creating additional opportunities for the Company to reach small-to-
medium sized merchants. See "Business--Technology--Software Development for
POS Terminals and PCs."
The Company periodically reviews its marketing efforts and distribution
channels to minimize channel conflict. Although channel conflict among bank
alliances, ISO partnering and direct sales marketing may occur, to date the
Company has not experienced any significant conflict while pursuing its
overall sales strategy.
THE FIRST UNION ALLIANCE
The First Union Alliance is the Company's most significant transaction to
date and represented approximately $4.6 billion in 1995 credit card charge
volume. The First Union Alliance resulted in the transfer by First Union of
its transaction processing assets to the Company, increasing the Company's
customer base by 66.9% to approximately 80,000 merchants and increasing the
annual charge card volume processed by the Company by 71.8% to $11.0 billion.
At January 1, 1996, First Union was the nation's sixth largest bank in terms
of total assets.
Pursuant to the First Union Alliance, First Union contributed its
transaction processing assets (the "First Union Assets"), including the
transaction processing assets of First Fidelity Bancorporation and its banking
subsidiaries (which merged with and into First Union effective January 1,
1996), to NOVA Corporation. Concurrently, the then current shareholders of
NOVA Information Systems (the "Original Shareholders") contributed to NOVA
Corporation all of the shares of capital stock of NOVA Information Systems
owned by them, together with all of their rights to acquire shares of capital
stock of NOVA Information Systems, causing NOVA Information Systems to become
a wholly-owned subsidiary of NOVA Corporation. In exchange for their
respective contributions to NOVA Corporation, First Union received 9,149,209
shares of NOVA Corporation common stock, while the Original Shareholders
collectively received an aggregate of 2,228,911 shares of NOVA Corporation
common stock, together with the right to acquire (through the exercise of
options and the conversion of Preferred Stock) an aggregate of 14,762,487
shares of NOVA Corporation common stock. NOVA Corporation was incorporated in
Georgia in December 1995 solely to facilitate the First Union Alliance. The
First Union Assets consist principally of merchant service contracts pursuant
to which the Company provides transaction processing services to approximately
31,000 additional merchant locations. For the 12 months ended December 31,
1995, the First Union Assets generated approximately $105 million in revenues
from approximately $4.6 billion in bankcard transaction volume. The First
Union Alliance was effective as of December 1, 1995. Accordingly,
39
<PAGE>
since such date all revenues derived from the First Union Assets have accrued
for the benefit of the Company and are reflected in the Company's results of
operations for the ten month year ended December 31, 1995.
The conversion and integration of the transaction processing assets
transferred to the Company as a result of the First Union Alliance currently
is in progress and is expected to be completed in the Fall of 1997. First
Union, on behalf of and as requested by the Company, has agreed to continue to
service the First Union Assets until the conversion and integration of the
First Union Assets is complete, for which the Company will reimburse First
Union for certain specified expenses. First Union also agreed, until January
31, 2003 and subject to certain specified exceptions and conditions, not to
solicit, contract or generally do business with merchants or ISOs with whom
the Company has a contractual relationship. In connection with the First Union
Alliance, the Company hired approximately 40 former First Union employees and
assumed a lease for office space in Jacksonville, Florida. See "Business--
Employees" and "Business--Properties."
The Marketing Support Agreement. In connection with the First Union
Alliance, the Company and First Union entered into a Marketing Support
Agreement which provides, subject to certain exceptions, that the First Union
Banks, together with and through each of the more than 2,000 First Union
branches, shall actively market the Company's transaction processing services
to merchants and shall refer merchants that request transaction processing
services exclusively to the Company. The marketing services and assistance
provided by the First Union Banks include the distribution by each First Union
Bank of promotional and informational materials and supplies relating to the
Company's transaction processing services, and such other services and
assistance as may mutually be agreed upon by First Union and the Company. The
Marketing Support Agreement also provides that the Company will, when
feasible, assist First Union in developing new products or services relating
to transaction processing or in otherwise supporting new business ventures.
The Company and First Union are actively pursuing initiatives relating to
transaction processing via the Internet and procurement and purchasing cards,
and management believes that these and other efforts may result in the
development of additional software application products and value-added
services. The Marketing Support Agreement also generally provides that the
Company may not, without the prior consent of First Union, enter into certain
marketing agreements with third parties generally located in specified areas
where First Union currently maintains a significant banking presence. The
Marketing Support Agreement expires January 31, 2003.
The Depositary and Settlement Agreement. The Company and First Union also
entered into a Depositary and Settlement Agreement under which, upon
consummation of the conversion and integration of the First Union Merchant
Portfolios into the Company's operations, FUNB-NC generally will act as the
exclusive clearing and settlement bank for transactions originating from
merchants maintaining a depository account with First Union for receipt of
payment of cleared transactions (collectively, "First Union Merchants"). The
Depositary and Settlement Agreement provides, however, that the Company may
solicit from one or more other member clearing banks proposals to provide
clearing and settlement services to the First Union Merchants, although FUNB-
NC will have the opportunity to match the terms and conditions of any such
third party proposal. With respect to merchants other than First Union
Merchants, management expects to continue to utilize the services of its other
member clearing banks (Mellon Bank, First Alabama Bank and the Bank of the
West) in a manner generally consistent with current and past business
practices, although the Company may offer to FUNB-NC opportunities to serve as
member clearing bank with respect to such merchants. The Depositary and
Settlement Agreement expires January 31, 2003.
The Shareholders Agreement. Concurrently with the consummation of the First
Union Alliance, the Company, its shareholders and First Union entered into a
Shareholders Agreement that sets forth, among other things, agreements
regarding the composition of the Company's Board of Directors, the
transferability of the Company's capital stock and the Company's future
business activities. In particular, the Shareholders Agreement provides that
the Company may, at its option, purchase from First Union any
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merchant portfolios acquired by First Union through whole-bank or other
acquisitions. To facilitate First Union's compliance with the Banking Laws,
and to allow First Union to obtain any required consents or approvals, the
Company also has agreed to notify First Union before it enters into, or
acquires any company which is engaged in, business activities substantially
different from the business activities the Company currently conduct. If First
Union is unable to obtain such consents or approvals, the Company may not
engage in the new business activity or proceed with the contemplated
acquisition. Accordingly, the Company may be limited in its ability to seek or
take advantage of certain business opportunities or relationships which differ
substantially from the business activities the Company currently conducts.
Nevertheless, management believes that the synergies and other significant
benefits derived from the First Union Alliance offset the potential
limitations imposed by the Banking Laws. See "Risk Factors--Banking and
Territorial Restrictions," "Business--Banking Regulations," "Management--The
Shareholders Agreement" and "Description of Capital Stock--Agreements and
Restrictions Relating to Stock."
ACQUISITION STRATEGY
The transaction processing industry has undergone rapid consolidation over
the last several years. The costs to convert from paper-based to electronic
processing, merchant requirements for improved customer service, and the
demands for additional customer applications have made it difficult for
community and regional banks and ISOs to remain competitive. Many of these
providers are unwilling or unable to invest the capital required to meet these
demands, and increasingly are exiting the transaction processing business or
otherwise seeking alliance partners to provide transaction processing for
their customers. Despite this ongoing consolidation, the transaction
processing industry remains fragmented with respect to the number of entities
providing merchant services. Industry sources indicate that in 1994, although
the ten largest bank card processors accounted for approximately 69% of the
total charge volume processed, there were over 400 additional registered
service providers marketing and selling transaction processing services to
merchants. Management believes that these factors will result in continuing
industry consolidation over the next several years.
Since inception, the Company has pursued an active acquisition strategy and
has consummated 58 transactions consisting of 54 merchant portfolio
acquisitions, three operating business acquisitions and the First Union
Alliance. The Company will continue to pursue acquisitions of merchant
portfolios as a principal component of its growth strategy in order to achieve
greater economies of scale. This acquisition strategy focuses on the merchant
portfolios of banks and ISOs that no longer desire or are unable to provide
efficient and cost-effective transaction processing services. The Company
attempts to structure its acquisition of merchant portfolios both to increase
its merchant base and to expand its distribution and marketing capabilities.
The Company accomplishes this objective principally by entering into an
exclusive marketing agreement or alliance with a bank that sells its merchant
portfolio to the Company. The exclusive marketing agreement typically provides
that the bank will refer to the Company, on an exclusive basis and for a
period of up to seven years, any merchants that request or otherwise inquire
about transaction processing services. This agreement generally also provides
that the bank will not, for a period of up to seven years, compete with the
Company in the provision of transaction processing services. In addition, the
Company may hire the bank's transaction processing salespersons and keep them
on site at the bank's premises to continue to service existing merchant
customers and to market and sell the Company's processing services to new
merchant customers, often allowing the Company to effect a nondisruptive
transition of services from the merchants' perspective.
The Company continues to evaluate potential acquisitions of merchant
portfolios and to negotiate with several third parties that may be seeking
purchasers of their merchant portfolios although the Company currently is not
a party to any agreements or understandings with respect to any such material
acquisitions. In addition, the First Union Alliance may create additional
acquisition opportunities for the
41
<PAGE>
Company, as the Company and First Union have agreed that the Company generally
may, at its option, purchase from First Union any merchant portfolios acquired
by First Union through whole-bank or other acquisitions. There can be no
assurance that any of these or any other acquisitions can be completed on
terms favorable to the Company, if at all.
RISK MANAGEMENT
The Company views its risk management and fraud avoidance practices as
integral to its operations and overall success because of the Company's
potential liability for merchant fraud, chargebacks and other losses. Risk
management and fraud avoidance occur initially at the application stage, when
merchant applications are reviewed by the Company against certain criteria to
determine acceptance or denial. The criteria used by the Company to determine
whether to accept or deny applications include the credit history of the
applicant, the industry in which the applicant conducts its business and
various other relevant factors. In certain instances, guarantees may be
required before an application is approved.
The Company's principal advantage in its risk management and fraud avoidance
capabilities, and one which management believes is rare in the transaction
processing industry, is the ability to run its proprietary fraud detection
software program against each transaction electronically processed on the NOVA
Network before funds are transferred to the merchant in payment for such
transaction. This ability is critical to the Company's overall program to
control fraud and manage risk and is an example of the Company's strategy of
leveraging available technologies, and the NOVA Network, to competitive
advantage. Specifically, the NOVA Network allows the Company to send a file
comprised of the day's transaction activity to its operations center in
Knoxville, Tennessee at or prior to the time it sends that information to
Total System Services or Mellon Bank for merchant accounting. In Knoxville,
the Company runs its proprietary rule-based fraud detection software program
against each of the day's transactions processed on the NOVA Network,
resulting in a computer-generated identification of potentially fraudulent
activity. Once identified, the Company analyzes and reviews the suspect
transactions to resolve potential problems. This can be accomplished before
funds are transferred to the merchant in payment for such transactions. If the
Company needs more time to review a transaction or series of transactions,
however, the Company can specify that the batches containing the identified
transactions be withheld from further processing to allow additional time to
attempt to verify the authenticity of such transactions. Consequently, the
Company has the ability to intercept and review potentially fraudulent
transactions and stop payment or otherwise resolve them, as appropriate, prior
to the time when financial liability for such transactions has shifted to the
Company. Despite the Company's risk management and fraud avoidance
capabilities, the Company is unable to identify all fraudulent transactions
resulting in financial exposure to the Company. Further, until the Company
converts each newly acquired merchant account to the Company's merchant
accounting processors, the Company is unable to apply fully its risk
management and fraud avoidance practices to such merchant accounts.
In connection with portfolio acquisitions, the Company reviews any merchant
portfolio that it proposes to acquire. The review process includes analyzing
the composition of the portfolio, applying uniform standards and underwriting
guidelines developed by the Company to the portfolio and identifying any high-
risk merchants contained in the portfolio. Upon completion of this review, the
Company determines whether the portfolio meets the Company's standards and
guidelines and is otherwise a suitable acquisition target. If the Company
decides to proceed with the proposed acquisition, the Company will focus on
the high-risk merchants identified by the due diligence review and attempt to
manage the risk associated with such merchants. Typically, the Company will
seek to exclude high-risk merchants from the portfolio acquisition, require
the seller of the merchant portfolio to establish a reserve account or require
the seller of the merchant portfolio to indemnify the Company for any
liability associated with such merchants. The experience accumulated by the
Company during the course of its
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acquisitions is constantly drawn upon to refine the Company's due diligence
procedures and practices and management expects to continue to improve its due
diligence efforts. Nevertheless, there can be no assurance that the Company's
due diligence process will consistently identify all high-risk merchants or
that the Company will otherwise assess properly the risk attributes of any
acquired portfolio.
MERCHANT ACCOUNTING AND CLEARING BANK RELATIONSHIPS
The Company relies upon third parties to provide merchant accounting and
clearing bank services to the Company and its merchant customers. In each of
these instances, the Company has engaged multiple providers to safeguard
against the loss of services or quality of any one of these providers.
Merchant Accounting. Merchant accounting services consist of reorganizing
and accumulating daily transaction data on a merchant-by-merchant and card
issuer-by-card issuer basis, and forwarding this data to the credit card
associations for ultimate payment. These functions are performed on the
Company's behalf by each of Total System Services and Mellon Bank under
agreements expiring April 30, 1997 and May 31, 1997, respectively.
Clearing Bank Arrangements. The Company's clearing banks receive payment for
merchant transactions from credit card associations (net of fees payable to
the credit card associations and card issuing banks), from which the clearing
banks remit payment to the merchant for the gross amount of the merchant's
transactions. Once each month, the Company collects applicable merchant
discount and other fees from each merchant for transactions effected and
services provided during the preceding month. The Company, along with all
other nonbank transaction processors that process VISA and MasterCard
transactions, must be sponsored by a financial institution that is a principal
member of the VISA and MasterCard credit card associations in order to process
these bankcard transactions. Through each of First Alabama Bank, Bank of the
West and Mellon Bank, which serve as member clearing banks for the Company,
the Company is registered with VISA and MasterCard as a certified processor
and member service provider. FUNB-NC also serves as a clearing bank for the
Company, but does not currently sponsor the Company as a member service
provider. While the Company's registration as a certified processor and member
service provider is necessary in order for the Company to process VISA and
MasterCard transactions, management believes that the revocation of such
registrations is unlikely and inconsistent to the objectives of both the
credit card associations and the clearing banks because of the adverse effect
such action would have on the continuity of credit card acceptance.
First Alabama Bank and Mellon Bank clear most of the Company's transactions
while Bank of the West clears only those transactions originating from
merchants acquired by the Company as part of the October 1993 acquisition of
the merchant portfolio of Bank of the West. Pursuant to the First Union
Alliance, upon and after consummation of the conversion and integration of the
First Union Assets, FUNB-NC will act as the exclusive clearing and settlement
bank, subject to certain exceptions and conditions, for First Union Merchants.
While the Company's Depositary and Settlement Agreement with First Union does
contain certain conditions relative to the Company's ability to transfer
clearing and settlement functions for the First Union Merchants away from
FUNB-NC, the Company's agreements with its principal member clearing banks
generally provide that the merchant relationship is controlled by the Company.
Accordingly, the Company generally is not obligated to continue to utilize the
clearing services of these banks, and may transfer the clearing functions to
another principal member clearing bank (i.e. any member of the VISA and
MasterCard associations), although there can be no assurance that the Company
would be able to find a financial institution to sponsor it on terms
acceptable to the Company. See "Business--The First Union Alliance."
CUSTOMER SERVICE AND SUPPORT
The Company is dedicated to providing reliable and effective customer
service and support to its merchant customers. The information access and
retrieval capabilities of networked systems, where real-
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time information is available to any of the Company's customer service
representatives, allow the Company to provide a level of customer service and
support to small-to-medium sized merchants historically available only to much
larger merchants. For example, any of the Company's customer service
representatives may access, on a real-time basis, all of the relevant
information pertaining to any particular merchant that may call and ask for
assistance. The Company also recently implemented an on-line, informational
database that provides the Company's customer service representatives user-
friendly access to an array of additional information relative to the
Company's services, products and systems, which often allows the Company to
more quickly and effectively resolve customer service inquiries.
The Company maintains a 24-hours-a-day, seven-days-a-week helpline at its
operations center in Knoxville, Tennessee. The Company measures the efficiency
of its customer service through certain quantitative data such as the number
of rings prior to operator pick-up, the number of abandoned calls, the number
of calls per day and the number of calls per customer service representative.
The Company has developed comprehensive programs and procedures for training
its approximately 50 full-time customer service representatives to assist the
Company's merchant clients in a timely and efficient manner with any problems,
issues or concerns they may have. Management is dedicated to providing
outstanding customer service and support and continually reviews its policies
and procedures in an effort to improve these services.
PROPRIETARY RIGHTS
The Company is continuously developing software for use in four principal
areas: (i) applications for POS Terminals and PCs; (ii) transaction switching;
(iii) the NOVA Network; and (iv) customer service and chargebacks. The Company
regards its proprietary software as protected by trade secret and copyright
laws of general applicability. The Company attempts to safeguard its software
through the protection afforded by the above-referenced laws, employee and
third-party non-disclosure agreements, licensing agreements and other methods
of protection. Despite these precautions, it may be possible for unauthorized
third parties to copy, obtain or reverse engineer certain portions of the
Company's software or to otherwise obtain or use other information the Company
regards as proprietary. While the Company's competitive position may be
affected by its ability to protect its software and other proprietary
information, management believes that the protection afforded by trade secret
and copyright laws are less significant to the Company's success than other
factors such as the knowledge, ability and experience of the Company's
personnel and the continued pursuit and implementation of its operating
strategies.
As the number of software application products in the transaction processing
industry increases, and as the functionality of such products further
overlaps, third parties could assert that the Company's software application
products infringe or may infringe the proprietary rights of such entities.
These third parties may seek damages from the Company as a result of such
alleged infringement, demand that the Company license certain proprietary
rights from them or otherwise demand that the Company cease and desist from
its use and/or license of the allegedly infringing software. Although
management is not currently aware of any alleged infringement issues, any such
action, if it were to occur, may result in protracted and costly litigation or
royalty arrangements or otherwise have a material adverse effect on the
Company's financial condition and results of operations.
The Company currently licenses certain software from third parties to
supplement its internal software and technology development and to shorten
time-to-market software application product deliveries. For instance, the
Company licenses the software for NOVA Time. Management believes that it will
be necessary to continue this practice in the future, although there can be no
assurance that the Company will be able to do so on favorable terms or at all.
The Company's trademarks include "NOVA," "NOVA Information Systems," "NOVA
ACS," "NOVA Remote ACS," "NOVA Time," "NOVA Clock," "NOVA Perks," "PC
Transact_It" and "NOVA Shadow Pay". To date, however, the Company only has
sought to have "NOVA" and "NOVA Perks" registered on the federal level. The
Company's application to register "NOVA Perks" with the U.S. Patent and
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Trademark Office was approved January 23, 1996. The Company's application to
register "NOVA" was refused and allowed to lapse without contesting the
refusal. The Company intends to refile this application. There can be no
assurance, however, that the Company will be successful in its attempt to
register "NOVA" or that it will otherwise be able to continue to use any of
the foregoing trademarks in its operations.
COMPETITION
The market for providing credit, charge and debit card transaction services
to the small-to-medium sized merchant segment served by the Company is highly
competitive. The level of competitiveness has increased significantly since
the Company's inception and this trend is expected to continue. The Company
competes in this market segment on the basis of price, the availability of
related products and services, the quality of customer service and support,
and transaction processing speed, quality and reliability. The Company's
principal competitors in this market segment include other smaller vertically
integrated processors, community and regional banks and ISOs and,
increasingly, the ten largest bankcard processors. Several of the Company's
competitors and potential competitors have greater financial, technological,
marketing and personnel resources than the Company, and there can be no
assurance that the Company will continue to be able to compete successfully
with such entities.
According to industry sources, the ten largest bankcard processors accounted
for approximately 69% of the total charge volume processed in 1994, and the
Company processed approximately 3% of the total charge volume for the same
period. Two of the three largest bankcard processors merged in 1995 and,
according to industry sources, the combined entity would have processed
approximately 25% of total charge volume in 1994.
The Company believes that it has reached a sufficient size whereby economies
of scale allow it to offer competitive pricing. However, certain of the
Company's competitors may have lower costs which could potentially give them
an advantage. As a result of its experience in payment processing, the Company
has been able to develop operating efficiencies which the Company believes
allow it to competitively bid for new business. In addition, the Company has
continually made technological improvements and is thus able to respond to the
unique needs of merchants in various industries. Management believes that the
quality, speed and reliability of the NOVA Network and the breadth,
flexibility and user-friendliness of its software application products and
services constitute a competitive advantage.
The Company faces increasing competition from other transaction processors
for available acquisition opportunities. In addition, in recent years
community and regional banks, whose transaction processing businesses have
been the Company's primary source of acquisition opportunities, have been
undergoing extensive consolidation reflective of underlying trends in the
financial institutions industry and unrelated to their transaction processing
businesses. As a result, smaller banks that may have sought to divest
themselves of their transaction processing businesses may be acquired by a
competitor of the Company, thus depriving the Company of an acquisition
opportunity. The First Union Alliance, however, may create additional
acquisition opportunities for the Company, as the Company and First Union have
agreed that the Company generally may, at its option, purchase from First
Union any merchant portfolios acquired by First Union through whole-bank or
other acquisitions. See "Business--The First Union Alliance."
BANKING REGULATION
As a result of First Union's ownership interest in the Company, the Company
has become subject to certain banking laws, orders and regulations
(collectively, the "Banking Laws"). For example, the Company is now subject to
the supervision and examination of the Office of the Comptroller of the
Currency (the "OCC"), one of the principal regulatory bodies having
jurisdiction over First Union (although management does not believe it is
likely that the OCC would ever exercise this supervisory and examination
authority). In addition, the OCC reviewed extensively the First Union Alliance
and the terms
45
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thereof, and the OCC's written approval was required in order for the First
Union Alliance to be consummated (the "OCC Approval"). To facilitate First
Union's compliance with the OCC Approval and the other Banking Laws, and to
allow First Union to obtain any required consents or approvals, the Company
has agreed to notify First Union before it enters into, or acquires any
company that is engaged in, any business activities substantially different
from the business activities the Company currently conducts. If First Union is
unable to obtain such consents or approvals, the Company may not engage in the
new business activity or proceed with the contemplated acquisition. Management
does not believe, however, that the Banking Laws will impact significantly the
manner in which the Company intends to conduct or expand its business or
product and services offerings, although there can be no assurance that the
Banking Laws will not have such an effect. See "Risk Factors--Banking and
Territorial Restrictions" and "Business--The First Union Alliance."
EMPLOYEES
At May 1, 1996, the Company had 392 full-time employees, of which 133 were
in sales and marketing, 188 were in operations and 71 were corporate and
general administrative employees. Of these employees, 60 were based in
Atlanta, Georgia at the Company's principal executive offices, 200 were based
in Knoxville, Tennessee at the Company's operations center, 29 were based in
Boulder and Arvada, Colorado, and 11 were based in Jacksonville, Florida in
connection with the First Union Alliance. In addition, the Company's 133 sales
and marketing employees include 116 salespersons located throughout the United
States, of whom 71 were based at branches of banks with which the Company has
formed Acquisition Alliances. None of the Company's employees is represented
by a collective bargaining agreement nor has the Company ever experienced any
work stoppage. Management believes that the Company's relationship with its
employees is good.
PROPERTIES
The Company's principal executive offices are located in Atlanta, Georgia
and consist of approximately 13,000 square feet that are leased pursuant to an
agreement scheduled to expire September 30, 1996. The Company is actively
pursuing alternative office space in the Atlanta, Georgia metropolitan area to
accommodate the increased size of its business and operations, although the
Company has not yet entered into any binding agreement in this regard. The
Company's operations center is located in Knoxville, Tennessee and consists of
approximately 26,000 square feet. This facility is leased pursuant to a
sublease agreement scheduled to expire September 1, 2003. Certain of the
Company's operations are conducted in facilities located in Boulder and
Arvada, Colorado consisting of approximately 25,000 and 3,040 square feet of
space, respectively. The Boulder space is being leased pursuant to an
agreement scheduled to expire December 31, 1998, while the Arvada space is
being leased pursuant to an agreement scheduled to expire June 30, 1997.
Certain of the Company's employees also occupy other office facilities at
various locations under leases and various other agreements, which require
aggregate payments that are not material.
LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation in the normal
course of its business. While management is aware of and dealing with certain
pending or threatened litigation, management does not believe such matters
will have a material adverse effect on the financial condition of the Company.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Edward Grzedzinski.................... 41 Director, Chairman of the Board,
President and Chief Executive
Officer
James M. Bahin........................ 51 Director, Vice Chairman of the
Board, Chief Financial Officer and
Secretary
Paul W. Bowers........................ 55 Senior Vice President, Systems
Support Services
Steve A. Hughes....................... 48 Senior Vice President, Network
Support Services
Pamela A. Joseph...................... 37 Senior Vice President, Business
Development
John M. Koopman....................... 43 Senior Vice President, Merchant
Services Operations
Rebecca L. Powell..................... 43 Senior Vice President, Program
Management
Tammy Cooper Zimmerman................ 37 Senior Vice President, Sales
Donna S. Hall......................... 37 Vice President, Business Analysis
Cathy A. Harper....................... 31 Vice President and General Counsel
Stephanie R. Sharp.................... 30 Vice President and Corporate
Controller
Charles T. Cannada(1)................. 37 Director
Dr. Henry Kressel(2).................. 62 Director
Joseph P. Landy(1).................... 34 Director
Maurice F. Terbrueggen, Jr............ 50 Director
Fred Martin Winkler(1)(2)............. 52 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Grzedzinski has served with the Company or its predecessor since
February 1991, most recently as a director, Chairman of the Board, President
and Chief Executive Officer. From October 1990 to February 1991, Mr.
Grzedzinski served as an officer of Phoenix Consulting Group, Inc., a
transaction processing consulting company. Mr. Grzedzinski has over ten years
experience in the bankcard industry.
Mr. Bahin has served with the Company or its predecessor since February
1991, most recently as a director, Vice Chairman of the Board, Chief Financial
Officer and Secretary. Prior to joining the Company, Mr. Bahin served in
various officer capacities with Fuqua Industries, Inc., a diversified
manufacturing and service company, most recently as Senior Vice President of
Operations. Mr. Bahin has over 25 years of financial and management
experience.
Mr. Bowers has served with the Company or its predecessor since February
1991, most recently as Senior Vice President, Systems Support Services. Prior
to joining the Company, Mr. Bowers served for 21 years in various management
positions at National Data Corporation, including the last 10 years as
Division Vice President, Systems. Mr. Bowers has over 25 years experience in
the payment systems industry, including the design and implementation of
advanced payment systems.
Mr. Hughes has served with the Company or its predecessor since February
1991, most recently as Senior Vice President, Network Support Services. Prior
to joining the Company, Mr. Hughes served for 16 years in various management
positions at National Data Corporation, most recently as Director of
Healthcare Systems. Mr. Hughes has over 20 years experience in the
communications industry.
Ms. Joseph has served with the Company or its predecessor since July 1994,
most recently as Senior Vice President, Business Development. Prior to joining
the Company, Ms. Joseph served for over two years as Director, New Market
Development, for VISA and for eight years in various management positions at
Wells Fargo Bank.
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Mr. Koopman has served with the Company or its predecessor since February
1996, most recently as Senior Vice President, Merchant Services Operations.
Prior to joining the Company, Mr. Koopman served in various retail banking
management positions with PNC Bank, N.A. for over 19 years, most recently as
Vice President and General Manager of Merchant Services. Mr. Koopman has over
19 years experience in the financial services industry.
Ms. Powell has served with the Company or its predecessor since August 1991,
most recently as Senior Vice President, Program Management. Prior to joining
the Company, Ms. Powell served for over two years as Vice President,
Operations, at MerchanTec International and for over 20 years in various
management positions at National Data Corporation. Ms. Powell has over 25
years experience in the transaction processing industry.
Ms. Zimmerman has served with the Company or its predecessor since February
1991, most recently as Senior Vice President, Sales. Prior to joining the
Company, Ms. Zimmerman served for over four years in various management and
sales positions at National Data Corporation, most recently as Senior Account
Executive. Ms. Zimmerman has over ten years experience in the transaction
processing industry.
Ms. Hall has served with the Company or its predecessor since February 1991,
most recently as Vice President, Business Analysis. Prior to joining the
Company, Ms. Hall served for over eight years in various financial and
management positions at National Data Corporation, most recently as Division
Controller for the Electronic Payment Systems division. Ms. Hall has over ten
years experience in the payment systems industry.
Ms. Harper has served with the Company or its predecessor since April 1994,
most recently as Vice President and General Counsel. Prior to joining the
Company, Ms. Harper was an attorney with Long, Aldridge & Norman, LLP for over
three years. Ms. Harper has served as a director of ATM/POS Services
Association, Inc., an organization of debit card transaction processors, since
1995. Ms. Harper has over ten years experience in the banking industry and in
banking and corporate related legal matters.
Ms. Sharp has served with the Company or its predecessor since July 1991,
most recently as Vice President and Corporate Controller. Prior to joining the
Company, Ms. Sharp was an associate with James Kelly & Associates, a certified
public accounting firm, for one year and an auditor with Coopers & Lybrand
L.L.P. for over two years.
Mr. Cannada has served as a director with the Company or its predecessor
since January 1995. Mr. Cannada has served with WorldCom, a long-distance
telecommunications firm, since October 1989, most recently as Senior Vice
President.
Dr. Kressel has served as a director of the Company or its predecessor since
November 1991. Dr. Kressel has served with E. M. Warburg, Pincus & Co., Inc.,
an investment firm, since 1983, most recently as Managing Director. Dr.
Kressel serves as a director of Level One Communications, Inc. and Zilog,
Inc., each a semi-conductor company, Maxis Inc., a software development
company, TresCom International, Inc., a long-distance telephone company, and
several privately held companies.
Mr. Landy has served as a director of the Company or its predecessor since
August 1994. Mr. Landy has served with E. M. Warburg, Pincus & Co., Inc., an
investment firm, since 1985, most recently as Managing Director. Mr. Landy
serves as a director of Level One Communications, Inc., a semi-conductor
company, and several privately held companies.
Mr. Terbrueggen has served as a director of the Company or its predecessor
since January 1996. Mr. Terbrueggen has served with First Union Corporation, a
bank holding company, since July 1973, most recently as Senior Vice President
and Division Manager of the First Union merchant acquiring business. Mr.
Terbrueggen has over 27 years of management experience in the financial
services industry, including over 22 years in the bankcard industry.
Mr. Winkler has served as a director of the Company or its predecessor since
January 1996. Mr. Winkler has served with First Union Corporation, a bank
holding company, since April 1993, most recently as Executive Vice President
and head of the Card Products Division of First Union Corporation.
48
<PAGE>
Prior to joining First Union Corporation, Mr. Winkler served for four years as
Chief Operating Officer for AT&T Universal Card and for five years as Chief
Executive Officer and President of CitiBank South Dakota (N.A.) where he
operated CitiBank's credit card business. Mr. Winkler has over 14 years
experience in the financial services industry, primarily in the bankcard
industry.
The Company's Articles of Incorporation provide that the Board of Directors
will consist of not less than seven persons, with all directors to be elected
by the holders of shares of the Company's Voting Stock, as defined below, at
the annual meeting of shareholders. Such directors shall serve until the
election of their successors at the next annual meeting of shareholders. The
Company's Articles of Incorporation authorize cumulative voting by holders of
the Company's Common Stock in the election of the Company's directors. The
Company's Articles of Incorporation further provide that no bylaw, resolution,
written consent or amendment to the Articles of Incorporation purporting to
create a classified or "staggered" Board of Directors or requiring prior
notice or qualification of members for director shall be effective. In
addition, NOVA Corporation, NOVA Information Systems, First Union, Warburg,
WorldCom and each other holder of the Company's equity securities
(collectively, the "Shareholders") are parties to the Shareholders Agreement
which contains certain provisions governing the election of directors which
are effective for six months following the consummation of this offering. So
long as the Board of Directors consists of ten or fewer directors, Warburg has
the right to designate two nominees for director; WorldCom has the right to
designate one nominee for director; the chief executive officer of the Company
has the right to designate two nominees for director; First Union has the
right to designate two nominees for director, and the remaining directors, if
any, are to be "independent" directors ("Independent Directors") in accordance
with certain qualifications specified therein; provided, however, that (i) the
chief executive officer's designees shall be Edward Grzedzinski and James M.
Bahin (so long as they remain executive officers of the Company); (ii) if
Warburg's ownership of the Company's Common Stock (on a fully-diluted basis)
falls below 10%, Warburg shall have the right to designate only one nominee,
and if Warburg's ownership of the Company's Common Stock (on a fully-diluted
basis) falls below 2.5%, then Warburg shall no longer have the right to
designate any nominees; (iii) if WorldCom's ownership of the Company's Common
Stock (on a fully-diluted basis) falls below 8%, then WorldCom shall no longer
have the right to designate a nominee; (iv) if First Union's ownership of the
Company's Common Stock (on a fully-diluted basis) falls below 20% (subject to
possible reduction in certain circumstances), First Union shall have the right
to designate only one nominee, and if First Union's ownership of the Company's
Common Stock (on a fully-diluted basis) falls below 10% (subject to possible
reduction in certain circumstances), then First Union shall no longer have the
right to designate any nominees; and (v) if the Board unanimously consents,
one of the Independent Directors need not meet the specified qualifications
for an Independent Director. Each Shareholder agrees to vote such
Shareholder's shares of the capital stock of the Company entitled to vote in
the election of directors ("Voting Stock") to cause the Board of Directors to
have no fewer than seven (7) members and in favor of the election of the
directors designated as set forth above. In addition, Warburg, WorldCom and
First Union are entitled to designate for removal any director which they
designated for nomination as director, and each Shareholder agrees to vote
such Shareholder's shares of Voting Stock in favor of the removal of such
designated director. The voting provisions described in this paragraph expire
automatically six months after an initial public offering of the Common Stock
of the Company. See "Description of Capital Stock--Agreements and Restrictions
Relating to Stock."
No family relationship exists among any of the directors and executive
officers of the Company.
The Board of Directors intends to appoint two outside directors as soon as
practicable following the offering. The Board of Directors has established an
Audit Committee and a Compensation Committee. The functions of the Audit
Committee include recommending to the Board of Directors the retention of
independent public auditors, reviewing the scope of the annual audit
undertaken by the Company's independent public auditors and the progress and
results of their work, and reviewing the financial statements of the Company
and its internal accounting and auditing procedures. The functions of the
Compensation Committee include reviewing and approving executive compensation
policies and practices, reviewing salaries and bonuses for certain officers of
the Company, administering the Company's 1991 Stock Option Plan and 1996 Stock
Incentive Plan, and considering other matters referred to the Committee by the
Board. See "Management--Compensation Committee Interlocks and Insider
Participation." The Compensation Committee has full power to take any actions
required or permitted to be taken under such plans.
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<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning
compensation earned by or paid to the Company's Chief Executive Officer and
the other named executive officers of the Company who received an annual
salary and bonuses in excess of $100,000 (collectively, the "Named Executive
Officers") for the ten month year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------
ALL OTHER
NAME AND POSITIONS YEAR(1) SALARY(2) BONUS COMPENSATION(3)
------------------ ------- --------- -------- ---------------
<S> <C> <C> <C> <C>
Edward Grzedzinski.................. 1995 $155,385 $100,000 $74
Chairman of the Board, President
and Chief Executive Officer
James M. Bahin...................... 1995 $147,692 $60,000 --
Vice Chairman of the Board, Chief
Financial Officer and Secretary
</TABLE>
- --------
(1) The Company changed its fiscal year-end from the last day of February to
December 31, effective December 31, 1995.
(2) Includes amounts deferred at the election of the executive officers
pursuant to NOVA Information Systems' 401(k) Profit Sharing Plan.
(3) Represents contributions of NOVA Information Systems to the executive
officers' 401(k) Profit Sharing Plan accounts.
STOCK OPTION AND SAR GRANTS IN LAST FISCAL YEAR
No options were granted to Messrs. Grzedzinski and Bahin during the ten
month year ended December 31, 1995. The Company has issued no stock
appreciation rights ("SARs").
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
In connection with the First Union Alliance, each outstanding option
representing the right to purchase shares of common stock of NOVA Information
Systems (collectively, the "NOVA Information Systems Options") granted under
the terms of the 1991 Stock Option Plan was automatically converted, upon
consummation of the First Union Alliance, into an option representing the
right to purchase an equal number of shares of Common Stock of the Company at
the same exercise price (collectively, the "NOVA Corporation Options"), and
the Company assumed all obligations under each NOVA Information Systems Option
in accordance with the terms of the 1991 Stock Option Plan and related stock
option agreements.
The following table summarizes (i) the aggregate number of options exercised
by Messrs. Grzedzinski and Bahin during the ten month year ended December 31,
1995, and (ii) the aggregate number and value of options held by Messrs.
Grzedzinski and Bahin at December 31, 1995. The Company has not issued any
SARs.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS OPTIONS
SHARES AT FISCAL AT FISCAL
ACQUIRED YEAR-END(#) YEAR-END
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- --------------- ---------------------
<S> <C> <C> <C> <C>
Edward Grzedzinski...... (1) (1) 309,242/442,629 $1,954,409/$2,797,415
James M. Bahin.......... (1) (1) 333,721/456,550 $2,109,117/$2,885,396
</TABLE>
- --------
(1) No options were exercised by Mr. Grzedzinski or Mr. Bahin during the ten
month year ended December 31, 1995.
50
<PAGE>
EMPLOYMENT AGREEMENTS
Messrs. Grzedzinski and Bahin each has entered into a written employment
agreement with NOVA Information Systems dated October 27, 1995, (collectively,
the "Employment Agreements"). Pursuant to the Employment Agreements, Mr.
Grzedzinski is employed by NOVA Information Systems as President and Chief
Executive Officer and serves as Chairman of the Board of Directors of NOVA
Information Systems, while Mr. Bahin is employed by NOVA Information Systems
as Chief Financial Officer and serves as Vice-Chairman of the Board of
Directors of NOVA Information Systems. Under the terms of the Employment
Agreements, Messrs. Grzedzinski and Bahin receive an annual base salary of
$250,000 and $200,000 respectively, as may be adjusted from time to time by
the Board of Directors. In addition, Messrs. Grzedzinski and Bahin each has
the opportunity to earn a percentage of his base salary as a cash bonus tied
to the performance of NOVA Information Systems. The Employment Agreements
provide that each employee is entitled to participate in all of NOVA
Information Systems' employee benefit plans and programs, including any stock
option plans adopted by the Board of Directors of NOVA Information Systems.
Each of the Employment Agreements is for an initial two-year term and
automatically renews for successive two-year terms unless either party
provides written notice to the other party at least 180 days before renewal.
Upon termination of employment other than as a result of one of the
Termination Exclusions, as defined below, each of the Employment Agreements
provides for cash severance compensation equal to two times the employee's
annual base salary to be paid in 24 equal monthly payments. In addition, stock
options granted to the employee as of the effective date of the Employment
Agreement will become vested and immediately exercisable. Such severance
compensation is triggered by, among other things, the occurrence of a "change
in control" (as defined in the Employment Agreements), a material diminution
in the employee's duties and responsibilities, or the failure of NOVA
Information Systems to automatically renew the Employment Agreement. The
Termination Exclusions consist of termination for cause, nonrenewal by the
employee of an Employment Agreement, or voluntary termination of employment by
the employee. In return for such severance compensation, Mr. Grzedzinski and
Mr. Bahin each has agreed, for a period of two years after termination of
employment, (i) not to use or disclose any confidential information of NOVA
Information Systems, (ii) not to solicit the customers or employees of NOVA
Information Systems, and (iii) not to become employed by, or to have a
financial interest in, any other business which will compete with NOVA
Information Systems in providing credit card and debit card transaction
processing services within the United States. In the event that the employment
of Mr. Grzedzinski or Mr. Bahin terminates as a result of one of the
Termination Exclusions, NOVA Information Systems has the option of requiring
the employee to comply with the non-disclosure and non-competition provisions
of his Employment Agreement for a period of either one year or two years, upon
payment of an amount equal to one year's base salary or two years' base
salary, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors of the Company served as the Compensation
Committee for the ten month year ended December 31, 1995. Neither Mr.
Grzedzinski nor Mr. Bahin participated in the approval of his respective
Employment Agreement.
The Board of Directors intends to appoint two outside directors as soon as
practicable following the completion of the offering. The Board of Directors
has established a Compensation Committee, which is comprised of directors who
are not employees of the Company. The Compensation Committee administers the
1991 Stock Option Plan and the 1996 Stock Incentive Plan and makes
recommendations to the Board of Directors concerning compensation of the
Company's executive officers.
DIRECTOR COMPENSATION
No officer who is a member of the Board of Directors receives compensation
for serving on the Board. To date, no member of the Board has received any
compensation for service as a director of the
51
<PAGE>
Company. The Company anticipates compensating outside directors other than the
director nominees of Warburg, First Union and WorldCom for their service on
the Board and any committee thereof. In addition, such outside directors may
receive reimbursement of expenses, if any, incurred in attending Board and
Committee meetings.
The Company expects to adopt in 1996 a non-employee director stock option
plan (the "Director Plan") under which 150,000 shares of Common Stock will be
reserved for issuance to outside directors of the Company other than the
director nominees of Warburg, First Union and WorldCom as partial compensation
for their service on the Board. Options granted under the Director Plan will
have an exercise price equal to the fair market value of the Common Stock on
the date of grant. The number of options to be granted to each such director
and the terms thereof have not yet been determined. The Director Plan is
expected to contain provisions providing for adjustment of the number of
shares available for option and subject to unexercised options in the event of
stock splits, dividends payable in Common Stock, business combinations or
certain other events of the Company. The Board of Directors or a committee
thereof will administer the Director Plan subject to certain limitations.
1991 EMPLOYEES' STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
In November 1991, NOVA Information Systems adopted the 1991 Stock Option
Plan. In connection with the First Union Alliance, the Company assumed the
1991 Stock Option Plan and each option granted by NOVA Information Systems
under such plan was automatically converted, upon consummation of the First
Union Alliance, into a NOVA Corporation option in accordance with the terms of
the 1991 Stock Option Plan and related stock option agreements.
The Company has reserved 3,100,000 shares of Common Stock for issuance upon
the exercise of stock options to key employees and non-employee directors of
the Company pursuant to the 1991 Stock Option Plan. As of April 25, 1996,
options representing the right to purchase 1,627,648 shares of Common Stock
under the 1991 Stock Option Plan have been exercised and options representing
the right to purchase 1,258,620 shares of Common Stock under the 1991 Stock
Option Plan were outstanding.
The 1991 Stock Option Plan authorizes a committee composed of two or more
disinterested non-employee directors of the Company to issue incentive stock
options ("Incentive Stock Options"), as defined in Section 422A of the
Internal Revenue Code, stock options that do not conform to the requirements
of that code section ("Non-qualified Stock Options") (collectively,
"Options"), and SARs (collectively, "Incentive Awards"). The committee has
discretionary authority (i) to determine the individuals to whom Options and
SARs will be granted from among those individuals who are eligible, as well as
the terms of the Options and SARs and the number of shares of Common Stock
issuable or deemed issuable in connection therewith, (ii) to determine whether
an Option will constitute an Incentive Stock Option or Non-qualified Stock
Option, and (iii) to interpret the provisions of, and prescribe, amend and
rescind any rules and regulations relating to, the 1991 Stock Option Plan. The
exercise price of each Incentive Stock Option shall not be less than 100% of
the fair market value of the Common Stock at the time of grant, except in the
case of a grant to an employee who owns (within the meaning of Section
422A(b)(6) of the Internal Revenue Code) 10% or more of the outstanding stock
of the Company (a "10% Shareholder"), the exercise price shall be not less
than 110% of such fair market value. The exercise price of each Non-qualified
Stock Option will be determined by the committee at the time of the grant of
the Non-qualified Stock Option. Options may be exercised in the manner and at
such times as may be fixed by the committee, but may not be exercisable on or
after the tenth anniversary (fifth anniversary in the case of an Incentive
Stock Option granted to a 10% Shareholder) of the date of grant of such
Options. Generally, Options and SARs, to the extent not theretofore exercised,
shall immediately terminate. Payment by holders of Options or SARs may be made
(as determined by the committee) in cash, by certified or bank cashier's
check, by promissory note, by delivery of shares of stock, or by canceling an
appropriate portion of the Options or SARs. Options and SARs may not be
transferred during the lifetime of an Option or SAR holder.
52
<PAGE>
The 1991 Stock Option Plan provides that Incentive Awards will become fully
vested upon (i) the sale or other disposition of all or substantially all of
the assets of the Company or the merger or consolidation of the Company into
another company in which the Company is not the surviving entity or (ii) the
occurrence of such special circumstance or event as in the opinion of the
committee merits special consideration. In June 1995, the 1991 Stock Option
Plan was amended to provide that Incentive Awards also will become fully
vested upon a "change of control." For purposes of the 1991 Stock Option Plan,
the term "change of control" is defined to mean any one of the following
events: a "change of control" is deemed to have occurred when (i) any
individual or entity, including related parties, becomes the actual or
beneficial owner of 30% or more of the Common Stock of the Company (on a
fully-diluted basis) without the prior approval of the Company's Continuing
Directors (a term defined as directors as of the date of adoption of the 1991
Stock Option Plan and their duly approved successors), (ii) the Company's
Continuing Directors fail to constitute at least a majority of the members of
the Board of Directors of the Company, (iii) all or substantially all of the
assets of the Company or any "Significant Subsidiary" (as such term is defined
in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange
Commission) are sold or otherwise transferred without the approval of the
Continuing Directors, or (iv) any individual or entity has filed an
application with any regulatory authority having jurisdiction over the
ownership of the Company in connection with any transaction by such person or
entity to acquire 20% or more of the combined voting power of the Company's
then outstanding securities without the prior approval of the Company's
Continuing Directors.
The 1991 Stock Option Plan was also amended in June 1995 to change the
vesting schedule for Incentive Awards. Under the new vesting schedule, 20% of
the SAR may be exercised, or the shares subject to an Option may be purchased,
on or after the March 1st immediately following the date of grant, and an
additional 20% of the SAR may be exercised, or the shares subject to an Option
may be purchased, on or after the first, second, third and fourth
anniversaries, respectively, of the March 1st immediately following the date
of grant.
1996 EMPLOYEES STOCK INCENTIVE PLAN
The Company adopted the NOVA Corporation 1996 Employees Stock Incentive Plan
(the "1996 Stock Incentive Plan") on December 28, 1995. Incentive Stock
Options, Non-qualified Stock Options, SARs and restricted stock awards may be
granted to employees (including employees who are also officers or directors)
of, or consultants to, the Company under the 1996 Stock Incentive Plan
(collectively, "ESIP Stock Rights"). The Company has reserved 2,000,000 shares
of Common Stock for issuance under the 1996 Stock Incentive Plan under which
no options have been granted as of the date of this Prospectus. The Company
anticipates granting options exercisable for up to 600,000 shares of Common
Stock to its employees prior to or shortly following the completion of this
offering. The 1996 Stock Incentive Plan is administered by a committee
composed of two or more disinterested outside directors of the Company (the
"ESIP Committee"). The ESIP Committee has discretionary authority (i) to
determine the individuals to whom ESIP Stock Rights will be granted from among
those individuals who are eligible, as well as the terms of ESIP Stock Rights
and the number of shares of Common Stock in connection with such ESIP Stock
Rights, (ii) to determine whether an Option will constitute an Incentive Stock
Option or a Non-qualified Stock Option, and (iii) to interpret the provisions
of, and prescribe, amend and rescind any rules and regulations relating to,
the 1996 Stock Incentive Plan. The exercise price for Incentive Stock Options
shall be determined in the same manner as described above for the 1991 Stock
Option Plan. The exercise price of Non-qualified Stock Options shall be at not
less than 75% of fair market value of the Common Stock at the time of grant.
Incentive Stock Options and Non-qualified Stock Options shall vest, unless
otherwise agreed to or accelerated by the ESIP Committee, 25% on the first
anniversary of the date of grant and 25% on each anniversary thereafter,
unless accelerated by the ESIP Committee. Options issued under the Plan may
not be exercisable on or after the tenth anniversary (fifth anniversary in the
case of an Incentive Stock Option granted to a 10% Shareholder) of the date of
grant of such Options.
53
<PAGE>
Restricted stock granted under the 1996 Stock Incentive Plan will be subject
to such restrictions as the ESIP Committee shall determine and will be subject
to forfeiture by the recipient until the earlier of (i) the time such
restrictions lapse or are satisfied, or (ii) the time such shares are
forfeited. In addition to such other restrictions as may be determined by the
ESIP Committee, all restricted stock granted under the 1996 Stock Incentive
Plan shall vest 25% on the first anniversary of the date of grant, and an
additional 25% on each anniversary thereafter unless accelerated by the ESIP
Committee. Generally, the termination of the recipient's employment with the
Company or any subsidiary for any reason will result in forfeiture of any
restricted stock for which the restrictions have not lapsed, although the ESIP
Committee may provide otherwise.
A SAR entitles the holder thereof to receive, upon the surrender of the SAR
(or portion thereof), an amount payable in Common Stock, cash or a combination
of Common Stock and cash (as specified by the ESIP Committee at the time of
grant or, if not so specified, as specified by the SAR recipient at the time
of exercise) equal to the excess of the fair market value of the shares of
Common Stock subject to such SAR (or portion thereof) over the exercise price
of such shares. The exercise price of the shares of Common Stock underlying an
SAR shall be the fair market value of the Common Stock on the date the SAR is
granted, unless otherwise determined by the Committee. The Committee may grant
SARs in connection with Options granted under the ESIP, or independently. SARs
relating to an Option are granted concurrently with the related underlying
Option. An Option related to an SAR ceases to be exercisable to the extent of
the shares with respect to which the related SAR was exercised, and upon
exercise or termination of a related Option, any related SAR terminates to the
extent of the shares with respect to which the related option was exercised or
terminated.
The Board of Directors may amend or terminate the 1996 Stock Incentive Plan
at any time, provided that (i) no amendment may be effected without the
approval of the Option holders, SAR recipients or restricted stock recipients
who have outstanding rights under the 1996 Stock Incentive Plan if such
amendment would affect, in any way, the rights of such Option holders, SAR
recipients or restricted stock recipients under the 1996 Stock Incentive Plan,
and (ii) no amendment may be effected without the approval of the shareholders
of the Company if (1) the amendment would cause the applicable portions of the
1996 Stock Incentive Plan to fail to qualify as an "incentive stock option
plan" pursuant to Section 422 of the Internal Revenue Code, (2) the amendment
would materially increase the benefits accruing to participants under the 1996
Stock Incentive Plan, (3) the amendment would materially increase the number
of securities which may be issued under the 1996 Stock Incentive Plan, (4) the
amendment would materially modify the requirements as to eligibility for
participation in the 1996 Stock Incentive Plan, or (5) the amendment would
modify the material terms of the 1996 Stock Incentive Plan within the meaning
of regulations under Section 162(m) of the Internal Revenue Code. The 1996
Stock Incentive Plan will terminate on the later of (a) the complete exercise
or lapse of the last outstanding ESIP Stock Right granted under the 1996 Stock
Incentive Plan, or (b) ten years following adoption of the 1996 Stock
Incentive Plan by the Board of Directors, subject to its earlier termination
by the Board of Directors at any time.
In the event of changes in the number of outstanding shares of Common Stock
by reason of stock dividends, splits or recapitalizations, an appropriate and
equitable adjustment will be made by the ESIP Committee to the number and kind
of shares subject to ESIP Stock Rights and to the number and kind of shares
remaining available for issuance pursuant to ESIP Stock Rights granted under
the 1996 Stock Incentive Plan.
ESIP Stock Options and restricted stock awards will become fully vested upon
a "change of control." For purposes of the 1996 Stock Incentive Plan, the term
"change of control" is defined to mean any one of the following events: a
"change of control" is deemed to have occurred when (i) any individual or
entity, including related parties, becomes the actual or beneficial owner of
30% or more of the Common Stock of the Company (on a fully-diluted basis)
without the prior approval of the Company's Continuing Directors (a term
defined as directors as of the date of adoption of the 1996 Stock Incentive
Plan and their
54
<PAGE>
duly approved successors), (ii) the Company's Continuing Directors fail to
constitute at least a majority of the members of the Board of Directors of the
Company, (iii) all or substantially all of the assets of the Company or any
"Significant Subsidiary" (as such term is defined in Rule 1.02 of Regulation
S-X promulgated by the Securities and Exchange Commission) are sold or
otherwise transferred without the approval of the Continuing Directors, and
(iv) any individual or entity has filed an application with any regulatory
authority having jurisdiction over the ownership of the Company in connection
with any transaction by such person or entity to acquire 20% or more of the
combined voting power of the Company's then outstanding securities without the
prior approval of the Company's Continuing Directors.
NOVA INFORMATION SYSTEMS, INC. 401(K) PROFIT SHARING PLAN
The NOVA Information Systems, Inc. 401(k) Profit Sharing Plan (the "401(k)
Plan") is intended to be a tax-qualified defined contribution plan
administered by a 401(k) Plan Advisory Committee appointed by the Board of
Directors of NOVA Information Systems. All employees of NOVA Information
Systems and its subsidiary, other than part-time employees who work less than
1,000 hours per year, are eligible to participate in the 401(k) Plan once they
have completed a year of employment with NOVA Information Systems during which
they have completed at least 1,000 hours of service. All former employees of
First Union hired by NOVA Information Systems in connection with the First
Union Alliance, however, are immediately eligible to participate in the 401(k)
Plan.
A participating employee may contribute up to 15% of his or her
compensation, with a maximum contribution of $9,240 to the 401(k) Plan on a
pre-tax basis, and NOVA Information Systems may make a matching contribution
to that employee's account based on a discretionary formula and the amount of
pre-tax contributions made by the employee, allocating a certain percentage
match on the first 4% of compensation contributed by an employee and
allocating a different percentage match on the next 4% (i.e., from 4% to 8%)
of compensation contributed by the employee, subject to certain legal
limitations imposed on tax-qualified plans. NOVA Information Systems may also
make a profit-sharing type contribution to the 401(k) Plan for any plan year
which would be allocated to the accounts of all participating employees based
on their compensation. Profit-sharing and matching contributions by NOVA
Information Systems may be made regardless of profits and are allocated only
to participants who complete 1,000 hours of service during the plan year and
who are employed on the last day of the plan year, except that those employees
who are not employed on the last day of the plan year and who terminated
employment during the year due to death, disability or attainment of normal
retirement age shall nonetheless receive an allocation.
All contributions to the 401(k) Plan are invested in five funds as directed
by the plan participant. No portion of the plan's assets may be invested
directly in the Company's securities, although after the date of this
offering, a portion of the plan's assets may be indirectly invested in the
Company's securities if one of the plan's funds invests in a mutual fund that
holds the Company's stock. All pre-tax employee contributions to the 401(k)
Plan are 100% vested; matching and profit-sharing contributions by NOVA
Information Systems become 20% vested after one year of service, 40% vested
after two years of service, 60% vested after three years of service, 80% after
four years of service and 100% vested after five years of service. Generally,
employees may not receive distributions from the 401(k) Plan until their
death, disability or termination of employment, although distributions for
hardship purposes are allowed prior to such events. Distributions are made in
the form of single lump sum payments. The Trustee of the 401(k) Plan is First
Trust Corporation.
NOVA INFORMATION SYSTEMS, INC. SEVERANCE PLAN
The Nova Information Systems, Inc. Severance Plan (the "Severance Plan") is
an employee welfare benefit plan which provides severance benefits to certain
former employees of NOVA Information Systems and BBP (collectively, the
"Employer"). In general, any full-time employee of the Employer shall be
eligible to participate in the Severance Plan (an "Eligible Employee"),
subject to certain exceptions
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described therein. In order to become a participant (a "Participant") in the
Severance Plan, an employee must (i) be an Eligible Employee as of the date on
which his or her employment is terminated by the Employer ("Separation from
Service"), (ii) be selected to be a Participant in the Severance Plan by the
committee (the "Committee") appointed by the Board of Directors of NOVA
Information Systems, Inc. to administer the Severance Plan, and (iii) receive
a written document from his or her Employer evidencing his or her selection to
participate in the Severance Plan. The Committee shall have sole discretion in
the selection of Eligible Employees to participate in the Severance Plan. Upon
his or her Separation from Service, a Participant shall receive a single lump-
sum cash payment (the "Cash Severance Benefit"), as determined in accordance
with the provisions of the Severance Plan. Payment of the Severance Benefit is
conditioned upon a Participant's execution and delivery of a Separation
Agreement and General Release which shall include a general release of all
claims against his Employer and affiliated persons. The Severance Plan
terminates on January 1, 1997.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH WORLDCOM
On February 28, 1996, NOVA Information Systems and WorldCom entered into an
Agreement (the "WorldCom Agreement"), effective as of March 1, 1996, pursuant
to which WorldCom provides long-distance and local telecommunications access,
as well as technical support, to the Company in connection with the NOVA
Network. See "Prospectus Summary--The Company." The WorldCom Agreement expires
February 28, 1999, subject to earlier termination by the Company if WorldCom
fails to meet certain agreed-upon performance obligations. The Company paid
WorldCom an aggregate of $606,000, $901,000 and $1.2 million during the fiscal
years ended February 28, 1994 and 1995 and the ten month year ended December
31, 1995, respectively, for these services.
TRANSACTIONS WITH WARBURG
On October 8, 1993, NOVA Information Systems issued 4,000 shares of Series D
Preferred Stock of NOVA Information Systems ($1,000 per share) to Warburg in
satisfaction of its obligations under a promissory note in the original
principal amount of $4,000,000 held by Warburg.
On February 28, 1994, Warburg purchased an additional 1,000 shares of Series
D Preferred Stock of NOVA Information Systems for aggregate consideration of
$1,000,000 ($1,000 per share).
TRANSACTIONS RELATED TO THE FIRST UNION ALLIANCE
Pursuant to an agreement dated October 30, 1995 (the "Contribution
Agreement") among NOVA Information Systems, Warburg, WorldCom, Edward
Grzedzinski, James M. Bahin and each of the remaining Original Shareholders of
NOVA Information Systems, the following transactions were consummated on
January 31, 1996:
(1) The First Union Banks collectively contributed the First Union Assets
to NOVA Corporation and, in exchange therefor, collectively received a
total of 9,149,209 shares of Common Stock of the Company, which represented
35% of the issued and outstanding shares of the Common Stock of the Company
(on a fully-diluted basis).
(2) Warburg contributed to NOVA Corporation (i) 768,000 shares of common
stock of NOVA Information Systems, (ii) a warrant to purchase 512,000
shares of common stock of NOVA Information Systems at an exercise price of
$2.34 per share (the "Warburg Warrant"), (iii) 14,832 shares of Series A
Convertible Preferred Stock of NOVA Information Systems, (iv) 10,027 shares
of Series B Convertible Preferred Stock of NOVA Information Systems, and
(v) 5,000 shares of Series D Preferred Stock of NOVA Information Systems.
In exchange therefor, Warburg received (i) 768,000 shares of Common Stock
of the Company, (ii) 400,291 shares of Common Stock of the Company, (iii)
14,832 shares of Series A Convertible Preferred Stock of the Company, (iv)
10,027 shares of Series B Convertible Preferred Stock of the Company, and
(v) 5,000 shares of Series D Preferred Stock of the Company, which
represented 42.4% of the issued and outstanding shares of the Common Stock
of the Company (on a fully-diluted basis). For a summary of the material
terms of the Company's Series A and Series B Convertible Preferred Stock
and Series D Preferred Stock, see Note 5 to the Consolidated Financial
Statements of the Company.
(3) WorldCom contributed to NOVA Corporation (i) 256,000 shares of common
stock of NOVA Information Systems, (ii) a warrant to purchase 665,600
shares of common stock of NOVA Information Systems at formula exercise
prices (the "WorldCom Warrant"), (iii) 683.34 shares of Series A
Convertible Preferred Stock of NOVA Information Systems and (iv) 3,029
shares of Series C Convertible Preferred Stock of NOVA Information Systems.
In exchange, WorldCom received (i) 256,000 shares of Common Stock of the
Company, (ii) 157,324 shares of Common Stock of the Company, (iii) 683.34
shares of Series A Convertible Preferred Stock of the Company and (iv)
3,029 shares of Series C Convertible Preferred Stock of the Company, which
represented 9.1% of the issued and outstanding shares of the Common Stock
of the Company (on a fully-diluted basis). For a
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summary of the material terms of the Company's Series C Convertible
Preferred Stock, see Note 5 to the Consolidated Financial Statements of the
Company.
(4) Edward Grzedzinski and James M. Bahin each contributed to NOVA
Corporation 192,000 shares and 153,600 shares, respectively, of common
stock of NOVA Information Systems, in exchange for 192,000 shares and
153,600 shares, respectively, of Common Stock of the Company, which
represented 1.32% of the issued and outstanding shares of the Common Stock
of the Company (on a fully-diluted basis). Eight members of management of
NOVA Information Systems, constituting the remainder of the NOVA
Information Systems Shareholders, collectively contributed to NOVA
Corporation a total of 301,696 shares of common stock of NOVA Information
Systems and, in exchange, collectively received a total of 301,696 shares
of Common Stock of the Company, which represented 1.15% of the issued and
outstanding shares of the Common Stock of the Company (on a fully-diluted
basis).
For a description of the business terms of the First Union Alliance, see
"Business--The First Union Alliance."
The First Union Alliance was effective December 1, 1995. Accordingly, since
such date all revenues derived from the First Union Assets have accrued for
the benefit of the Company and are reflected in the Company's results of
operations for the ten month year ended December 31, 1995. The Company will
reimburse First Union for all taxes which First Union has paid on revenues
generated by the First Union Assets between December 1, 1995 and January 31,
1996. First Union, on behalf of and as requested by the Company, has agreed to
continue to service the First Union Assets until such time as the conversion
and integration of the First Union Assets is complete, for which the Company
will reimburse First Union for certain specified expenses. See "Business--The
First Union Alliance."
OTHER TRANSACTIONS
On February 28, 1994, James M. Bahin purchased 153,600 shares of Common
Stock for aggregate consideration of $181,500 ($1.18 per share).
The Company's Convertible Preferred Stock converts upon completion of this
offering into Common Stock (at the rate of 380.273 shares of Common Stock for
each share of Series A Convertible Preferred Stock, 426.675 shares of Common
Stock for each share of Series B Convertible Preferred Stock, and 560.543
shares of Common Stock for each share of Series C Convertible Preferred
Stock). Further, the Company intends to redeem all outstanding shares of
Series D Preferred Stock concurrent with the closing of this offering and to
pay all accrued and unpaid dividends on the outstanding shares of preferred
stock of the Company out of the net proceeds to the Company from the sale of
Common Stock in this offering.
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PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of the date of this Prospectus
of (i) each person known by the Company to own beneficially 5% or more of the
Common Stock, (ii) each director of the Company who beneficially owns shares
of Common Stock, (iii) each Named Executive Officer who beneficially owns
shares of Common Stock, and (iv) all directors and executive officers as a
group, and as adjusted to reflect the sale of the Common Stock offered hereby.
Except as otherwise indicated, the persons or entities listed below have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1) NUMBER OF OFFERING(1)
----------------------- SHARES -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
---------------- ------------ ------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
PRINCIPAL SHAREHOLDERS
Warburg, Pincus
Investors, L.P.(2)..... 11,086,770 44.6% -- 11,086,770 39.4%
WorldCom, Inc.(3)....... 2,371,063 9.5 -- 2,371,063 8.4
First Union
Corporation(4)......... 9,149,209 36.8 -- 9,149,209 32.5
NAMED EXECUTIVE OFFICERS
AND DIRECTORS
Edward Grzedzinski(5)... 634,540 2.6 85,000 549,540 2.0
James M. Bahin(6)....... 628,300 2.5 85,000 543,300 1.9
Charles T.
Cannada(3)(7).......... 2,371,063 9.5 -- 2,371,063 8.4
Dr. Henry
Kressel(2)(8).......... 11,086,770 44.6 -- 11,086,770 39.4
Joseph P. Landy(2)(8)... 11,086,770 44.6 -- 11,086,770 39.4
Maurice F. Terbrueggen,
Jr.(4)(9).............. 9,149,209 36.8 -- 9,149,209 32.5
Fred Martin
Winkler(4)(9).......... 9,149,209 36.8 -- 9,149,209 32.5
All executive officers
and directors as a
group(10) (13
persons)............... 24,538,447 98.5 203,445 24,335,002 86.3
OTHER SELLING
SHAREHOLDERS
Elmer F. Arnold(11)..... 70,604 * 9,600 61,004 *
Rodney Beegle(12)....... 55,244 * 5,000 50,244 *
Donna S. Hall(13)....... 85,478 * 6,500 78,978 *
Steve Hughes(14)........ 222,371 * 23,195 199,176 *
Rebecca L. Powell(15)... 66,262 * 7,350 58,912 *
James Rinkel(16)........ 55,244 * 7,040 48,204 *
Tammy Cooper
Zimmerman(17).......... 115,670 * 2,900 112,770 *
-------
Total................. 231,585
=======
</TABLE>
- --------
*Less than 1% of the outstanding Common Stock.
(1) Gives retroactive effect to the conversion of all Convertible Preferred
Stock for Common Stock effective upon the closing of the offering. Also
includes shares of Common Stock which the named shareholder has a right
to acquire, upon the exercise of options, within 60 days of the date of
this Prospectus. Such shares receivable upon the exercise of options are
deemed outstanding for purposes of completing the percentage ownership of
the person holding such shares, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person shown
in the table.
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(2) The sole general partner of Warburg, Pincus Investors, L.P. ("Investors")
is Warburg, Pincus & Co. ("WP"), a New York general partnership. Lionel
I. Pincus is the managing partner of WP and may be deemed to control WP.
E. M. Warburg, Pincus & Company ("E. M. Warburg"), a New York general
partnership that has the same general partners as WP, manages Investors.
WP has a 20% interest in the profits of Investors and, through its
wholly-owned subsidiary, E. M. Warburg, Pincus & Co., Inc. ("EMW"), owns
1.13% of the limited partnership interests in Investors. Dr. Kressel and
Mr. Landy, directors of the Company, are Managing Directors of EMW and
general partners of WP and E. M. Warburg. As such, Dr. Kressel and Mr.
Landy may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion
of the shares beneficially owned by Investors, EMW and WP. See footnote
(8) below. The named person's address is 466 Lexington Avenue, 10th
Floor, New York, New York 10017.
(3) Mr. Cannada, a director of the Company, is a Senior Vice President of
WorldCom. See footnote (7) below. WorldCom's address is 515 East Amite,
Jackson, Mississippi 39201.
(4) All of the shares indicated are owned beneficially by indirect, wholly-
owned subsidiaries of First Union Corporation. Pursuant to the terms of a
voting agreement among FUNB-NC and such subsidiaries, FUNB-NC holds the
proxy for each of such subsidiaries with respect to such shares. See
"Description of Capital Stock--Agreements and Restrictions Relating to
Stock--Voting Agreement." Accordingly, each of First Union Corporation
and FUNB-NC may be deemed to be the beneficial owner of all such shares
within the meaning of Rule 13d-3 under the Exchange Act. Such shares also
may be attributed to Mr. Terbrueggen and Mr. Winkler, directors of the
Company, who are Senior Vice President and Executive Vice President of
First Union Corporation, respectively. See footnote (9) below. First
Union Corporation's address is 301 South College Street, Charlotte, North
Carolina 28288.
(5) Mr. Grzedzinski serves as Chairman of the Board, President, Chief
Executive Officer and a director of the Company. Mr. Grzedzinski's
address is Five Concourse Parkway, Suite 700, Atlanta, Georgia 30328.
(6) Mr. Bahin serves as Vice Chairman of the Board, Chief Financial Officer,
Secretary and a director of the Company. Mr. Bahin's address is Five
Concourse Parkway, Suite 700, Atlanta, Georgia 30328.
(7) All of the shares indicated are owned of record by WorldCom and are
included because of Mr. Cannada's affiliation with WorldCom. See footnote
(3) above. Mr. Cannada disclaims beneficial ownership of these shares.
Mr. Cannada's address is 515 East Amite, Jackson, Mississippi 39201.
(8) All of the shares indicated are owned of record by Investors and are
included because of Dr. Kressel's and Mr. Landy's affiliation with
Investors. See footnote (2) above. Dr. Kressel and Mr. Landy disclaim
beneficial ownership of these shares, except to the extent of their
respective pecuniary interests therein. Dr. Kressel's and Mr. Landy's
address is 466 Lexington Avenue, 10th Floor, New York, New York 10017.
(9) All of the shares indicated are owned of record by indirect, wholly-owned
subsidiaries of First Union Corporation and are included because of
Messrs. Terbrueggen's and Winkler's affiliation with First Union
Corporation. See footnote (4) above. Mr. Terbrueggen and Mr. Winkler
disclaim beneficial ownership of these shares. Mr. Terbrueggen's and Mr.
Winkler's address is 301 South College Street, Charlotte, North Carolina
28288.
(10) Includes 34,979 shares which may be acquired, upon the exercise of
options, within 60 days of the date of this Prospectus. The 203,445
shares of Common Stock offered by the executive officers and directors
include the shares offered by Messrs. Grzedzinski, Bahin and Hughes and
Ms. Powell and Ms. Zimmerman.
(11) Mr. Arnold serves as a Vice President of NOVA Information Systems. Mr.
Arnold's address is Five Concourse Parkway, Suite 700, Atlanta, Georgia
30328.
(12) Mr. Beegle serves as a Vice President of NOVA Information Systems. Mr.
Beegle's address is Five Concourse Parkway, Suite 700, Atlanta, Georgia
30328.
(13) Ms. Hall serves as Vice President, Business Analysis, of NOVA Information
Systems. Ms. Hall's address is Five Concourse Parkway, Suite 700,
Atlanta, Georgia 30328.
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(14) Mr. Hughes serves as Senior Vice President, Network Support Services, of
NOVA Information Systems. Mr. Hughes' address is Five Concourse Parkway,
Suite 700, Atlanta, Georgia 30328.
(15) Ms. Powell serves as Senior Vice President, Program Management, of NOVA
Information Systems. Ms. Powell's address is Five Concourse Parkway,
Suite 700, Atlanta, Georgia 30328.
(16) Includes 27,852 shares which may be acquired, upon the exercise of
options, within 60 days of the date of this Prospectus. Mr. Rinkel serves
as a Vice President of NOVA Information Systems. Mr. Rinkel's address is
Five Concourse Parkway, Suite 700, Atlanta, Georgia 30328.
(17) Ms. Zimmerman serves as Senior Vice President, Sales, of NOVA Information
Systems. Ms. Zimmerman's address is Five Concourse Parkway, Suite 700,
Atlanta, Georgia 30328.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, without
par value ("Preferred Stock").
COMMON STOCK
As of April 25, 1996, there were 13,005,768 shares of Common Stock
outstanding held of record by 37 shareholders. Immediately following the
offering (and after giving effect to the Preferred Stock Transaction),
28,150,401 shares of Common Stock will be outstanding (assuming the
Underwriters' over-allotment option is not exercised). Holders of Common Stock
of the Company are entitled to one vote for each share held of record on all
matters submitted to a vote of the shareholders, including the election of
directors. The Company's Articles of Incorporation provide that holders of
Voting Stock (defined as stock entitled to vote in the election of directors)
may cumulate their votes. Accordingly, holders of Common Stock are entitled to
cumulate their votes in the election of directors and, subject to the
Shareholders Agreement, it is possible for the holders of less than a majority
of the shares of Common Stock to elect one or more of the Company's directors.
Pursuant to the Shareholders Agreement, during the six months following the
consummation of this offering, each Shareholder has agreed to vote their
Voting Stock in favor of the election of the directors designated for
nomination or removal by Warburg, WorldCom, First Union and the chief
executive officer of the Company. See "Description of Capital Stock--
Agreements and Restrictions Relating to Stock," below.
Subject to the preferences that may be applicable to any then outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board out of
funds legally available therefor. See "Dividend Policy." Upon any liquidation,
dissolution or winding up, whether voluntary or involuntary, of the Company,
holders of Common Stock are entitled to receive pro rata all assets available
for distribution to shareholders after payment or provision for payment of the
debts and other liabilities of the Company and the liquidation preferences of
any then outstanding Preferred Stock. There are no preemptive or other
subscription rights, conversion rights, or redemption or sinking fund
provisions with respect to shares of Common Stock. All outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
consummation of the offering will be, fully paid and nonassessable. For a
description of a provision eliminating certain personal liability of
directors, see "Description of Capital Stock--Certain Charter and Bylaw
Provisions--Limitation of Directors' Liability."
PREFERRED STOCK
As of April 25, 1996, there were 15,515.34 shares of Series A Convertible
Preferred Stock, 10,027 shares of Series B Convertible Preferred Stock, 3,029
shares of Series C Convertible Preferred Stock, and 5,000 shares of Series D
Preferred Stock outstanding. Upon the closing of the offering, no Convertible
Preferred Stock will be outstanding (after giving effect to the Preferred
Stock Transaction) and no Series D Preferred Stock will be outstanding (after
the redemption of all outstanding shares). See "Certain Relationships and
Related Transactions" regarding the beneficial ownership of the Convertible
Preferred Stock and the Series D Preferred Stock. For a summary of the
material terms of the Convertible Preferred Stock and the Series D Preferred
Stock, see Note 5 to the Consolidated Financial Statements of the Company.
Pursuant to the Company's Articles of Incorporation, the Company will be
authorized to issue up to 5,000,000 shares of Preferred Stock. The Preferred
Stock may be issued at any time or from time to time in one or more classes or
series with such designations, powers, preferences, rights, qualifications,
limitations and restrictions (including dividend, conversion and voting
rights) as may be fixed by the Board of Directors, without any further vote or
action by the shareholders. Although the Company has no present plans to issue
any Preferred Stock, the ownership and control of the Company by the holders
of the Common Stock would be diluted if the Company were to issue Preferred
Stock that had voting rights or that was convertible into Common Stock. In
addition, the holders of Preferred Stock issued by the
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Company would be entitled by law to vote on certain transactions such as a
merger or consolidation, and thus the issuance of Preferred Stock could dilute
the voting rights of the holders of the Common Stock on such issues. The
issuance of Preferred Stock also could have the effect of delaying, deferring
or preventing a change in control of the Company. See "Description of Capital
Stock--Certain Charter and Bylaw Provisions--Anti-Takeover Provisions."
AGREEMENTS AND RESTRICTIONS RELATING TO STOCK
In connection with the consummation of the First Union Alliance, NOVA
Corporation, NOVA Information Systems, First Union, Warburg, WorldCom and each
other Shareholder entered into the Shareholders Agreement. Pursuant to the
Shareholders Agreement, each Shareholder agreed not to sell or transfer the
Company's equity securities, including NOVA Corporation Options (the
"Securities") except as expressly permitted by the Shareholders Agreement. The
Shareholders further agreed not to sell or offer to sell any Securities which
they owned (other than those included in the Company's initial public offering
of Common Stock (the "Initial Public Offering")) for 180 days following the
effective date of the Initial Public Offering without the express consent of
the underwriters of the offering. Prior to the Initial Public Offering, NOVA
Corporation, Warburg, and First Union each has a right of first refusal with
respect to any Securities which a Shareholder wishes to sell or transfer, with
the Company having the first option to purchase all or a part of such
Securities. The Shareholders Agreement also provides that Warburg and First
Union each has a right of first refusal with respect to any security offered
or sold by the Company which is convertible into or exchangeable for Common
Stock; this right of first refusal does not extend to securities issued by the
Company in connection with the distribution of securities in an underwritten
offering to the general public, including the Initial Public Offering.
The Shareholders Agreement also contains certain provisions governing the
election of directors which provisions are effective until six months
following the consummation of this offering. Each Shareholder agrees to vote
such holder's shares of Voting Stock of the Company to cause the Board of
Directors to have no fewer than seven members; further, so long as the Board
of Directors consists of ten or fewer directors, Warburg has the right to
designate two nominees for director; WorldCom has the right to designate one
nominee for director; the chief executive officer of the Company has the right
to designate two nominees for director; First Union has the right to designate
two nominees for director, and the remaining directors, if any, are to be
Independent Directors; provided, however, that (i) the chief executive
officer's designees shall be Edward Grzedzinski and James M. Bahin (so long as
they remain executive officers of the Company); (ii) if Warburg's ownership of
the Company's Common Stock (on a fully-diluted basis) falls below 10%, Warburg
shall have the right to designate only one nominee, and if Warburg's ownership
of the Company's Common Stock (on a fully-diluted basis) falls below 2.5%,
then Warburg shall no longer have the right to designate any nominees; (iii)
if WorldCom's ownership of the Company's Common Stock (on a fully-diluted
basis) falls below 8%, then WorldCom shall no longer have the right to
designate a nominee; (iv) if First Union's ownership of the Company's Common
Stock (on a fully-diluted basis) falls below 20% (subject to possible
reduction in certain circumstances), First Union shall have the right to
designate only one nominee, and if First Union's ownership of the Company's
Common Stock (on a fully-diluted basis) falls below 10% (subject to possible
reduction in certain circumstances), then First Union shall no longer have the
right to designate any nominees; and (v) if the Board unanimously consents,
one of the Independent Directors need not meet the specified qualifications
for an Independent Director. Each Shareholder agrees to vote such
Shareholder's shares of the Company's Voting Stock in favor of the election of
the directors designated as set forth above. In addition, Warburg, WorldCom
and First Union are entitled to designate for removal any director which they
designated for nomination as director, and each Shareholder agrees to vote
such Shareholder's shares of the Company's Voting Stock in favor of the
removal of such designated director. The voting provisions described in this
paragraph expire automatically six months after the Initial Public Offering.
FIRST UNION VOTING AGREEMENT
The shares of the Company's Common Stock owned by First Union are held of
record by indirect, wholly-owned subsidiaries of First Union. Each of such
subsidiaries has entered into a voting agreement
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with FUNB-NC that grants FUNB-NC the right to vote all of the shares of the
Company's Common Stock held by such subsidiaries. This proxy automatically
terminates upon the transfer of such shares to any person that is not an
affiliate of First Union, and also may be terminated by such subsidiaries upon
written notice delivered to FUNB-NC at least 15 days prior to the proposed
date of termination.
CERTAIN CHARTER AND BYLAW PROVISIONS
Shareholders' rights and related matters are governed by the Georgia
Business Corporation Code and the Company's Articles of Incorporation and
Bylaws. Certain provisions of the Articles of Incorporation and Bylaws of the
Company, which are summarized below, could either alone or in combination with
each other, have the effect of preventing a change in control of the Company
or making changes in management more difficult.
Anti-Takeover Provisions. The Company's Articles of Incorporation authorize
the Company to issue up to 5,000,000 shares of preferred stock with such
designations, powers, preferences and rights as may be fixed by the Board of
Directors, without any further vote or action by the shareholders. The
issuance of Preferred Stock could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Description of Capital
Stock--Preferred Stock."
Amendment to Charter Documents. Under Georgia law, the holders of a majority
of the voting power of a corporation, subject to a class vote in certain
instances, may generally approve any amendment to the articles of
incorporation, except as otherwise provided therein or as required by the
board of directors.
Constituency Considerations. The Company's Articles of Incorporation provide
the Board of Directors the right to consider the interests of various
constituencies, including employees, customers, supplier and creditors of the
Company, as well as the communities in which the Company is located, in
addition to the interest of the Company and its shareholders, in discharging
their duties in determining what is the Company's best interests.
Election, Term and Removal of Directors. The Company's Articles of
Incorporation provide that the Board of Directors will consist of not less
than seven persons, with all directors to be elected by the holders of shares
of the Company's Voting Stock at the annual meeting of shareholders. Such
directors shall serve until the election of their successors at the next
annual meeting of shareholders. Under Georgia law, the articles of
incorporation or a bylaw adopted by the shareholders may provide for
staggering the terms of the directors by dividing the total number of
directors into two or more groups, with each group containing, to the extent
practicable, an equal number of directors. The Company's Articles of
Incorporation provide that no bylaw, resolution, written consent or amendment
to the Articles of Incorporation purporting to create a classified or
"staggered" Board of Directors or requiring prior notice or qualification of
members for director shall be effective.
The Company's Articles of Incorporation and Bylaws provide that directors
may be removed with or without cause at any annual or special meeting of the
shareholders. Under Georgia law, if cumulative voting is authorized, a
director may not be removed if the number of votes sufficient to elect him
under cumulative voting is voted against his removal; if cumulative voting is
not authorized, a director may be removed only by a majority of the votes
entitled to be cast. Accordingly, under the Company's Articles of
Incorporation, a director may not be removed if the number of votes sufficient
to elect him is voted against his removal.
Limitation of Directors' Liability. The Company's Articles of Incorporation
eliminate, subject to certain exceptions, the personal liability of directors
to the Company or its shareholders for monetary damages for breaches of such
directors' duty of care or other duties as a director. The Articles do not
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provide for the elimination of or any limitation on the personal liability of
a director for (i) any appropriation, in violation of the director's duties,
of any business opportunity of the Company, (ii) acts or omissions that
involve intentional misconduct or a knowing violation of law, (iii) unlawful
corporate distributions, or (iv) any transaction from which the director
received an improper benefit. In addition, the Company's Bylaws provide broad
indemnification rights to directors and officers so long as the director or
officer acted in a manner he or she believed in good faith to be in, or not
opposed to, the best interests of the Company, and with respect to criminal
proceedings, if the director had no reasonable cause to believe his or her
conduct was unlawful. The Company is also required to indemnify its directors
and officers against reasonable expenses incurred in the defense of any action
if the director or officer has been successful in such defense. The Company
may not indemnify any of its directors or officers, however, against any
liability incurred in connection with a proceeding in which the director or
officer was adjudged liable on the basis that personal benefit was improperly
received by him or her or in connection with a proceeding by or in the right
of the Company in which the director or officer was adjudged liable to the
Company. These provisions of the Articles and Bylaws will limit the remedies
available to a shareholder who is dissatisfied with a Board decision protected
by these provisions, and such shareholder's only remedy in that circumstance
may be to bring a suit to prevent the Board's action. In many situations, this
remedy may not be effective, as, for example, when shareholders have no prior
awareness of the Board's consideration of the particular transaction or event.
DIVIDEND RESTRICTIONS
The Company's ability to pay dividends is dependent upon the Company's
earnings, capital requirements, financial condition and the ability of the
Company's subsidiaries to pay cash dividends to the Company and any other
factors deemed relevant by the Board of Directors. The Credit Agreement also
restricts the payment of cash dividends by the Company and its subsidiaries.
See "Dividend Policy." The payment of dividends on Common Stock also is
subject to the preferences that may be applicable to any then outstanding
Preferred Stock. All currently outstanding shares of Convertible Preferred
Stock will be converted into shares of Common Stock concurrent with the
closing of the offering. See "Certain Relationships and Related Transactions."
All outstanding shares of Series D Preferred Stock will be redeemed out of net
proceeds to the Company from the sale of Common Stock in this offering. See
"Use of Proceeds."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Union National Bank of North Carolina.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 28,150,401 shares of
Common Stock outstanding (assuming the over-allotment option is not
exercised). Of these shares, the 3,500,000 shares sold in this offering will
be freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitation
of Rule 144 described below. The remaining 24,650,401 shares of Common Stock
are deemed "Restricted Shares" under Rule 144.
SALES OF RESTRICTED SHARES
Beginning 180 days after the date of this Prospectus, no shares of Common
Stock will become eligible for immediate sale in the public market upon
expiration of lock-up agreements and subject to the provisions of Rule 144.
The Company intends to register for offer and sale under the Securities Act a
total of 5,100,000 shares of Common Stock issued or reserved for issuance
under the Company's various stock option plans, of which 71,960 shares are
held by or issuable to persons not subject to lock-up agreements, and of which
1,628,451 shares are held by or issuable to persons that are subject to lock-
up agreements and may be sold 180 days after the date of this Prospectus (or
earlier with the consent of Alex. Brown & Sons Incorporated).
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
a person who may be deemed an Affiliate of the Company, is entitled to sell,
within any three-month period, a number of shares of Common Stock that does
not exceed the greater of 1% of the then-outstanding shares of Common Stock of
the Company (approximately 281,504 shares after giving effect to this
offering) and the average weekly reported trading volume of the Company's
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are subject to certain restrictions relating to manner of sale,
notice and availability of current public information about the Company. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least three years, would be entitled to sell
such shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144. The transfer agent, however, may require an opinion of counsel that a
proposed sale of shares comes within the terms of Rule 144 prior to effecting
a transfer of such shares. Such opinion would be provided by and at the cost
of the transferor.
Prior to this offering, there has been no public market for the Common Stock
of the Company and no predictions can be made of the effect, if any, that the
sale of availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
might occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
OPTIONS
As of April 25, 1996, options representing the right to purchase a total of
1,258,620 shares of Common Stock pursuant to the Company's various stock
option plans are outstanding, of which options representing the right to
purchase a total of 72,763 shares are exercisable or will be exercisable upon
consummation of this offering. The Company anticipates granting options
exercisable for up to 600,000 shares of Common Stock to its employees prior to
or shortly following the completion of this offering. See "Management--1991
Employees' Stock Option and Stock Appreciation Rights Plan" and
66
<PAGE>
"Management--1996 Employees Stock Incentive Plan" and "Management-Director
Compensation." Of the shares subject to exercisable options, 62,831 are
subject to lock-up agreements. See "Shares Eligible for Future Sale--Lock-Up
Agreements."
Rule 701 under the Securities Act provides that shares of Common Stock
acquired upon the exercise of outstanding options may be resold by persons
other than Affiliates, beginning 90 days after the date of this Prospectus,
subject only to the manner of sale provisions of Rule 144, and by Affiliates
under Rule 144 without compliance with its two-year minimum holding period,
subject to certain limitations. The Company intends to file one or more
registration statements on Form S-8 under the Securities Act to register all
shares of Common Stock issuable pursuant to options granted or to be granted
under the Company's 1991 Stock Option Plan and 1996 Stock Incentive Plan. The
Company expects to file these registration statements following the closing of
this offering, and such registration statements are expected to become
effective upon filing. Shares covered by these registration statements will
thereupon be eligible for sale in the public markets, subject to lock-up
agreements, if applicable.
LOCK-UP AGREEMENTS
The directors and executive officers of the Company and certain other
security holders of the Company who in the aggregate will hold 24,588,373
shares of Common Stock (after giving effect to the Preferred Stock
Transaction) and options to purchase 62,831 shares of Common Stock have agreed
pursuant to certain agreements that they will not, without the prior written
consent of the Representatives of the Underwriters, offer, sell, sell short or
otherwise dispose of any shares of Common Stock beneficially owned by them or
any shares issuable upon exercise of stock options for a period of 180 days
from the date of this Prospectus. See "Underwriting" and "Description of
Capital Stock--Agreements and Restrictions Relating to Stock."
REGISTRATION RIGHTS
In connection with the First Union Alliance, the Company, WorldCom and First
Union entered into a Registration Rights Agreement dated January 31, 1996 (the
"Registration Rights Agreement") pursuant to which each of the Shareholders
have certain rights with respect to registration under the Securities Act of
shares of Common Stock of the Company (i) issued upon the consummation of the
First Union Alliance, (ii) issued upon conversion of Convertible Preferred
Stock, or (iii) issued as a dividend or other distribution with respect to
securities issued by the Company (collectively, the "Registrable Securities").
If, at any time, the Company proposes to register any of its securities under
the Securities Act (with certain exceptions), such shareholders will be
entitled to notice of such registration and to include their shares of Common
Stock in such registration; provided, however, that the number of Registrable
Securities to be sold by a Shareholder who is a member of management pursuant
to each such registration statement shall not exceed 40% of the Registrable
Securities owned by such Shareholder. The underwriters of any offering have
the right to limit the number of shares to be included in such registration by
such shareholders if the underwriters state in writing that they are unwilling
to include any or all of such securities in the proposed underwriting because
such inclusion will materially interfere with the orderly sale and
distribution of the securities being offered by the Company. Generally, the
Company will be required to bear the expenses of all such registrations, other
than underwriting discounts and selling commissions attributable to the
inclusion of such Registrable Securities in such registration statement.
In addition, after the Company becomes subject to the reporting requirements
of the Securities Exchange Act of 1934 (the "Exchange Act"), each of First
Union and Warburg (each, a "Principal Shareholder" and collectively, the
"Principal Shareholders") has the right to require the Company on not more
than two occasions to file a registration statement under the Securities Act
with respect to Registrable Securities owned by the Principal Shareholders.
Following notice by the Company to the other holders of Registrable Securities
that a Principal Shareholder has exercised one of its demand registration
rights, such other holders will have the option of including their Registrable
Securities in such registration statement. The Company is required to use its
best efforts to effect such registration, subject to certain
67
<PAGE>
conditions and limitations. The Principal Shareholders also are entitled to
demand an unlimited number of registration statements on a Form S-3 or "short-
form" registration statement. In addition, after the Company becomes subject
to the reporting requirements of the Exchange Act, WorldCom has the right to
demand on one occasion that the Company register WorldCom's Registrable
Securities on a Form S-3 or similar "short-form" registration statement. Such
demands for registration by holders of Registrable Securities will not count
as such until such registration has become effective and unless the holders of
the Registrable Securities are able to register and sell at least 80% of the
Registrable Securities requested to be included in such registration
statement. Generally, the Company will be required to bear the expenses of all
requested registration statements, except that holders of Registrable
Securities will be required to bear their pro rata share of the underwriters'
discounts and compensation attributable to the inclusion of such Registrable
Securities in such registration statement.
68
<PAGE>
UNDERWRITING
Subject to terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Smith Barney Inc., Montgomery Securities and
The Robinson-Humphrey Company, Inc. have severally agreed to purchase from the
Company and the Selling Shareholders the following respective numbers of
shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.................................... 595,000
Smith Barney Inc................................................... 595,000
Montgomery Securities.............................................. 595,000
The Robinson-Humphrey Company, Inc................................. 595,000
Bear, Stearns & Co. Inc............................................ 80,000
CS First Boston Corporation........................................ 80,000
Dean Witter Reynolds Inc........................................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 80,000
Goldman, Sachs & Co................................................ 80,000
Hambrecht & Quist LLC.............................................. 80,000
J.P. Morgan Securities Inc......................................... 80,000
Oppenheimer & Co., Inc............................................. 80,000
Salomon Brothers Inc............................................... 80,000
J.C. Bradford & Co................................................. 50,000
Brean Murray, Foster Securities Inc................................ 50,000
Cleary Gull Reiland & McDevitt Inc................................. 50,000
Equitable Securities Corporation................................... 50,000
Interstate/Johnson Lane Corporation................................ 50,000
Southcoast Capital Corp............................................ 50,000
Unterberg Harris................................................... 50,000
Wheat First Butcher Singer......................................... 50,000
---------
Total............................................................ 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $0.78 per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $0.10 per
share to certain other dealers. After the initial public offering, the public
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 525,000
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by each of them shown in the above table bears to 3,500,000, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The
69
<PAGE>
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,500,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
The directors, executive officers and certain shareholders of the Company,
who in the aggregate own 24,588,373 shares of Common Stock and options
representing the right to purchase 62,831 shares of Common Stock, have agreed
not to offer, sell, sell short or otherwise dispose of any such Common Stock
beneficially owned by them or any shares issuable upon exercise of stock
options for a period of 180 days after the date of this Prospectus without the
prior consent of Alex. Brown & Sons Incorporated. The Company has agreed not
to offer, sell, sell short or otherwise dispose of any shares of Common Stock
for a period of 180 days from the date of this Prospectus without the prior
consent of Alex. Brown & Sons Incorporated, except that the Company may issue
and may grant options representing the right to purchase shares of Common
Stock under its current stock option and incentive plans and may issue shares
of stock upon exercise of currently outstanding employee stock options. See
"Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters. Among the factors
considered in such negotiations were prevailing market conditions, the results
of operations of the Company in recent periods, the capital structure of the
Company, the market capitalizations and stages of development of other
companies which the Company and the Representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential
of the Company, an assessment of the Company's management, the present state
of the Company's development, the demand for similar securities of companies
comparable to the Company, and other factors deemed relevant.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "NIS." The Underwriters have advised the New York
Stock Exchange that they will undertake to ensure that the New York Stock
Exchange share distribution standards required to be satisfied for initial
listing of the Common Stock will be met.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock will
be passed upon for the Company and the Selling Shareholders by Long, Aldridge
& Norman, LLP of Atlanta, Georgia. King & Spalding of Atlanta, Georgia is
acting as counsel for the Underwriters in connection with certain legal
matters relating to the shares of Common Stock offered hereby.
70
<PAGE>
EXPERTS
The consolidated financial statements and schedule of NOVA Corporation at
February 28, 1995 and December 31, 1995 and for each of the two years in the
period ended February 28, 1995 and for the ten months ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The statements of operations and cash flows of the Bank of Boulder bankcard
processing operations for the ten-month period ended October 31, 1994 and for
the year ended December 31, 1993, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 relating to the
Common Stock offered hereby with the Securities and Exchange Commission,
Washington, D.C. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contracts or
other documents referred to are not necessarily complete and in each instance
reference is made to a copy of such contract or other document filed as an
exhibit to the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof
may be obtained from the Commission upon payment of certain fees prescribed by
the Commission.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
NOVA CORPORATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets as of February 28, 1995 and December 31,
1995 and December 31, 1995 Pro Forma Shareholders' Equity
(unaudited)........................................................... F-3
Consolidated Statements of Operations for the years ended February 28,
1994 and 1995 and the ten months ended December 31, 1995.............. F-4
Consolidated Statements of Shareholders' Equity for the years ended
February 28, 1994 and 1995 and the ten months ended December 31,
1995.................................................................. F-5
Consolidated Statements of Cash Flows for the years ended February 28,
1994 and 1995 and the ten months ended December 31, 1995.............. F-6
Notes to Consolidated Financial Statements............................. F-7
THE BANK OF BOULDER BANKCARD PROCESSING OPERATIONS
Report of Independent Auditors......................................... F-18
Statements of Operations for the year ended December 31, 1993 and for
the ten months ended October 31, 1994................................. F-19
Statements of Cash Flows for the year ended December 31, 1993 and for
the ten months ended October 31, 1994................................. F-20
Notes to Financial Statements.......................................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NOVA Corporation
We have audited the accompanying consolidated balance sheets of NOVA
Corporation as of February 28, 1995 and December 31, 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the two years in the period ended February 28, 1995 and for the
ten months ended December 31, 1995. 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 consolidated financial position of NOVA
Corporation at February 28, 1995 and December 31, 1995 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended February 28, 1995 and for the ten months ended December 31,
1995 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 19, 1996
F-2
<PAGE>
NOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY
FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1995 1995 1995 (NOTE 13)
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 996,000 $ 630,000
Trade receivables, less allowance
for doubtful accounts of $206,000
and $440,000 at February 28, 1995
and December 31, 1995,
respectively....................... 5,462,000 6,466,000
Accounts receivable from affiliate.. -- 719,000
Inventory........................... 647,000 1,080,000
Deferred tax asset.................. -- 3,065,000
Other current assets................ 308,000 694,000
----------- -----------
Total current assets.............. 7,413,000 12,654,000
Merchant and customer contracts
(Note 2)........................... 19,626,000 20,603,000
Property and equipment, net (Note
3)................................. 4,678,000 7,403,000
Excess cost of businesses acquired
(Note 2)........................... 14,083,000 13,795,000
Deferred tax asset.................. -- 1,671,000
Other non-current assets............ 2,023,000 1,992,000
----------- -----------
$47,823,000 $58,118,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................... $ 3,612,000 $ 4,180,000
Accrued compensation and related
costs.............................. 548,000 996,000
Reserve for credit losses........... 691,000 883,000
Other accrued liabilities........... 1,659,000 3,120,000
Capital lease obligations due within
one year........................... 1,284,000 1,083,000
Long-term debt obligations due
within one year.................... 4,616,000 4,101,000
----------- -----------
Total current liabilities......... 12,410,000 14,363,000
Capital lease obligations (Note 7).. 1,294,000 725,000
Long-term debt obligations (Note
6)................................. 15,400,000 17,013,000
COMMITMENTS AND CONTINGENCIES (NOTES
6, 7 and 8)
SHAREHOLDERS' EQUITY (NOTE 5):
Preferred Stock..................... 33,571,000 33,571,000 $ --
Common Stock, $.01 par value,
50,000,000 shares authorized,
1,792,000 and 11,378,120 shares
issued at February 28, 1995 and
December 31, 1995 and 23,254,338
shares issued on pro forma basis... 18,000 114,000 233,000
Additional paid in capital.......... 301,000 2,615,000 31,067,000
Accumulated deficit................. (15,028,000) (10,283,000) (20,485,000)
----------- ----------- -----------
18,862,000 26,017,000 10,815,000
Less: Common Stock held in treasury,
at cost, 120,704 shares at February
28, 1995........................... (143,000) -- --
----------- ----------- -----------
Total shareholder's equity........ 18,719,000 26,017,000 $10,815,000
----------- ----------- ===========
$47,823,000 $58,118,000
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NOVA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
FEBRUARY 28, ENDED
------------------------ DECEMBER 31,
1994 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES............................... $68,213,000 $93,592,000 $129,035,000
OPERATING EXPENSES:
Cost of service...................... 54,984,000 74,032,000 100,375,000
Conversion costs..................... 2,080,000 1,827,000 3,441,000
Selling, general and administrative.. 12,419,000 14,091,000 17,795,000
Depreciation and amortization........ 2,661,000 3,887,000 4,635,000
----------- ----------- ------------
72,144,000 93,837,000 126,246,000
----------- ----------- ------------
OPERATING INCOME (LOSS)................ (3,931,000) (245,000) 2,789,000
Interest expense, net................ 211,000 968,000 1,959,000
----------- ----------- ------------
Income (loss) before provision for
income taxes........................ (4,142,000) (1,213,000) 830,000
Provision (benefit) for income tax-
es.................................. -- -- (4,057,000)
----------- ----------- ------------
Net income (loss).................... $(4,142,000) $(1,213,000) $ 4,887,000
=========== =========== ============
Pro forma net income (loss) per
common and common equivalent share.. $ (0.13) $ 0.24
=========== ============
Pro forma weighted average common and
common equivalent shares
outstanding......................... 13,603,000 18,024,000
=========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
NOVA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ -------------------- PAID-IN ACCUMULATED TREASURY SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK RECEIVABLE
------ ----------- ---------- -------- ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE at March 1,
1993................... 28,571 $28,571,000 1,792,000 $ 18,000 $ 301,000 $ (9,673,000) $ -- $(138,000)
Issuance of Preferred
Stock................. 4,000 4,000,000 -- -- -- -- -- --
Purchase of treasury
shares................ -- -- -- -- -- -- (292,000) --
Issuance of treasury
shares................ -- -- -- -- -- -- 182,000 (182,000)
Forgiveness of Common
Stock subscriptions... -- -- -- -- -- -- -- 138,000
Net loss............... -- -- -- -- -- (4,142,000) -- --
------ ----------- ---------- -------- ---------- ------------ -------- ---------
BALANCE at February 28,
1994................... 32,571 32,571,000 1,792,000 18,000 301,000 (13,815,000) (110,000) (182,000)
Issuance of Preferred
Stock................. 1,000 1,000,000 -- -- -- -- -- --
Purchase of treasury
shares................ -- -- -- -- -- -- (33,000) --
Payment of Common Stock
subscriptions......... -- -- -- -- -- -- -- 182,000
Net loss............... -- -- -- -- -- (1,213,000) -- --
------ ----------- ---------- -------- ---------- ------------ -------- ---------
BALANCE at February 28,
1995................... 33,571 33,571,000 1,792,000 18,000 301,000 (15,028,000) (143,000) --
Retirement of Treasury
Stock................. -- -- (121,000) (1,000) -- (142,000) 143,000 --
Issuance of Common
Stock in a non-mone-
tary transaction with
First Union (Note 1).. -- -- 9,149,000 91,000 2,320,000 -- -- --
Issuance of Common
Stock in exchange for
outstanding warrants.. -- -- 558,000 6,000 (6,000) -- -- --
Net Income............. -- -- -- -- -- 4,887,000 -- --
------ ----------- ---------- -------- ---------- ------------ -------- ---------
BALANCE at December 31,
1995................... 33,571 $33,571,000 11,378,000 $114,000 $2,615,000 $(10,283,000) $ -- $ --
====== =========== ========== ======== ========== ============ ======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
FEBRUARY 28, ENDED
------------------------ DECEMBER 31,
1994 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $(4,142,000) $(1,213,000) $ 4,887,000
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 2,661,000 3,887,000 4,635,000
Interest paid with in-kind deben-
tures................................ -- 38,000 --
Non-cash compensation................. 146,000 -- --
Changes in assets and liabilities, net
of the effects of business
acquisitions:
Trade receivables................... (1,105,000) (1,972,000) (1,723,000)
Inventory........................... 327,000 813,000 (303,000)
Other assets........................ (3,000) (729,000) (348,000)
Accounts payable.................... (1,739,000) 1,851,000 568,000
Accrued liabilities................. 435,000 (147,000) (2,797,000)
----------- ----------- -----------
Net cash provided by (used in) oper-
ating activities................... (3,420,000) 2,528,000 4,919,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses............... (1,671,000) (16,631,000) (3,302,000)
Additions to property and equipment... (806,000) (828,000) (1,624,000)
Other................................. 55,000 (92,000) (130,000)
----------- ----------- -----------
Net cash used in investing activi-
ties............................... (2,422,000) (17,551,000) (5,056,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and notes
payable.............................. -- 16,150,000 4,900,000
Payment of long-term debt and capital
leases............................... (2,056,000) (1,650,000) (5,129,000)
Purchase of treasury stock............ (292,000) (33,000) --
Proceeds from Common Stock
subscriptions receivable............. -- 182,000 --
Proceeds from sale of Preferred
Stock................................ 4,000,000 1,000,000 --
----------- ----------- -----------
Net cash provided by (used in) fi-
nancing activities................. 1,652,000 15,649,000 (229,000)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (4,190,000) 626,000 (366,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR................................... 4,560,000 370,000 996,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.. $ 370,000 $ 996,000 $ 630,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND ORGANIZATION
NOVA Corporation (the "Company" or "NOVA") is an integrated provider of
transaction processing services, related software application products and
value-added services primarily to small-to-medium sized merchants. The Company
provides transaction processing support for all major credit and charge cards,
including VISA, MasterCard, American Express, Discover, Diners Club and JCB,
and also provides access to debit card processing and check verification
services. The Company provides merchants with a broad range of transaction
processing services, including authorizing card transactions at the point-of-
sale, capturing and transmitting transaction data, effecting the settlement of
payments and assisting merchants in resolving billing disputes with their
customers.
NOVA Corporation was incorporated in December 1995. NOVA Information
Systems, Inc., a wholly-owned subsidiary and predecessor to the Company ("NOVA
Information Systems") was incorporated in Georgia in February 1991. Effective
December 1, 1995, the then current shareholders of NOVA Information Systems
contributed to NOVA Corporation all of the shares of capital stock of NOVA
Information Systems owned by them, thereby causing NOVA Information Systems to
become a wholly-owned subsidiary of NOVA Corporation.
On October 30, 1995 NOVA entered into an agreement with First Union
Corporation (First Union) whereby First Union agreed to contribute its
transaction processing assets, including those acquired by First Union through
its acquisition of First Fidelity Bancorporation, to NOVA in exchange for
9,149,209 shares of NOVA's common stock. The transaction, which was
consummated on January 31, 1996, is reflected in the accompanying financial
statements since December 1, 1995 because, pursuant to the terms of the
agreement revenues since December 1, 1995 derived from the First Union assets
have irrevocably accrued to the benefit of NOVA. The transfer of these
nonmonetary assets, primarily terminals at merchant locations, by First Union
has been accounted for at their historical cost of $2,411,000 because First
Union is deemed under the rules and regulations of the Securities and Exchange
Commission to be a promoter of NOVA. Revenues attributable to the December
1995 processing activities of the First Union Alliance merchant portfolios
aggregating approximately $9,500,000 are included in the accompanying
statement of operations together with related First Union costs reimbursed by
NOVA.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NOVA
Corporation and its wholly-owned subsidiaries as if NOVA Corporation existed
for all periods presented. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company has made
business and customer base acquisitions and has accounted for them as purchase
transactions, and, accordingly, the results of the acquired businesses or
customer bases are included since the dates of acquisition.
FISCAL YEAR
The Company changed its fiscal year end from the last day of February to
December 31, effective December 31, 1995.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE AND COST RECOGNITION
Revenues derived from the electronic processing of transactions (principally
merchant discount) are recognized at the time the merchants' transactions are
processed. Related commissions and processing charges are also recognized at
that time.
F-7
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
When the Company purchases merchant portfolios it also enters into revenue
sharing agreements with sellers. The revenue sharing amounts are determined
primarily based on sales volume processed for a particular group of merchants.
The revenue sharing agreements have an initial term of at least three years
with renewal provisions. Revenue is shown in the accompanying statements of
operations net of revenue sharing amounts of $1,817,000, $3,547,000, and
$5,446,000 for the two years ended February 28, 1995 and the ten months ended
December 31, 1995, respectively.
Cost of service includes interchange fees paid to the credit card issuing
bank, communications costs, VISA and MasterCard assessments and merchant
accounting processing fees. These costs are recognized at the time the
merchants transactions are processed and the related revenue is recorded.
RENTAL EQUIPMENT
The Company rents point-of-sale equipment to merchants under month-to-month
agreements. The rented equipment is capitalized and depreciated over three
years. The cost of such equipment and accumulated depreciation at February 28,
1995 and December 31, 1995 included in property and equipment was as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Cost of equipment.................................. $2,075,000 $4,357,000
Less accumulated depreciation...................... 988,000 1,626,000
---------- ----------
$1,087,000 $2,731,000
========== ==========
</TABLE>
ACCOUNTS RECEIVABLE
Accounts receivable are primarily comprised of amounts due from the
Company's clearing and settlement banks and represent the discount earned,
after related interchange fees and other processing costs, on transactions
processed during the month ending on the balance sheet date. Such balances are
received from the Company's clearing and settlement banks approximately 15
days following the end of each month.
The Company's merchant customers have liability for charges disputed by
cardholders. However, in the case of merchant insolvency, bankruptcy or other
nonpayment, the Company may be liable for any of such charges disputed by
cardholders. 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 credit losses on transactions processed.
STOCK COMPENSATION
The Company accounts for its stock option plans in accordance with
Accounting Principles Board Opinion Number 25, "Accounting for Stock Issued to
Employees" ("APB 25"). In accordance with APB 25, no compensation expense has
been recognized because the options had an exercise price equal to the market
value of Common Stock on the day of grant.
INVENTORY
Inventory, which consists of electronic point-of-sale equipment, held for
sale or rental to merchants, is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
F-8
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONVERSION COSTS
The cost of converting acquired merchant portfolios from the seller's
processing platform and telecommunications network to the Company's network is
expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated using the straight-
line method for financial reporting purposes and primarily accelerated methods
for tax purposes. For financial reporting purposes, equipment is depreciated
over three to seven years and buildings are depreciated over 30 years.
Leasehold improvements and property acquired under capital leases are
amortized over the useful life of the asset or the lease term, whichever is
shorter.
INTANGIBLES
The excess cost of businesses acquired is amortized on the straight-line
basis over 30 years. Accumulated amortization at February 28, 1995 and
December 31, 1995 was $646,000 and $1,058,000, respectively.
Amortization of merchant and customer contracts (portfolios) is provided on
a straight-line basis over a ten year life based on the Company's estimates of
future merchant sales volumes. Accumulated amortization of portfolios was
$3,436,000 and $5,451,000 at February 28, 1995 and December 31, 1995,
respectively. The Company evaluates the reasonableness of the amortization
period for its portfolios by monitoring the merchant sales volume processed
for those merchants included in the portfolio at the acquisition date. The
Company will adjust the amortization period of the portfolios if actual
merchant sales volumes indicate a different amortization period is more
appropriate.
Management periodically evaluates intangibles for indications of impairment
based on the operating results of the related business or merchant portfolio
acquired. If this evaluation indicates that the intangible asset will not be
recoverable, as determined based on the undiscounted cash flows related to the
intangible asset over the remaining life of the asset, the carrying value of
the related intangible asset will be reduced to fair value.
The Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed Of" (SFAS 121) which will be effective for the Company's fiscal
year beginning January 1, 1996. The Company believes the adoption of SFAS 121
will not have a significant effect on its financial statements.
CHANGES IN ACCOUNTING AND AMORTIZATION PERIODS
Incident to the Company's initial public offering of its Common Stock, the
Company changed its accounting method for conversion costs to the method
described above. Previously such costs were capitalized upon acquisition of a
merchant portfolio and amortized over the estimated life of the portfolio.
Also, the Company reduced the amortization period for its merchant portfolios
from 15 years to 10 years as discussed above. The accompanying financial
statements have been retroactively restated for these changes, which were made
to more conservatively reflect these costs in the Company's results of
operations.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
2. BUSINESS ACQUISITIONS
During fiscal years ending February 28, 1994 and 1995, the Company purchased
the rights and interests under certain merchant credit card processing
agreements and the related assets and liabilities, primarily from Bank of the
West in 1994 and the Bank of Boulder ("Boulder") in 1995, for purchase prices
which aggregate approximately $2,423,000 and $20,066,000, respectively.
F-9
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the ten months ending December 31, 1995, the Company made similar
purchases from various banks and third parties for an aggregate purchase price
of $3,476,000.
The following summarizes the allocation of the purchase price to the major
categories of assets acquired and liabilities assumed resulting from the
acquisitions:
<TABLE>
<CAPTION>
FEBRUARY 28
---------------------- DECEMBER 31,
1994 1995 1995
---------- ----------- ------------
<S> <C> <C> <C>
Current assets.......................... $ -- $ 285,000 $ 157,000
Property and equipment.................. -- 739,000 15,000
Non-compete agreement................... -- 693,000 330,000
Excess cost of businesses acquired...... -- 9,623,000 354,000
Merchant and customer contracts......... 2,423,000 8,726,000 2,620,000
---------- ----------- ----------
2,423,000 20,066,000 3,476,000
Liabilities assumed..................... 752,000 459,000 --
Notes payable to seller................. -- 2,976,000 174,000
---------- ----------- ----------
Net cash paid........................... $1,671,000 $16,631,000 $3,302,000
========== =========== ==========
</TABLE>
The merchant business of Boulder is included in the accompanying
consolidated financial statements beginning November 1, 1994. The following
unaudited pro forma summary presents the Company's results of operations (in
thousands, except for per share data) as if the acquisition had occurred at
the beginning of fiscal 1994. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisition been made at the beginning of fiscal 1994 or of
the results which may occur in the future.
<TABLE>
<CAPTION>
FEBRUARY 28
------------------
1994 1995
-------- --------
<S> <C> <C>
Revenues............................................. $112,067 $128,157
Net income (loss).................................... (5,787) (908)
Pro forma net income per common share assuming
conversion of preferred stock as described in
Note 12............................................. (0.43) (0.11)
</TABLE>
The pro forma net income per common share results do not include adjustments
for expected reductions from certain third party processing costs which will
be realized as the portfolios are converted to the NOVA Network.
3. PROPERTY AND EQUIPMENT
Property and equipment at February 28, 1995 and December 31, 1995 consist
of:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Land and building............................... $ 343,000 $ 343,000
Equipment....................................... 6,395,000 10,293,000
Furniture and fixtures.......................... 842,000 1,190,000
Leasehold improvements.......................... 451,000 611,000
----------- -----------
8,031,000 12,437,000
Less accumulated depreciation and amortization.. (3,353,000) (5,034,000)
----------- -----------
$ 4,678,000 $ 7,403,000
=========== ===========
</TABLE>
4. INCOME TAXES
At December 31, 1995, the Company has available net operating loss
carryforwards of approximately $11,900,000 for income tax purposes that expire
in years 2007 through 2011. In the ten months ended December 31, 1995, there
was a $5,206,000 change in the valuation allowance which resulted in a
reduction of the excess cost of business acquired of $228,000 as a result of
deductible temporary differences acquired in businesses combinations. The
remainder of $4,978,000 is included in the provision
F-10
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for income taxes. In assessing the likelihood of utilization of existing net
deferred tax assets, management has considered (a) its current operating
environment, (b) results of future operations to generate sufficient taxable
income including the anticipated effects of the First Union transaction, and
(c) the excess of its appreciated asset values over the related tax basis and
accordingly has determined that it is more likely than not that the deferred
tax assets at December 31, 1995 will be realized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.......... $ 181,000 $ 129,000
Tax over book amortization...... 6,000 79,000
Other........................... -- 305,000
----------- -----------
Total deferred tax
liabilities.................. 187,000 513,000
Deferred tax assets:
Start-up expenses............... 133,000 74,000
Allowance for doubtful
accounts....................... 272,000 424,000
Accrued liabilities............. 179,000 130,000
Net operating loss
carryforwards.................. 4,809,000 4,621,000
----------- -----------
Total deferred tax assets..... 5,393,000 5,249,000
Valuation allowance............... (5,206,000) --
----------- -----------
Net deferred tax assets........... 187,000 5,249,000
----------- -----------
Net deferred taxes............ $ -- $ 4,736,000
=========== ===========
The components of the provision (benefit) for income taxes are as follows:
<CAPTION>
FEBRUARY 28, FEBRUARY 28, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current........................... $ -- $ -- $ --
Deferred.......................... (1,181,000) (283,000) 921,000
Change in valuation allowance..... 1,181,000 283,000 (4,978,000)
----------- ----------- -----------
$ -- $ -- $(4,057,000)
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes differs from the amount computed by
applying the federal income tax statutory rate to income before provision for
income taxes for the following reasons:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31,
1995
----------------
<S> <C>
Provision for income taxes at statutory rate................ $ 282,000
Amortization of excess cost of businesses acquired.......... 48,000
Change in valuation allowance............................... (4,978,000)
State income taxes, net of federal tax benefit.............. 33,000
Other....................................................... 558,000
-----------
$(4,057,000)
===========
</TABLE>
F-11
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITALIZATION
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock in
one or more series with such designations, powers, preferences, rights,
qualifications, limitations and restrictions as may be fixed by the Board of
Directors. Authorized and issued series of Preferred Stock at February 28,
1995 and December 31, 1995 consist of:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Convertible Preferred Stock, no par, $1,000
stated value, cumulative 9% dividends per share
per annum:
Series A, 15,515 shares authorized, issued and
outstanding................................... $15,515,000 $15,515,000
Series B, 10,027 shares authorized, issued and
outstanding................................... 10,027,000 10,027,000
Series C, 3,029 shares authorized, issued and
outstanding................................... 3,029,000 3,029,000
Preferred Stock, $1,000 stated value, cumulative
10% dividends per share per annum:
Series D, 10,000 shares authorized, 5,000
shares issued and outstanding................. 5,000,000 5,000,000
----------- -----------
Total Preferred Stock............................ $33,571,000 $33,571,000
=========== ===========
</TABLE>
Holders of all series of Convertible Preferred Stock are entitled to receive
cumulative dividends at an annual rate of 9%, compounded quarterly through
October 31, 1998, and at an annual rate of 15% thereafter. Upon liquidation,
such holders are entitled to receive $1,000 per share, plus accrued and unpaid
dividends, before any distribution or payment is made to the holders of Common
Stock. The holders of Convertible Preferred Stock have the right to elect two
members of the Board of Directors of the Company, with the remaining members
to be elected by the holders of the outstanding Common Stock.
All series of the Convertible Preferred Stock are callable at stated value
plus accrued and unpaid dividends after consummation of the Company's initial
distribution of securities in an underwritten public offering to the general
public which results in aggregate gross proceeds to the Company of at least
$15,000,000.
Holders of Convertible Preferred Stock have the right to convert all or any
portion of their shares into shares of Common Stock for each share of
Convertible Preferred Stock at the following conversion rates:
<TABLE>
<S> <C>
Series A.............. 380.273 shares of Common Stock per preferred share
Series B.............. 426.675 shares of Common Stock per preferred share
Series C.............. 560.543 shares of Common Stock per preferred share
</TABLE>
Further, such shares of Convertible Preferred Stock convert automatically
upon completion of the initial public offering into Common Stock at the
conversion rates set forth above.
At December 31, 1995, the Company has reserved 11,876,218 shares of unissued
Common Stock in the event the outstanding preferred shares are converted.
Series D Preferred Stock is non-convertible, non-voting and is entitled to
receive cumulative dividends at an annual rate of 10%, compounded quarterly.
Upon liquidation, such holders are entitled to receive $1,000 per share, plus
accrued and unpaid dividends, before any distribution or payment is made to
holders of Series A, B or C Convertible Preferred Stock, Common Stock or any
other junior stock.
F-12
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of February 28, 1995 and December 31, 1995, no dividends have been
declared or paid on any class of stock. Cumulative dividends on preferred
shares are in arrears in the amount of $10,202,000 at December 31, 1995. All
unpaid dividends through October 31, 1998 are required to be paid no later
than November 1, 1998.
Effective December 1, 1995, all outstanding warrants held by a principal
investor to purchase 1,177,600 of Common Stock at prices from $2.34-8.20 per
share were exchanged for 557,616 shares of the Company's Common Stock. The
fair value of the shares issued in exchange for the warrants was based upon
the value of the shares inherent in the First Union transaction which
approximated market value. No compensation or distributions were recorded with
respect to the exchange.
6. LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations at February 28, 1995 and December 31, 1995
consist of:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Term loan payable to bank, due in quarterly
principal installments of $792,000. Interest is
payable quarterly at rates based on Eurodollars (8%
at December 31, 1995).............................. $12,500,000 $11,083,000
Acquisition loan payable to bank, due in equal
quarterly installments of $760,000 beginning March
1997. Interest is payable quarterly at rates based
on Eurodollars (8% at December 31, 1995)........... 3,650,000 7,600,000
Line of credit, due in equal quarterly installments
of $95,000 beginning March 1997. Interest is
payable quarterly at rates based on Eurodollars (8%
at December 31, 1995).............................. -- 950,000
Note payable to The Bank of Boulder................. 2,244,000 --
Non-compete payable to The Bank of Boulder,
discounted at an effective rate of 9% and due in
equal annual installments of $180,000 through
1999............................................... 714,000 587,000
Note payable to former owner of a business acquired,
discounted at an effective rate of 9% and due in
varying payments through 1996...................... 575,000 574,000
Other............................................... 333,000 320,000
----------- -----------
Total long-term debt obligations.................... 20,016,000 21,114,000
Less amounts due within one year.................... 4,616,000 4,101,000
----------- -----------
Long-term debt obligation........................... $15,400,000 $17,013,000
=========== ===========
</TABLE>
The annual aggregate maturities of long-term obligations at December 31,
1995 for each of the next five years are:
<TABLE>
<S> <C>
1996............................................................. $ 4,101,000
1997............................................................. 6,769,000
1998............................................................. 6,781,000
1999............................................................. 3,463,000
2000............................................................. --
-----------
$21,114,000
===========
</TABLE>
The Company entered into an agreement in 1994, for aggregate loans of up to
$22,500,000. Term loans of $12,500,000 and a combination of revolving loans,
letters of credit and acquisition loans aggregating $10,000,000 are available
under the agreement. Amounts drawn under the revolving loans and letters of
credit are not to exceed $2,500,000 and $3,000,000, respectively. Funds may be
drawn until
F-13
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 1, 1996 or until the aggregate borrowing limit has been reached.
Outstanding loans (an aggregate of $19,633,000 at December 31, 1995) under the
loan agreement are subject to interest, at the Company's option, at either the
bank's base rate plus 1.0% or the Eurodollar rate plus 2.5%. Interest is
payable quarterly. In addition, the Company pays a quarterly commitment fee in
arrears at .5% per annum on the average daily unused portion of the funds
available for revolving loans, letters of credit and acquisition loans and
2.5% per annum on the outstanding letter of credit balance ($0 at December 31,
1995).
Borrowings under the loan agreement are collateralized by substantially all
the assets of the Company. The loan agreement contains restrictive covenants
which include, among other items, maintenance of specified ratios of EBITDA to
fixed charges and funded debt, minimum tangible net worth requirements and
restrictions on the payment of dividends and capital expenditures.
On January 31, 1996, the Company amended its credit facility, such that the
aggregate loan available was increased to $36,083,000, $11,083,000 available
under the term facility and payable in 14 quarterly installments beginning
March 1, 1996, and $25,000,000 ($10,000,000 after June 30, 1997) available
under the revolving facility.
7. LEASE OBLIGATIONS
The Company leases office facilities and equipment under non-cancelable
capital lease agreements. The Company also has entered into non-cancelable
operating leases covering certain other equipment and office facilities.
Rental expense for the two years ended February 28, 1995 and the ten months
ended December 31, 1995 was approximately $187,000, $363,000 and $509,000,
respectively.
Asset balances for property acquired under capital leases included in
property and equipment consist of:
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Building........................................... $ 273,000 $ 273,000
Equipment.......................................... 2,238,000 2,573,000
---------- ----------
2,511,000 2,846,000
Less accumulated amortization...................... 1,044,000 1,130,000
---------- ----------
$1,467,000 $1,716,000
========== ==========
</TABLE>
F-14
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments for all non-cancelable leases at December 31,
1995 are summarized below:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31,
1996.................................................. $ 677,000 $1,195,000
1997.................................................. 438,000 364,000
1998.................................................. 416,000 160,000
1999.................................................. 203,000 150,000
2000.................................................. 178,000 95,000
Thereafter............................................ -- 192,000
---------- ----------
Total future minimum lease payments................... $1,912,000 2,156,000
==========
Less amount representing interest..................... 348,000
----------
Present value of minimum lease payments............... 1,808,000
Less amounts due within one year...................... 1,083,000
----------
Long-term obligations under capital leases............ $ 725,000
==========
</TABLE>
8. CONTINGENCIES
At December 31, 1995 the Company had committed to purchase $825,000 of
equipment less the trade in value ($243,000) of equipment already owned.
The Company is from time to time subject to claims and suits arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of any such pending matters will not have a material effect on the
Company's financial position and results of operations.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures, including non-cash investing and
financing activities, are:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------- DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Interest paid............................ $ 471,000 $ 971,000 $2,251,000
Acquisition of equipment in exchange for
debt or capital leases.................. 1,038,000 1,773,000 383,000
Note payable issued in conjunction with
business acquisition.................... -- 2,976,000 174,000
Transfer of transaction processing
assets, primarily terminals at merchant
locations, in exchange for common
stock................................... -- -- 2,411,000
</TABLE>
F-15
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The Company has a stock option and stock appreciation rights plan. The
shares subject to options can be purchased and rights exercised, unless
otherwise determined by the Board of Directors, in 20% increments annually
beginning on the March 1 following the date of grant. The options expire ten
years from the grant date. A total of 3,100,000 shares may be subject to
Options, as authorized under the plan. No stock appreciation rights have been
granted. Option activity during the period March 1, 1993 to December 31, 1995
is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------
<S> <C> <C>
Outstanding at March 1, 1993................ 585,933 $2.34-$3.91
Granted..................................... 1,927,808 1.18
Terminated.................................. (585,933) 2.34-5.00
---------
Outstanding at February 28, 1994............ 1,927,808 1.18
Granted..................................... 1,087,357 1.18
Terminated.................................. (142,976) 1.18
---------
Outstanding at February 28, 1995............ 2,872,189 1.18
Granted..................................... 64,000 2.34
Terminated.................................. (24,320) 1.18
---------
Outstanding at December 31, 1995............ 2,911,869 1.18-2.34
=========
Exercisable at December 31, 1995............ 1,183,434 1.18
=========
</TABLE>
As of December 28, 1995, the Company adopted the NOVA Corporation 1996
Employees Stock Incentive Plan. The Company has reserved 2,000,000 shares of
Common Stock for issuance under this plan related to Incentive Stock Options,
Non-qualified Stock Options, SARs and restricted stock awards. No options were
issued in 1995.
11. STOCK SUBSCRIPTIONS
Stock subscriptions for 768,000 shares of Common Stock were issued in 1992.
The Company canceled 384,000 subscriptions during 1993 and the remainder
during 1994 and refunded all amounts previously paid toward the subscriptions,
including interest, at the time of cancellation. Concurrently, the shares
previously under subscription were granted to the former subscribers as
compensation. Compensation expense of $146,000 was recognized in 1994, related
to these transactions.
Stock subscriptions for 153,600 shares were issued during 1994 and paid
during 1995.
12. NET INCOME (LOSS) PER SHARE
Pro forma net income (loss) per common share is based on net income
attributable to holders of the Company's Common Stock (net income less
dividends on Series D Preferred Stock of $535,000 and $489,000 for the year
ended February 28, 1995 and the ten months ended December 31, 1995,
respectively) and the weighted average number of common and common equivalent
shares outstanding during the respective periods assuming the conversion of
Series A, B, and C Convertible Preferred Stock into Common Stock. Dilutive
common equivalents consist of stock options (calculated using the treasury
stock method). Pursuant to the requirements of the Securities and Exchange
Commission, common shares and common equivalent shares issued at prices below
the public offering price of $19.00 per share during the ten months
immediately preceding the date of the initial filing of the Registration
Statement have been included in the calculation of common shares and common
shares equivalents, using the treasury stock method, as if they were
outstanding for all periods presented. Weighted average shares outstanding do
not include common stock equivalents which are antidilutive. All common share
and per share data, except par value per share, have been retroactively
adjusted to reflect the 2.56-for-one stock split effected in the form of a
stock dividend of the Company's Common Stock effective February 1996.
F-16
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The historical net income (loss) per common share amounts as required by
generally accepted accounting principles, which do not give effect to the pro
forma amounts described in the preceding paragraph, are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
FEBRUARY 28, ENDED
---------------- DECEMBER 31,
1994 1995 1995
------- ------- ------------
<S> <C> <C> <C>
Net income (loss)........................... $(4,142) $(1,213) $ 4,887
Less undeclared Preferred Stock dividends... (2,878) (3,507) (3,178)
------- ------- -------
Net income (loss) applicable to common
shares..................................... $(7,020) $(4,720) $ 1,709
======= ======= =======
Net income (loss) per common share--
primary.................................... $ (3.89) $ (2.73) $ 0.38
======= ======= =======
Net income (loss) per common share--fully
diluted.................................... $ (3.89) $ (2.73) $ 0.27
======= ======= =======
</TABLE>
Net income (loss) per common share--fully diluted considers the dilutive
effect of convertible preferred stock in the ten months ended December 31,
1995.
13. PRO FORMA SHAREHOLDERS' EQUITY
The holders of Series A, B and C Convertible Preferred Stock will convert
into the Company's Common Stock upon the completion of an initial public
offering. Pro forma shareholder's equity as of December 31, 1995 presented on
the balance sheet reflects these conversions and the redemption of Series D
Preferred Stock. The pro forma amounts also reflect the effect on
shareholder's equity of payment of the accumulated dividends on all series of
Preferred Stock, which will be declared upon the completion of the initial
public offering. (See Note 5). The stated value of the Series D Preferred
Stock will be redeemed with the proceeds of the offering.
14. RELATED PARTY TRANSACTIONS
The Company paid one of its shareholders $606,000, $901,000 and $1,220,000
in each of the two years ended February 28, 1995 and the ten months ended
December 31, 1995, respectively, relating to the Company's utilization of the
shareholders transmission network.
15. RETIREMENT PLAN
The Company maintains the NOVA Information Systems, Inc. 401(k) and Profit
Sharing Plan (the "Plan") which covers substantially all eligible employees of
the Company. Under the Plan, the Company may match a percentage of employee
contributions. The Company may also make a profit sharing contribution to the
Plan on behalf of eligible employees. During the year ended February 28, 1995
and the ten months ending December 31, 1995, expenses related to its
contributions to the Plan were not significant.
16. SUBSEQUENT EVENT
On February 27, 1996, the Company's Board of Directors approved a 2.56-for-
one Common Stock split effected in the form of a stock dividend. All share
data in the accompanying consolidated financial statements and footnotes have
been restated for all periods presented to reflect the effect of the stock
split.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at February 28, 1995 and December 31,
1995 consist primarily of cash and cash equivalents, loans payable to a bank,
and a short-term note payable. Due to the short maturities of the cash, cash
equivalents and note payable, carrying amounts approximate the respective fair
values. The loans payable are variable rate instruments at terms the Company
believes would be available if similar financing were obtained from another
third party. As such, their carrying amounts also approximate their fair
value.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NOVA Corporation
We have audited the accompanying statements of operations and the related
statements of cash flows of The Bank of Boulder bankcard processing operations
for the year ended December 31, 1993 and for the ten months ended October 31,
1994. 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 results of operations and cash flows of The Bank
of Boulder bankcard processing operations for the year ended December 31, 1993
and for the ten months ended October 31, 1994, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
December 21, 1994
F-18
<PAGE>
THE BANK OF BOULDER
BANKCARD PROCESSING OPERATIONS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED 10 MONTHS ENDED
DECEMBER 31, OCTOBER 31,
1993 1994
------------ ---------------
<S> <C> <C>
Revenues........................................... $43,854,000 $41,427,000
Operating expenses:
Cost of service.................................. 37,361,000 35,166,000
Selling, general and administrative.............. 4,009,000 3,748,000
Systems and product development.................. -- 238,000
Depreciation and amortization.................... 282,000 309,000
----------- -----------
2,202,000 1,966,000
Allocated overhead................................. 212,000 205,000
----------- -----------
Operating income................................... 1,990,000 1,761,000
Allocated cost of funds............................ 85,000 105,000
----------- -----------
$ 1,905,000 $ 1,656,000
=========== ===========
Pro forma net income data:
Income before income taxes as reported........... $ 1,905,000 $ 1,656,000
Pro forma income tax provision................... 724,000 629,000
----------- -----------
Pro forma net income............................. $ 1,181,000 $ 1,027,000
=========== ===========
</TABLE>
F-19
<PAGE>
THE BANK OF BOULDER
BANKCARD PROCESSING OPERATIONS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED 10 MONTHS ENDED
DECEMBER 31, OCTOBER 31,
1993 1994
------------ ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Operating income................................. $1,905,000 $ 1,656,000
Adjustments to reconcile operating income to net
cash provided by operating activities:
Depreciation and amortization.................. 282,000 309,000
Loss (gain) on the sale of property and
equipment..................................... 9,000 3,000
Change in assets and liabilities:
Receivables.................................. (985,000) 1,109,000
Inventories.................................. (186,000) 73,000
Prepaid expenses and other................... (57,000) 1,000
Accounts payable............................. 21,000 (178,000)
Accrued liabilities.......................... 210,000 (380,000)
---------- -----------
Net cash provided by operating activities.. 1,199,000 2,593,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (416,000) (187,000)
---------- -----------
Net cash used in investing activities...... (416,000) (187,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases............. (5,000) (9,000)
---------- -----------
Net cash used in financing activities...... (5,000) (9,000)
---------- -----------
Increase in cash and cash equivalents............ 778,000 2,397,000
Cash transferred to The Bank of Boulder.......... (778,000) (2,397,000)
---------- -----------
Cash and cash equivalents, end of year........... $ -- $ --
========== ===========
Interest paid.................................... $ 85,000 $ 105,000
========== ===========
</TABLE>
F-20
<PAGE>
THE BANK OF BOULDER
BANKCARD PROCESSING OPERATION
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Bank of Boulder (the "Bank") in Boulder, Colorado provided bankcard
processing services as a component of its business. On November 1, 1994, NOVA
Information Systems, Inc. ("NOVA") entered into an asset purchase agreement
with The Bank of Boulder in which NOVA purchased inventory, property, and
equipment, certain other assets and assumed lease obligations and certain
other payables associated with The Bank of Boulder bankcard processing
operations ("BBP") for $23,939,000. The accompanying statements of operations
and statements of cash flows include the operations of BBP.
Prior to the above transaction, the assets and liabilities of BBP were
components of the Bank's operations and therefore did not constitute a legal
or reporting entity for which financial statements were prepared. In addition,
only certain limited assets and liabilities of the Bank were directly
attributable to BBP. Specifically, there were no separate cash accounts
related to BBP. Accordingly, in preparing the statements of cash flows,
management has assumed that all cash generated by BBP operations was
transferred to the Bank, except where amounts were clearly identifiable as
having been used for investing and financing activities of BBP. Further, all
costs allocated from the Bank to BBP were assumed to have been paid as
incurred (i.e., the Bank is assumed to have no accrued liabilities or deferred
costs related to BBP).
Revenues, cost and expenses included in the statements of operations include
amounts directly attributable to BBP operations and certain amounts allocated
from the Bank. Costs and revenues which have not been allocated by The Bank of
Boulder include certain corporate administrative expenses, income taxes and
interest income. The corporate administrative expenses were not allocated to
BBP by the Bank because none of such expenses were directly attributable to
BBP or were deemed to be incremental expenses incurred by the Bank as a result
of BBP's operations. The Bank has not allocated a portion of its provision for
income taxes to BBP because BBP was a component of the Bank and not a separate
legal or reporting entity; however, the accompanying statements of operations
reflects pro forma provisions for income taxes, based on a statutory income
tax rate.
Description of Business
BBP offers transaction authorization and processing services to merchants
who accept credit and debit cards as the forms of payment for products and
services. BBP provides these services to merchants throughout the United
States with point-of-sale equipment. Processing services include point-of-sale
authorization, data capture and daily settlement of merchant funding.
Revenue
Revenues derived from the electronic processing of transactions (merchant
discount) are recognized at the time the merchants' transactions are
processed. Related commissions and processing charges are also recognized at
that time.
BBP enters into revenue sharing agreements with independent service
organizations and agent banks. The revenue sharing amounts are determined
primarily based on sales volume processed for a particular group of merchants.
The duration of the revenue sharing agreements is specific to the agreement.
Revenue is shown in the accompanying statements of operations net of revenue
sharing amounts of
F-21
<PAGE>
THE BANK OF BOULDER
BANKCARD PROCESSING OPERATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$3,190,000 and $3,050,000 for the year ended December 31, 1993 and for the ten
months ended October 31, 1994, respectively.
Cost of service includes interchange fees paid to the credit card issuing
bank, fees paid to the network service provider, Visa and MasterCard
assessments and merchant accounting fees. These fees are recognized at the
time the merchants' transactions are processed and the related revenue is
recorded.
Property and Equipment
Equipment is depreciated over three to seven years and leasehold
improvements and property acquired under capital leases are amortized over the
useful life of the asset or the lease term, whichever is shorter.
NOTE 2--LEASE OBLIGATIONS
BBP acquired electronic point-of-sale equipment in 1993 under two non-
cancelable capital lease agreements. This equipment has a net book value of
$28,000 and $23,000 at December 31, 1993 and October 31, 1994, respectively.
BBP also has entered into non-cancelable operating leases covering office
facilities. Rental expense for the year ended December 31, 1993 and the ten
months ended October 31, 1994 was approximately $215,000 and $224,000,
respectively.
Future annual minimum lease payments for all non-cancelable leases at
October 31, 1994 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1995....................................................... $11,000 $199,000
1996....................................................... 9,000 208,000
1997....................................................... -- 214,000
1998....................................................... -- 221,000
1999....................................................... -- 37,000
Thereafter................................................. -- --
------- --------
Total future minimum lease payments........................ 20,000 $879,000
========
Less amount representing interest.......................... 1,000
-------
Present value of net minimum lease payments................ 19,000
Less current portion....................................... 10,000
-------
Long-term obligation under capital leases.................. $ 9,000
=======
</TABLE>
NOTE 3--CONTINGENCIES
BBP's merchant customers have liability for charges disputed by cardholders.
However, in the case of merchant insolvency or bankruptcy, BBP may be liable
for any such charges. Management believes that the diversification of its
merchant portfolio among industries and geographic regions minimizes its risk
of loss. Based on its historical loss experience, BBP provides for estimated
losses during the period in which the related transaction revenues are
recognized. These established reserves were not assumed by NOVA in the
purchase agreement as the losses relating to revenues generated during the
time period prior to the effective date of the agreement are the liability of
The Bank of Boulder.
F-22
<PAGE>
THE BANK OF BOULDER
BANKCARD PROCESSING OPERATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS
The following expenses have been allocated from The Bank of Boulder to the
results of operations for BBP:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
YEAR ENDED OCTOBER 31,
1993 1994
---------- -----------
<S> <C> <C>
Salaries and benefits................................ $159,000 $165,000
Cost of funds........................................ 85,000 105,000
Occupancy expense.................................... 16,000 16,000
Other................................................ 37,000 24,000
</TABLE>
F-23
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDER-
WRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY
ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLIC-
ITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 25
Management............................................................... 47
Certain Relationships and Related Transactions........................... 57
Principal and Selling Shareholders....................................... 59
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 66
Underwriting............................................................. 69
Legal Matters............................................................ 70
Experts.................................................................. 71
Additional Information................................................... 71
Index to Financial Statements............................................ F-1
</TABLE>
------------
UNTIL JUNE 1, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
3,500,000 Shares
[LOGO OF NOVA CORPORATION APPEARS HERE]
Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Smith Barney Inc.
Montgomery Securities
The Robinson-Humphrey Company, Inc.
May 7, 1996
===============================================================================
<PAGE>
[GRAPHIC OF COMPANY'S PRODUCT OFFERINGS APPEARS ON INSIDE BACK COVER]
