<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO
___________
Commission file number 1-14342
NOVA Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2209575
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Concourse Parkway, Suite 300, Atlanta, Georgia 30328
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(770) 396-1456
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
---- ----
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 28,843,201 shares of common
stock outstanding as of May 12, 1997.
<PAGE>
NOVA CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets-
March 31, 1997 (unaudited) and December 31, 1996............. 3
Condensed Consolidated Statements of Income (unaudited)-
Three months ended March 31, 1997 and 1996................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)-
Three months ended March 31, 1997 and 1996................... 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 7
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............ 9
ITEM 6. Exhibits and Reports on Form 8-K............................... 10
Signatures..................................................... 11
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
NOVA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
A S S E T S (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 40,326 $ 43,672
Trade receivables, less allowance for doubtful accounts
of $2,707 and $2,705, respectively................... 16,147 16,391
Inventory................................................ 857 818
Deferred tax asset
and other current assets............................... 3,160 3,180
-------- --------
Total current assets................................. 60,490 64,061
Merchant and customer contracts.......................... 21,868 21,257
Property and equipment, net.............................. 10,212 11,377
Excess cost of businesses acquired....................... 13,301 13,177
Deferred tax asset
and other non-current assets........................... 1,834 1,729
-------- --------
Total Assets............................................. $107,705 $111,601
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 4,810 $ 6,057
Accounts payable to affiliate............................ 1,534 753
Accrued compensation and related costs................... 1,416 1,077
Settlement obligations................................... 7,691 6,286
Other accrued liabilities................................ 5,157 7,172
Long-term debt obligations due within one year........... 507 410
-------- --------
Total current liabilities............................. 21,115 21,755
Deferred tax liability.................................... 849 849
Long-term debt obligations................................ 859 844
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares authorized,
28,721,000 and 28,824,000 shares issued, respectively.. 288 288
Additional paid in capital................................ 99,299 99,425
Accumulated deficit....................................... (14,705) (11,560)
-------- --------
Total Shareholders' equity................................ 84,882 88,153
-------- --------
Total Liabilities and Shareholders' Equity................ $107,705 $111,601
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
For the three months
ended March 31,
1996 1997
----------- -----------
<S> <C> <C>
REVENUES................................................. $ 60,199 $ 66,525
OPERATING EXPENES
Cost of Service......................................... 46,634 52,071
Conversion Cost......................................... 1,573 491
Selling, General and Administrative..................... 8,030 7,358
Depreciation and Amortization........................... 1,679 1,876
----------- -----------
TOTAL OPERATING COST..................................... 57,916 61,796
OPERATING INCOME......................................... 2,283 4,729
Interest expense (income), net.......................... 490 (342)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES................................................... 1,793 5,071
Provision for Income Taxes.............................. 678 1,926
----------- -----------
NET INCOME............................................... $ 1,115 $ 3,145
=========== ===========
Share used in per share calculation...................... 25,970,790 29,852,000
=========== ===========
Primary and Fully Diluted Earnings
Per share (Proforma prior to May 7, 1996 - see Note 2).. $ 0.04 $ 0.11
=========== ===========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the three months
ended March 31,
1996 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 1,115 $ 3,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................. 1,679 1,876
Changes in assets and liabilities, net of the effects of
business acquisitions:
Trade receivables....................................... 1,406 (103)
Inventory............................................... 136 39
Other assets............................................ 165 (172)
Accounts payable........................................ (1,854) (940)
Accrued liabilities..................................... (744) 1,676
------- -------
Net cash provided by operating activities................. 1,903 5,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses...................................... (161) (142)
Additions to property and equipment.......................... (1,161) (2,047)
------- -------
Net cash used in investing activities.................... (1,322) (2,189)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and notes payable............... 5,100 ---
Payment of long-term debt and capital leases................. (7,034) (112)
Proceeds from stock issued and
stock options exercised..................................... 1,164 126
------- -------
Net cash provided by (used in) financing activities....... (770) 14
------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................................. (189) 3,346
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 630 40,326
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 441 $43,672
------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
For the three Months
Ended March 31,
1996 1997
------------- -------------
Interest Paid................................................. $ 539 $ 65
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. These financial statements should be read in conjunction
with the Company's audited financial statements included in the Company's Form
10-K for the year ended December 31, 1996 filed with the Securities and Exchange
Commission. The results for the quarter ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
NOTE 2 - EARNINGS PER SHARE
Earnings per share and shares used in the per share calculation for periods
prior to May 7, 1996, the date of the Company's initial public offering, have
been presented on the consolidated statements of income as if the conversion of
the Company's preferred stock had occurred at the later of the beginning of the
period or the issuance date.
Primary and fully diluted earnings per share is computed using the weighted
average number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents are computed for the
Company's outstanding options using the treasury stock method. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common stock
equivalents also include amounts computed on options issued during the twelve
months immediately preceding the date of the initial filing of the Company's
Registration Statement on Form S-1 relating to the Company's initial public
offering as if they were outstanding for all periods prior to the closing on May
7, 1996 using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement 128 on the calculation
of primary and fully diluted earnings per share for these quarters is not
expected to be material.
NOTE 3 - CONTINGENCIES
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 currently pending matters will not have a material effect
on the Company's financial position and results of operations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage of
revenues represented by certain line items in the Company's consolidated
statement of income:
<TABLE>
<CAPTION>
Three Months %/Increase
Ended March 31, (Decrease)
------------------- -----------
1996 1997
------ -------
<S> <C> <C> <C>
Revenues....................... 100.0% 100.0% 10.5%
Cost of service................ 77.5 78.3 11.7
Conversion cost................ 2.6 0.7 (68.8)
Selling, general and
administrative expenses........ 13.3 11.1 ( 8.4)
Depreciation and amortization.. 2.8 2.8 11.7
----- ----- -----
96.2 92.9 (53.8)
Operating income............... 3.8 7.1 107.1
Interest expense(income), net.. 0.8 (0.5) -
----- ---- -----
Income before provision
for income taxes............ 3.0 7.6 182.8
Provision for income taxes..... 1.1 2.9 184.1
----- ----- -----
Net Income..................... 1.9% 4.7% 182.1%
----- ----- -----
</TABLE>
REVENUES
Revenue increased 10.5% to $66.5 million for the quarter ended March 31, 1997
compared with $60.2 million for the same period in 1996. This resulted from a
8.5% increase in merchant sales volume processed of $3.0 billion for the quarter
ending March 31, 1997, compared to $2.8 billion for the same period in 1996.
This increase was attributable to new customer volume related to exclusive bank
marketing agreements signed, as well as new customer volume added from the
marketing and sales efforts targeting regional, national and local merchants. In
addition, the Company signed a letter of intent with Crestar Bank to form an
exclusive marketing alliance and to acquire the merchant transaction processing
business. The Crestar portfolio acquisition is expected to be consummated in the
second quarter of 1997. Crestar processed approximately $1.3 billion in merchant
sales volume in 1996.
COST OF SERVICE
NOVA's cost of service increased 11.7% to $52.1 million for the quarter ended
March 31, 1997 compared with $46.6 million for the same period in 1996. This
increase resulted primarily from additional interchange and assessment fees
associated with increased bankcard volume. Cost of service as a percent of
revenues increased from 77.5% for the quarter ending March 31, 1996 to 78.3% for
the same period in 1997.
CONVERSION COST
Conversion cost decreased 68.8% to $0.5 million for the quarter ended March 31,
1997, compared with $1.6 million for the same period in 1996. The decrease is
primarily due to a reduction of cost as the Company nears the completion of the
conversion of the First Union portfolio which was acquired in December 1995.
7
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general and administrative expenses decreased 8.4% to $7.4 million for
the quarter ended March 31, 1997 compared with $8.0 million for the same period
in 1996. As a percentage of revenues, selling, general and administrative
expenses decreased to 11.1% for the quarter ended March 31, 1997 from 13.3% for
the same period in 1996. This decline was primarily the result of the Company's
consolidation plan which has resulted in overall improvement in the utilization
of personnel and control of operating expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 11.7% to $1.9 million for the quarter
ended March 31, 1997 compared with $1.7 million for the same period in 1996. The
increase was principally due to greater depreciation for Point of Sale ("POS")
terminals and additional systems hardware and software purchases to enhance the
Company's transaction processing system, as well as operational equipment needed
to support NOVA's growth. To a lesser extent, this expense increased due to
additional amortization of certain intangible assets related to the acquisition
of merchant portfolios.
OPERATING INCOME
For the foregoing reasons, operating income for the quarter ended March 31, 1997
increased $2.4 million or 107.1% to $4.7 million compared with $2.3 for the same
period in 1996.
INTEREST EXPENSE (INCOME) - NET
Net interest expense decreased $0.8 million for the quarter ended March 31,
1997, resulting in net interest income of $0.3 million compared to net interest
expense of $0.5 million for the same period in 1996. The decrease in interest
expense resulted from the repayment of bank debt and purchase note obligations
with the net proceeds received from the Company's initial public offering. The
increase in interest income resulted from the investment of the remaining net
proceeds received from the Company's initial public offering, as well as the
investment of cash provided from operations of the Company.
INCOME TAXES
Income tax expense reflects an effective tax rate of 38% for the quarters ended
March 31, 1997 and March 31, 1996.
NET INCOME
For the quarter ended March 31, 1997, net income increased $2.0 million, or
182.1%, to $3.1 million as compared to $1.1 million for the quarter ended March
31, 1996, due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of its capital resources include acquisitions of
merchant portfolios, capital expenditures and working capital.
The Company entered into a credit agreement in 1994, which was amended on
January 31, 1996, and May 1, 1996, for aggregate loans of up to $36,083,000.
Term loans of $11,083,000 and a combination of revolving loans, letters of
credit and acquisition loans aggregating $25,000,000 ($10,000,000 on June 30,
1997) are available under the agreement. As of March 31, 1997, no borrowings
exist under this agreement.
Net cash provided by operating activities was $5.5 million for the first three
months of 1997 as compared to net cash provided by operating activities of $1.9
million for the same period in 1996.
Net cash used in investing activities was $2.2 million for the three month
period ended March 31, 1997 compared to $1.3 million for the same period in
1996. The Company's capital expenditure requirements included POS terminals that
are leased to merchants and computer hardware and software necessary to support
the NOVA Network and the systems at the Company's operation center. For the
three months ended March 31, 1997 and March 31, 1996, the Company's capital
expenditures totaled approximately $2.0 million and $1.2 million, respectively.
In addition to capital expenditures, the Company purchased various merchant
processing portfolios totaling $0.1 million and $0.2 million for the three
months ended March 31, 1997 and March 31, 1996, respectively.
Net cash provided by financing activities was minimal for the three months ended
March 31, 1997 compared to cash used by financing activities of $0.8 million
for the same period in 1996. This change is due primarily to the reduction of
long-term debt as a result of the debt repayment with the proceeds of the
Company's initial public offering.
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 its
existing cash and cash equivalents, cash generated from operations and available
credit facilities to fund future merchant portfolio acquisitions and working
capital requirements.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Shareholders of the Company during
the quarter ended March 31, 1997.
ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits
11.1 Statement regarding Computation of Pro Forma Earnings Per
Share
11.2 Statement regarding Computation of Historical Earnings Per
Share
27. Financial Data Schedule
(aa) Reports on Form 8-K
None.
9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
<S> <C> <C>
11.1 Statement regarding Computation of Pro Forma Earnings Per Share 12
11.2 Statement regarding Computation of Historical Earnings Per Share 13
27. Financial Data Schedule 14
</TABLE>
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVA Corporation
(Registrant)
By:
----------------------------------------
James M. Bahin
Vice Chairman, Chief Financial Officer
and Secretary
Date: May 14, 1997
By:
----------------------------------------
Edward Grzedzinski
Date: May 14, 1997 Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
By:
----------------------------------------
James M. Bahin
Vice Chairman, Chief Financial Officer
and Secretary
(Principal Accounting Officer)
11
<PAGE>
EXHIBIT 11.1
NOVA CORPORATION
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
------------
<S> <C>
Weighted average Common Stock outstanding during
the period 11,490,802
Cheap Stock (1) 28,053
Conversion of Preferred Stock into Common Stock 11,876,218
Dilutive effect of common stock equivalents 2,575,717
-----------
Total 25,970,790
===========
Net income $ 1,115,000
Less: Preferred Stock dividends 154,595
-----------
Net income available for Common Stock and
common stock equivalents $ 960,405
-----------
Per share amount $0.04
===========
</TABLE>
__________
(1) Pursuant to Securities and Exchange Commission Accounting Bulletin No. 83,
common stock and common stock equivalents issued at prices below the assumed
initial public offering price per share ("Cheap Stock") during the twelve
months immediately preceding the initial filing date of the Company's
Registration Statement for its public offering have been included as
outstanding for all periods presented.
12
<PAGE>
EXHIBIT 11.2
NOVA CORPORATION
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
PRIMARY
Weighted average Common Stock outstanding during
the period 11,490,802 28,747,813
Cheap Stock (1) 28,053 0
Dilutive effect of common stock equivalents 2,575,717 1,104,187
----------- -----------
Total 14,094,571 29,852,000
=========== ===========
Net income $ 1,115,000 $ 3,145,000
Less: Preferred Stock dividends 1,000,388 0
----------- -----------
Net income available for Common Stock
and common stock equivalents $ 114,612 $ 3,145,000
=========== ===========
Per share amount $0.01 $0.11
=========== ===========
FULLY DILUTED
Weighted average Common Stock outstanding during
the period 11,490,801 28,747,813
Cheap Stock (1) 28,053 0
Dilutive effect of common stock equivalents 2,575,717 1,104,187
----------- -----------
Total 14,094,571 29,852,000
=========== ===========
Net income $ 1,115,000 $ 3,145,000
Less: Preferred Stock dividends 1,000,388 0
----------- -----------
Net income available for Common Stock
and common stock equivalents $ 114,612 $ 3,145,000
=========== ===========
Per share amount $0.01 $0.11
=========== ===========
</TABLE>
__________
(1) Pursuant to Securities and Exchange Commission Accounting Bulletin No. 83,
common stock and common stock equivalents issued at prices below the assumed
initial public offering price per share ("Cheap Stock") during the twelve
months immediately preceding the initial filing date of the Company's
Registration Statement for its public offering have been included as
outstanding for all periods presented.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 43,672,000
<SECURITIES> 0
<RECEIVABLES> 19,096,000
<ALLOWANCES> 2,705,000
<INVENTORY> 818,000
<CURRENT-ASSETS> 64,061,000
<PP&E> 18,431,000
<DEPRECIATION> 7,054,000
<TOTAL-ASSETS> 111,601,000
<CURRENT-LIABILITIES> 21,755,000
<BONDS> 0
0
0
<COMMON> 288,000
<OTHER-SE> 99,425,000
<TOTAL-LIABILITY-AND-EQUITY> 111,601,000
<SALES> 66,525,000
<TOTAL-REVENUES> 66,525,000
<CGS> 52,071,000
<TOTAL-COSTS> 52,071,000
<OTHER-EXPENSES> 9,725,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (342,000)
<INCOME-PRETAX> 5,071,000
<INCOME-TAX> 1,926,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,145,000
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
