<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] For the fiscal year ended December 31, 1996
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission File Number 1-14342
NOVA CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 58-2209575
(State of organization) (IRS Employer Identification No.)
ONE CONCOURSE PARKWAY, SUITE 300, ATLANTA, GEORGIA 30328
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (770) 396-1456
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- -------------------------------------------------------------------------------
Common Stock, $0.01 par value per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _____
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 28, 1997, the aggregate market value of the 4,796,880 shares of
Common Stock of the Company held by non-affiliates of the Company was
approximately $78,548,910, based upon the closing price of $16.375 per share on
The New York Stock Exchange composite tape on such date. Non-affiliate ownership
is calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors, without conceding that all such
persons are "affiliates" for purposes of the federal securities laws. As of
February 28, 1997, there were 28,730,185 shares of the Company's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1996 Parts II and IV
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders to
be held on May 14, 1997 Part III
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1). Index to Consolidated Financial Statements
The following financial statements are incorporated herein by reference to
the Company's 1996 Annual Report to Shareholders, and are filed herewith as
part of Exhibit 13:
Consolidated Balance Sheets at December 31, 1996 and 1995.
Consolidated Statements of Operations for each of the three fiscal years
ending December 31, 1996, December 31, 1995 and February 28, 1995.
Consolidated Statements of Shareholders' Equity for each of the three
fiscal years ending December 31, 1996, December 31, 1995 and February 28,
1995.
Consolidated Statements of Cash Flows for each of the three fiscal years
ending December 31, 1996, December 31, 1995 and February 28, 1995.
Notes to Consolidated Financial Statements
Report of Independent Auditors
(2) The following consolidated financial statement schedule of the Company
is included in Item 14(d):
Schedule II. - Valuation and Qualifying Accounts
Schedules not included above have been omitted because they are not
applicable, not material, or the required information is given in the financial
statements or notes thereto.
(3) The following exhibits are incorporated by reference or were
previously filed as part of this Form 10-K, except Exhibit 13 which is filed
herewith:
17
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------
2.1 Merchant Business Purchase Agreement, dated October 18, 1994, as amended
November 30, 1994 and December 9, 1994, among NOVA Information Systems,
Inc., the Bank of Boulder, Bolder Bancorporation and NOVA Newco, Inc.
(the "Bank of Boulder Business Purchase Agreement") /(1)/
*2.2 Contribution Agreement, dated October 30, 1995 (the "Contribution
Agreement"), among the Registrant (formerly NOVA Holdings, Inc.), NOVA
Information Systems, Inc., the then-current shareholders of NOVA
Information Systems, Inc. (the "Original Shareholders"), First Union
Corporation, the First Union Union Banks, and First Fidelity
Bancorporation and its banking subsidiaries (which merged with and into
First Union Corporation effective January 1, 1996) /(1)/
3.1 Articles of Incorporation of the Registrant, as amended /(1)/
3.2 Bylaws of the Registrant, as amended
4.1 Specimen form of Common Stock certificate
4.2 See Articles of Incorporation of the Registrant and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively
4.3 Shareholders Agreement dated January 31, 1996 (the "Shareholders
Agreement"), among the Registrant (formerly NOVA Holdings, Inc.), NOVA
Information Systems, Inc., First Union, WorldCom, Warburg and each of the
other Original Shareholders /(1)/
4.4 Registration Rights Agreement (the "Registration Rights Agreement") dated
January 31, 1996, among the Registrant (formerly NOVA Holdings, Inc.),
Warburg, WorldCom, and First Union /(1)/
9 Shareholders Agreement, incorporated by reference to Exhibit 4.3 /(1)/
10.1 Shareholders Agreement, incorporated by reference to Exhibit 4.3 /(1)/
10.2 Registration Rights Agreement, incorporated by reference to Exhibit 4.4
/(1)/
10.3 Employment Agreement, dated October 27, 1995, effective January 31, 1996,
between NOVA Information Systems, Inc. and Edward Grzedzinski /(1)/
10.4 Employment Agreement dated October 27, 1995, effective January 31, 1996,
between NOVA Information Systems, Inc. and James M. Bahin /(1)/
10.5 1991 Employees' Stock Option and Stock Appreciation Rights Plan, as
amended /(1)/
10.6 1996 Employees Stock Incentive Plan, as amended, together with form of
Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement
/(1)/
10.7 1996 Directors Stock Option Plan, as amended and restated
10.8 Contribution Agreement, incorporated by reference to Exhibit 2.2 /(1)/
10.9 Lease Agreement dated May 31, 1996 by and between NOVA Information
Systems, Inc. and Concourse I, LTD. /(2)/
10.10 Sublease, dated April 1, 1991, between Inter-Banc, Inc. and The Baptist
Health System of East Tennessee, Inc./ (1)/
18
<PAGE>
10.11 Credit Agreement, dated December 8, 1994, as amended and restated
January 31, 1996 among NOVA Information Systems, Inc., the Lenders named
therein, and Bank of America National Trust and Savings Association, as
Agent, and First Amendment and Waiver to Amended and Restated Credit
Agreement dated as of May 1, 1996. /(2)/
10.12 Agreement dated February 28, 1996, between NOVA Information Systems,
Inc. and WorldCom /(1)/
10.13 Subscribers Agreement, dated May 1, 1993, between NOVA Information
Systems, Inc. and Total System Services, Inc., and Addendum to
Subscribers Agreement, dated July 1993, between NOVA Information
Systems, Inc. and Total System Services, Inc. /(1)/
*10.14 Marketing Agreement, dated June 30, 1994, between NOVA Information
Systems, Inc. and Kessler Financial Services, L.P. /(1)/
*10.15 Agreement Regarding Merchant Processing Services and Other Matters,
dated May 5, 1995, among NOVA Information Systems, Inc., First Alabama
Bank and Regions Financial Corp. /(1)/
*10.16 Agreement, dated June 3, 1992, as amended December 9, 1992, April 28,
1994 and November 2, 1994 between NOVA Information Systems, Inc. and
Mellon Bank, N.A. (''Mellon Bank''), together with the Letter Agreement
dated June 3, 1992 between NOVA Information Systems, Inc. and Mellon
Bank relating to fees /(1)/
10.17 Depositary and Processing Agreement, dated September 30, 1993, between
NOVA Information Systems, Inc. and Bank of the West /(1)/
*10.18 Bank of Boulder Purchase Agreement, incorporated by reference to Exhibit
2.1 /(1)/
*10.19 Non-Competition Agreement, dated December 9, 1994, among NOVA
Information Systems, Boulder Bankcard Processing, Inc. and Steven K.
Bosley /(1)/
10.20 Marketing Agreement, dated October 1, 1992, between NOVA Information
Systems, Inc. and MBNA America Bank, N.A. /(1)/
10.21 Agreement Not to Compete, dated October 1, 1992, between NOVA
Information Systems, Inc. and MBNA America Bank, N.A. /(1)/
10.22 Depositary and Settlement Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems,
Inc. and FUNB-NC /(1)/
10.23 Marketing Support Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems,
Inc. and the First Union Banks /(1)/
11.1 Statement re: Computation of Pro Forma Earnings Per Share
11.2 Statement re: Computation of Historical Earnings Per Share
11.3 Statement re: Computation of Supplemental Earnings Per Share
13 1996 Annual Report to Shareholders - Following portions only:
"Shareholder Information;" "Selected Consolidated Financial Data;"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations;" the Consolidated Financial Statements and Accompanying
Notes to Consolidated Financial Statements and the "Report of
Independent Auditors"
21 Subsidiaries of Registrant
23 Consent of Ernst & Young LLP
19
<PAGE>
24 Powers of Attorney
27 Financial Data Schedule
______________________
* Confidential treatment pursuant to 17 CFR (S)(S) 200.80 and 230.406 was
previously requested regarding certain portions of the indicated Exhibit in
connection with the Company's Registration Statement on Form S-1 (Registration
No. 333-3287), which portions have been filed separately with the
Commission.
/(1)/ Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-3287), and incorporated herein by reference.
/(2)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, filed on June 18, 1996, Commission File No. 1-
14342, and incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed during the
fourth quarter of 1996.
20
<PAGE>
(c) Index of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------
<S> <C>
2.1 Merchant Business Purchase Agreement, dated October 18, 1994, as amended
November 30, 1994 and December 9, 1994, among NOVA Information Systems,
Inc., the Bank of Boulder, Bolder Bancorporation and NOVA Newco, Inc.
(the "Bank of Boulder Business Purchase Agreement") /(1)/
*2.2 Contribution Agreement, dated October 30, 1995 (the "Contribution
Agreement"), among the Registrant (formerly NOVA Holdings, Inc.), NOVA
Information Systems, Inc., the then-current shareholders of NOVA
Information Systems, Inc. (the "Original Shareholders"), First Union
Corporation, the First Union Union Banks, and First Fidelity
Bancorporation and its banking subsidiaries (which merged with and into
First Union Corporation effective January 1, 1996) /(1)/
3.1 Articles of Incorporation of the Registrant, as amended /(1)/
3.2 Bylaws of the Registrant, as amended /(3)/
4.1 Specimen form of Common Stock certificate /(3)/
4.2 See Articles of Incorporation of the Registrant and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively
4.3 Shareholders Agreement dated January 31, 1996 (the "Shareholders
Agreement"), among the Registrant (formerly NOVA Holdings, Inc.), NOVA
Information Systems, Inc., First Union, WorldCom, Warburg and each of
the other Original Shareholders /(1)/
4.4 Registration Rights Agreement (the "Registration Rights Agreement")
dated January 31, 1996, among the Registrant (formerly NOVA Holdings,
Inc.), Warburg, WorldCom, and First Union /(1)/
9 Shareholders Agreement, incorporated by reference to Exhibit 4.3 /(1)/
10.1 Shareholders Agreement, incorporated by reference to Exhibit 4.3 /(1)/
10.2 Registration Rights Agreement, incorporated by reference to Exhibit 4.4
/(1)/
10.3 Employment Agreement, dated October 27, 1995, effective January 31,
1996, between NOVA Information Systems, Inc. and Edward Grzedzinski
/(1)/
10.4 Employment Agreement dated October 27, 1995, effective January 31, 1996,
between NOVA Information Systems, Inc. and James M. Bahin /(1)/
10.5 1991 Employees' Stock Option and Stock Appreciation Rights Plan, as
amended /(1)/
10.6 1996 Employees Stock Incentive Plan, as amended, together with form of
Incentive Stock Option Agreement and Non-Qualified Stock Option
Agreement /(1)/
10.7 1996 Directors Stock Option Plan, as amended and restated /(3)/
10.8 Contribution Agreement, incorporated by reference to Exhibit 2.2 /(1)/
10.9 Lease Agreement dated May 31, 1996 by and between NOVA Information
Systems, Inc. and Concourse I, LTD. /(2)/
10.10 Sublease, dated April 1, 1991, between Inter-Banc, Inc. and The Baptist
Health System of East Tennessee, Inc./ (1)/
10.11 Credit Agreement, dated December 8, 1994, as amended and restated
January 31, 1996 among NOVA Information Systems, Inc., the Lenders named
therein, and Bank of America National Trust and Savings Association, as
Agent, and First Amendment and Waiver to Amended and Restated Credit
Agreement dated as of May 1, 1996. /(2)/
10.12 Agreement dated February 28, 1996, between NOVA Information Systems,
Inc. and WorldCom /(1)/
10.13 Subscribers Agreement, dated May 1, 1993, between NOVA Information
Systems, Inc. and Total System Services, Inc., and Addendum to
Subscribers Agreement, dated July 1993, between NOVA Information
Systems, Inc. and Total System Services, Inc. /(1)/
*10.14 Marketing Agreement, dated June 30, 1994, between NOVA Information
Systems, Inc. and Kessler Financial Services, L.P. /(1)/
*10.15 Agreement Regarding Merchant Processing Services and Other Matters,
dated May 5, 1995, among NOVA Information Systems, Inc., First Alabama
Bank and Regions Financial Corp. /(1)/
*10.16 Agreement, dated June 3, 1992, as amended December 9, 1992, April 28,
1994 and November 2, 1994 between NOVA Information Systems, Inc. and
Mellon Bank, N.A. (''Mellon Bank''), together with the Letter Agreement
dated June 3, 1992 between NOVA Information Systems, Inc. and Mellon
Bank relating to fees /(1)/
10.17 Depositary and Processing Agreement, dated September 30, 1993, between
NOVA Information Systems, Inc. and Bank of the West /(1)/
*10.18 Bank of Boulder Purchase Agreement, incorporated by reference to Exhibit
2.1 /(1)/
*10.19 Non-Competition Agreement, dated December 9, 1994, among NOVA
Information Systems, Boulder Bankcard Processing, Inc. and Steven K.
Bosley /(1)/
10.20 Marketing Agreement, dated October 1, 1992, between NOVA Information
Systems, Inc. and MBNA America Bank, N.A. /(1)/
10.21 Agreement Not to Compete, dated October 1, 1992, between NOVA
Information Systems, Inc. and MBNA America Bank, N.A. /(1)/
10.22 Depositary and Settlement Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems,
Inc. and FUNB-NC /(1)/
10.23 Marketing Support Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems,
Inc. and the First Union Banks /(1)/
11.1 Statement re: Computation of Pro Forma Earnings Per Share /(3)/
11.2 Statement re: Computation of Historical Earnings Per Share /(3)/
11.3 Statement re: Computation of Supplemental Earnings Per Share /(3)/
13 1996 Annual Report to Shareholders - Following portions only:
"Shareholder Information;" "Selected Consolidated Financial Data;"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations;" the Consolidated Financial Statements and Accompanying
Notes to Consolidated Financial Statements and the "Report of
Independent Auditors" /(4)/
21 Subsidiaries of Registrant /(3)/
23 Consent of Ernst & Young LLP /(3)/
24 Powers of Attorney /(3)/
27 Financial Data Schedule /(3)/
</TABLE>
- ----------------------
* Confidential treatment pursuant to 17 CFR (S)(S) 200.80 and 230.406 was
previously requested regarding certain portions of the indicated Exhibit in
connection with the Company's Registration Statement on Form S-1 (Registration
No. 333-3287), which portions have been filed separately with the
Commission.
/(1)/ Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-3287), and incorporated herein by reference.
/(2)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, filed on June 18, 1996, Commission File No. 1-
14342, and incorporated herein by reference.
/(3)/ Previously filed as part of this Form 10-K.
/(4)/ Filed herewith.
<PAGE>
(d) The following financial statement schedules are filed herewith:
<TABLE>
<CAPTION>
SCHEDULE II
NOVA INFORMATION SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------------------------------------
BALANCE AT CURRENT CURRENT BALANCE AT
THE BEGINNING YEAR YEAR THE END
OF THE PERIOD COST/EXPENSE WRITE-OFFS OF THE PERIOD
---------------------------------------------------------------
FISCAL YEAR ENDING DECEMBER 31, 1996:
<S> <C> <C> <C> <C>
Reserve For Doubtful Accounts and Chargebacks $440,000 $3,245,000 $978,000 2,707,000
Credit and Fraud Loss Reserve 883,000 0 133,000 750,000
TEN MONTHS PERIOD ENDING DECEMBER 31, 1995:
Reserve For Doubtful Accounts and Chargebacks $206,000 $ 634,000 $400,000 $ 440,000
Credit and Fraud Loss Reserve 691,000 337,000 145,000 883,000
FISCAL YEAR ENDING FEBRUARY 28, 1995:
Reserve For Doubtful Accounts and Chargebacks $210,000 $ 668,000 $672,000 $ 206,000
Credit and Fraud Loss Reserve 587,000 264,000 160,000 691,000
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 16th day of
April, 1997.
NOVA CORPORATION
By: /s/
---------------------------
Edward Grzedzinski
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on April 16th, 1997.
SIGNATURE TITLE
--------- -----
/s/ Edward Grzedzinski Director, Chairman of the Board,
- ------------------------------- President and Chief Executive Officer
Edward Grzedzinski (principal executive officer)
/s/ James M. Bahin Director, Vice Chairman of the Board,
- ------------------------------- Chief Financial Officer and Secretary
James M. Bahin (principal financial and accounting
officer)
* Director
- -------------------------------
Charles T. Cannada
* Director
- -------------------------------
U. Bertram Ellis, Jr.
* Director
- -------------------------------
Dr. Henry Kressel
* Director
- -------------------------------
Joseph P. Landy
* Director
- -------------------------------
Maurice F. Terbrueggen, Jr.
* Director
- -------------------------------
Fred Martin Winkler
*By: /s/ James M. Bahin
---------------------
James M. Bahin
as Attorney-In-Fact
22
<PAGE>
EXHIBIT 13
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Index to Financials
____
Selected Consolidated Financial Data
........................................................ 16
Management's Discussion and Analysis
of Financial Condition & Results of Operations
........................................................ 17
Consolidated Balance Sheets
........................................................ 24
Consolidated Statements of Operations
........................................................ 25
Consolidated Statements of Shareholders' Equity
........................................................ 26
Consolidated Statements of Cash Flows
........................................................ 27
Notes to Consolidated Financial Statements
........................................................ 28
Report of Independent Auditors
........................................................ 45
- --------------------------------------------------------------------------------
[15]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Selected Consolidated Financial Data
The following table sets forth selected consolidated financial data for the
Company as of, and for the two years ended December 31, 1996 and the three years
ended February 28 or 29, 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 Annual
Report. 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
10-month period ended December 31, 1995, is considered an annual period.
<TABLE>
<CAPTION>
10-month period
Year ended ended Year ended
December 31, December 31, February 28 or 29,
(in thousands, except ------------ ------------ ------------------------------------
per share and merchant location data) 1996 1995/(1)/ 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 265,829 $ 129,035 $ 93,592 $ 68,213 $ 37,230
....................................................................................................................................
Cost of service 207,595 100,375 74,032 54,984 30,206
....................................................................................................................................
Conversion costs 6,395 3,441 1,827 2,080 1,472
....................................................................................................................................
Selling, general and administrative 32,952 17,795 14,091 12,419 9,327
....................................................................................................................................
Depreciation and amortization 6,982 4,635 3,887 2,661 1,646
....................................................................................................................................
Operating income (loss) 11,905 2,789 (245) (3,931) (5,421)
....................................................................................................................................
Interest expense, (income), net (126) 1,959 968 211 996
....................................................................................................................................
Income (loss) before provision for
income taxes 12,031 830 (1,213) (4,142) (6,417)
....................................................................................................................................
Provision (benefit) for income taxes 4,764 (4,057) -- -- --
....................................................................................................................................
Net income (loss)/(2)/ $ 7,267 $ 4,887 $ (1,213) $ (4,142) $ (6,417)
....................................................................................................................................
Pro forma net income (loss) per common
and common equivalent share/(3)/ $0.25 $0.24 $(0.13) -- --
....................................................................................................................................
Pro forma weighted average
common and common equivalent
shares outstanding/(4)/ 28,604 18,024 13,603 -- --
....................................................................................................................................
Other Data:
Merchant sales volume processed $11,925,126 $5,975,013 $4,131,071 $2,871,793 $1,409,861
....................................................................................................................................
Merchant locations at period end 82,906 77,884 43,980 24,838 19,179
....................................................................................................................................
Balance Sheet Data (at period end):
Total assets $ 107,705 $ 61,001 $ 47,823 $ 26,437 $ 27,879
....................................................................................................................................
Long-term debt and capital lease
obligations, less current portion 859 17,738 16,694 1,950 2,339
....................................................................................................................................
Total shareholders' equity 84,882 26,017 18,719 18,783 19,079
- ------------------------------------------------------------------------------------------------------------------------------------
</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 10-month period 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.
- --------------------------------------------------------------------------------
[44]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
& Results of Operations
Overview
The Company 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 program 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"), the consummation of the First
Union Alliance, effective as of December 1, 1995, and the consummation of
23 merchant portfolio transactions in 1996.
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 10-month
period ended December 31, 1995.
The Company has increased 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 74
transactions consisting of 70 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 First Union Alliance, the Company has
consolidated substantially all of its previous transactions. The
consolidation of the operating centers acquired in the First Union
Alliance, into the Company's Knoxville, Tennessee, facility, is
substantially complete. In addition, the majority of the merchant terminals
resulting from the First Union Alliance 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 other smaller merchant portfolios 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 First Union Alliance. The costs of these
conversion activities are expensed as incurred.
- --------------------------------------------------------------------------------
[16]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
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 12-month
year ended December 31, 1996, with the 10-month period ended December 31,
1995; and the 10-month period ended December 31, 1995, with the 10-month
period 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 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 94.6%
and 93.7% of the Company's revenues for the years ended December 31, 1996
and 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 independent sales organizations ("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 ("POS") 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 point-of-sale terminals ("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 POS systems. The
Company has not capitalized any internal expenditures with respect to these
items.
- --------------------------------------------------------------------------------
[17]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
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 10 years based upon the Company's
merchant attrition experience and projected revenue streams. Excess cost of
businesses acquired is amortized over 30 years.
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:
Percentage of Total Revenues
<TABLE>
<CAPTION>
10-month 10-month
Year ended period ended period ended Year ended
December 31, December 31, December 31, February 28,
---------------- ------------------------------ ---------------------
1996 1995 1994 1995 1994
---------------- ------------------------------ ---------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
........................................................................................................................
Cost of service 78.1 77.8 78.9 79.1 80.6
........................................................................................................................
Conversion costs 2.4 2.7 1.2 2.0 3.0
........................................................................................................................
Selling, general and administrative 12.4 13.8 15.0 15.1 18.3
........................................................................................................................
Depreciation and amortization 2.6 3.6 3.9 4.2 3.9
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 4.5 2.2 1.0 (0.3) (5.8)
........................................................................................................................
Interest expense, net 0.0 1.5 0.8 1.0 0.3
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 4.5 0.6 0.2 (1.3) (6.1)
........................................................................................................................
Provision (benefit) for income taxes 1.8 (3.1) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) 2.7% 3.8% 0.2% (1.3)% (6.1)%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Year Ended December 31, 1996, Compared to
10-month Period Ended December 31, 1995
____
Revenues
Revenues for the year ended December 31, 1996 increased 106.0% to $265.8 million
compared with $129.0 million for the 10 months ended December 31, 1995. The
increase resulted primarily from a 99.6 %, or $6.0 billion, increase in sales
volume processed for the year to $11.9 billion from $5.9 billion in 1995. This
increase was attributable to the increased bankcard volume from the acquisition
of the First Union's merchant processing portfolio acquisition, as well as
record new customer volume added from the marketing efforts targeted towards
- --------------------------------------------------------------------------------
[18]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
regional, national and local merchants. Due to the Company's change in fiscal
year end, effective as of December 31, 1995, the Company's revenues in 1996
included a full 12 months, as compared to the prior year's 10-month fiscal year.
Additionally, the Company has entered into 17 exclusive bank marketing
agreements in 1996.
Cost of Service
NOVA's cost of service increased 106.8% to $207.6 million for the year ended
December 31, 1996 from $100.4 million for the 10-month period ended December 31,
1995. As a percentage of revenues, cost of service increased to 78.1% for the
year ended December 31, 1996 from 77.8% for the 10-month period ended
December 31, 1995. These increases resulted from additional interchange and
assessment fees associated with the higher volume of merchant sales and from
authorization fees paid to third-party networks and merchant accounting
processors for merchants not yet converted to the NOVA Network.
Conversion Costs
Conversion costs increased 85.8% to $6.4 million for the year ended December 31,
1996, as compared with $3.4 million for the 10-month period ended December 31,
1995. The increase resulted primarily from the ongoing conversion of the First
Union portfolio, acquired in December 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 85.1% to $33.0 million in
the year ended December 31, 1996 from $17.8 million for the 10-month period
ended December 31, 1995. Higher expenses in 1996 resulted from additional
staffing levels in the Company's operations center to support the increased
merchant sales volume processed, as well as a one-time cost involved in
consolidating three operational offices around the country to NOVA's corporate
headquarters and the Knoxville, Tennessee center. In addition, sales and
marketing expenses increased to support the Company's growing merchant and bank
alliance relationships. The Company's consolidation plan is to provide even
higher-quality information systems processing to all market sectors within the
credit card industry, provide for operational efficiencies, as well as create
new revenue opportunities in the future. Selling, general and administrative
expenses decreased as a percent of revenues to 12.4% in 1996 from 13.8% in the
prior year, reflecting operating efficiencies.
Depreciation and Amortization
Depreciation and amortization increased 50.6% to $7.0 million for the year ended
December 31, 1996, from $4.6 million for the 10-month period ended December 31,
1995. The increase was principally due to greater depreciation for POS
Terminals, 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.
- --------------------------------------------------------------------------------
[19]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
Operating Income
For the foregoing reasons, operating income increased 326.9%, or $9.1 million,
to $11.9 million for the year ended December 31, 1996, compared to $2.8 million
for the 10-month period ended December 31, 1995.
Interest Expense (Income) - Net
Net interest expense decreased $2.1 million for the year ended December 31,
1996, resulting in net interest income of $126,000, compared to net interest
expense of $2.0 million for the prior year. The decrease in interest expense was
due to reduced levels of bank debt and purchase note obligations resulting from
the use of net proceeds received from the Company's initial public offering. The
increase in interest income was generated from the investment of the net
proceeds received from the Company's initial public offering, as well as cash
generated from operating activities in 1996.
Income Taxes
Income tax expense was recorded at an effective tax rate of 40% in 1996. During
the fiscal year ended December 31, 1995, a one-time tax benefit of $5.0 million
was included in the provision for income tax reflecting the reversal of a
deferred tax valuation allowance as a result of the Company's improved
profitability in 1995.
Net Income
For the year ended December 31, 1996, net income increased $2.4 million, or
48.7%, to $7.3 million compared to $4.9 million for the 10-month period ended
December 31, 1995, due to the factors discussed above. Net income for 1995
included a one-time tax benefit of $5.0 million.
10-Month Period Ended December 31, 1995, Compared With
10-month Period Ended December 31, 1994
____
Revenues
Revenue increased 72.5% to $129.0 million for the 10-month period 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 10-month period 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.
- --------------------------------------------------------------------------------
[20]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
Conversion Costs
Conversion costs increased 270.8% to $3.4 million for the 10-month period ended
December 31, 1995, compared with $900,000 for the same period in 1994. The
increase resulted primarily from the acquisition and conversion of the Boulder
portfolio.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 58.9% to $17.8 million
for the 10-month period 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 expenses declined to 13.8% of revenues for the 10-month
period ended December 31, 1995, compared with 15.0% for the same period in 1994,
reflecting operational efficiencies.
Depreciation and Amortization
Depreciation and amortization increased 60.2% to $4.6 million for the 10-month
period 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
10-month period ended December 31, 1995, compared with the 10-month period ended
December 31, 1994.
Operating Income
For the foregoing reasons, operating income for the 10-month period ended
December 31, 1995, increased 298.4% to $2.8 million compared with $800,000 for
the same period in 1994.
Interest Expense
Interest expense increased to $2.0 million for the 10-month period 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 10-month period ended December 31, 1995, the income tax provision
reflects the recognition of $5.0 million in tax benefits related to prior year
tax losses.
Net Income
Net income increased $4.7 million to $4.9 million for the 10-month period ended
December 31, 1995, compared with net income of $200,000 for the same period in
1994, due to the factors discussed above.
- --------------------------------------------------------------------------------
[21]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
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 with Bank of America 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 after June 30, 1997) are available under the agreement. As of
December 31, 1996, no borrowings exist under this agreement.
Net cash provided by operating activities was $20.7 million for the year
ended December 31, 1996, as compared to $4.9 million for the 10-month period
ended December 31, 1995.
Net cash used in investing activities was $10 million for the year ended
December 31, 1996, as compared to $5.1 million for the 10-month period ended
December 31, 1995. The Company's capital expenditure requirements include
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
operations center, as well as the expansion and consolidation to the new Atlanta
facility. For the year ended December 31, 1996 and the 10-month period ended
December 31, 1995, and the fiscal year ended February 28, 1995, the Company's
capital expenditures totaled approximately $6.0 million, $1.6 million and $0.8
million, respectively. In addition to capital expenditures, the Company
purchased various merchant processing portfolios totaling $4.0 million, $3.5
million and $20.1 million in the year ended December 31, 1996, the 10-month
period ended December 31, 1995, and the year ended February 28, 1994,
respectively.
Net cash provided by financing activities was $28.9 million for the year
ended December 31, 1996, due primarily to the Company's initial public offering.
The proceeds received were used to reduce most of the bank debt, to redeem the
5,000 shares of Series D Preferred Stock for $5.0 million and to pay all
cumulative dividends of $11.7 million to holders of Preferred Stock concurrent
upon the liquidation of all series of Preferred Stock.
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 and
cash generated from operations to fund future merchant portfolio acquisitions
and working capital requirements for the foreseeable future.
- --------------------------------------------------------------------------------
[22]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 40,326,000 $ 630,000
................................................................................................
Trade receivables, less allowance for doubtful accounts
of $2,707,000 and $440,000 at December 31, 1996 and
December 31, 1995, respectively 16,147,000 10,068,000
................................................................................................
Inventory 857,000 1,080,000
................................................................................................
Deferred tax asset and
other current assets 3,160,000 3,759,000
- ------------------------------------------------------------------------------------------------
Total current assets 60,490,000 15,537,000
................................................................................................
Merchant and customer contracts 21,868,000 20,603,000
................................................................................................
Property and equipment, net 10,212,000 7,403,000
................................................................................................
Excess cost of businesses acquired 13,301,000 13,795,000
................................................................................................
Deferred tax asset and
other non-current assets 1,834,000 3,663,000
- ------------------------------------------------------------------------------------------------
$107,705,000 $ 61,001,000
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,810,000 $ 4,180,000
................................................................................................
Accounts payable to affiliate 1,534,000 2,883,000
................................................................................................
Accrued compensation and related costs 1,416,000 996,000
................................................................................................
Settlement obligations 7,691,000 --
................................................................................................
Other accrued liabilities 5,157,000 4,003,000
................................................................................................
Long-term debt obligations due within one year 507,000 5,184,000
- ------------------------------------------------------------------------------------------------
Total current liabilities 21,115,000 17,246,000
................................................................................................
Deferred tax liability 849,000 --
................................................................................................
Long-term debt obligations 859,000 17,738,000
................................................................................................
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock -- 33,571,000
................................................................................................
Common Stock, $.01 par value, 50,000,000 shares
authorized, 28,721,000 and 11,378,000 shares issued at
December 31, 1996, and December 31, 1995, respectively 288,000 114,000
................................................................................................
Additional paid in capital 99,299,000 2,615,000
................................................................................................
Accumulated deficit (14,705,000) (10,283,000)
- ------------------------------------------------------------------------------------------------
Total shareholder's equity 84,882,000 26,017,000
- ------------------------------------------------------------------------------------------------
$107,705,000 $ 61,001,000
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
[23]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended 10-month period ended Year ended
December 31, December 31, February 28,
- --------------------------------------------------------------------------------------------------------------
1996 1995 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $265,829,000 $129,035,000 $93,592,000
..............................................................................................................
OPERATING EXPENSES:
Cost of service 207,595,000 100,375,000 74,032,000
..............................................................................................................
Conversion costs 6,395,000 3,441,000 1,827,000
..............................................................................................................
Selling, general and administrative 32,952,000 17,795,000 14,091,000
..............................................................................................................
Depreciation and amortization 6,982,000 4,635,000 3,887,000
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 11,905,000 2,789,000 (245,000)
..............................................................................................................
Interest expense (income), net (126,000) 1,959,000 968,000
- --------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 12,031,000 830,000 (1,213,000)
..............................................................................................................
Provision (benefit) for income taxes 4,764,000 (4,057,000) --
- --------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 7,267,000 $ 4,887,000 $(1,213,000)
- --------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) per common and
common equivalent share $ 0.25 $ 0.24 $ (0.13)
- --------------------------------------------------------------------------------------------------------------
Pro forma weighted-average common and
common equivalent shares outstanding 28,604,000 18,024,000 13,603,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
[24]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL ACCUMULATED TREASURY SUBSCRIPTION
PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL DEFICIT STOCK RECEIVABLE
----------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
..................................................................................................................................
BALANCE AT March 1, 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-monetary transaction
with First Union -- -- 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) -- --
..................................................................................................................................
Exchange of Preferred
Stock for Common Stock (28,571) (28,571,000) 11,876,000 119,000 28,452,000 -- -- --
..................................................................................................................................
Redemption of Series D
Preferred Stock (5,000) (5,000,000) -- -- -- -- -- --
..................................................................................................................................
Payment of accrued
dividends on Preferred
Stock -- -- -- -- -- (11,689,000) -- --
..................................................................................................................................
Exercise of stock options -- -- 1,674,000 17,000 1,965,000 -- -- --
..................................................................................................................................
Income tax benefit from
stock option exercises -- -- -- -- 977,000 -- -- --
..................................................................................................................................
Issuance of Common Stock
related to IPO -- -- 3,793,000 38,000 72,038,000 -- -- --
..................................................................................................................................
IPO expenses -- -- -- -- (6,748,000) -- -- --
..................................................................................................................................
Net Income -- -- -- -- -- 7,267,000 -- --
----------------------------------------------------------------------------------------------------------------------------------
BALANCE at December 31,
1996 -- $ -- 28,721,000 $288,000 $99,299,000 $ (14,705,000) $ -- $ --
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
[25]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended 10-months period ended Year ended
December 31, December 31, February 28,
----------------------------------------------------------------------------------------------------------------
1996 1995 1995
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,267,000 $ 4,887,000 $ (1,213,000)
................................................................................................................
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 6,982,000 4,635,000 3,887,000
................................................................................................................
Deferred income taxes 3,045,000 (4,057,000) --
................................................................................................................
Interest paid with in-kind debentures -- -- 38,000
................................................................................................................
Gain on disposition of non-compete agreement (150,000) -- --
................................................................................................................
Changes in assets and liabilities, net of the
effects of business acquisitions:
Trade receivables (6,079,000) (4,606,000) (1,972,000)
................................................................................................................
Inventory 223,000 (303,000) 813,000
................................................................................................................
Other assets (84,000) (348,000) (729,000)
................................................................................................................
Accounts payable (719,000) 3,451,000 1,851,000
................................................................................................................
Accrued liabilities 10,242,000 1,260,000 (147,000)
----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,727,000 4,919,000 2,528,000
................................................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses (3,967,000) (3,302,000) (16,631,000)
................................................................................................................
Additions to property and equipment (6,065,000) (1,624,000) (828,000)
................................................................................................................
Other 64,000 (130,000) (92,000)
----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,968,000) (5,056,000) (17,551,000)
................................................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and notes payable 4,008,000 4,900,000 16,150,000
................................................................................................................
Payment of long-term debt and capital leases (25,692,000) (5,129,000) (1,650,000)
................................................................................................................
Payment of Preferred Stock dividends (11,689,000) -- --
................................................................................................................
Proceeds from stock options exercised 1,982,000 -- --
................................................................................................................
Proceeds from IPO, net 65,328,000 -- --
................................................................................................................
Redemption of Preferred Stock (5,000,000) -- --
................................................................................................................
Purchase of treasury stock -- -- (33,000)
................................................................................................................
Proceeds from Common Stock subscriptions receivable -- -- 182,000
................................................................................................................
Proceeds from sale of Preferred Stock -- -- 1,000,000
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 28,937,000 (229,000) 15,649,000
----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 39,696,000 (366,000) 626,000
................................................................................................................
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 630,000 996,000 370,000
----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 40,326,000 $ 630,000 $ 996,000
----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
[26]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 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.
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.
RECLASSIFICATIONS Certain prior year items have been reclassified to
conform to current year presentation.
- --------------------------------------------------------------------------------
[27]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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.
When the Company purchases merchant portfolios, it generally 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 generally 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 $6,455,000, $5,446,000 and $3,547,000 for the year ended
December 31, 1996, 10-month period ended December 31, 1995, and year ended
February 28, 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 POS 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 December 31, 1996, and December 31, 1995, included in property and
equipment was as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Cost of equipment $5,796,000 $4,357,000
...........................................................................
Less accumulated depreciation 2,939,000 1,626,000
---------------------------------------------------------------------------
$2,857,000 $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 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.
- --------------------------------------------------------------------------------
[28]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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. Refer to Note 10 regarding pro forma information provided pursuant
to Financial Accounting Standard Board (FASB) Statement No. 123,
"Accounting for Stock-Based Compensation."
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.
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. Depreciation 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 December 31,
1996, and December 31, 1995, was $1,552,000 and $1,058,000, respectively.
Amortization of merchant and customer contracts (portfolios) is
provided on a straight-line basis over a 10-year life, based on the
Company's estimates of future merchant sales volumes. Accumulated
amortization of portfolios was $8,174,000 and $5,451,000 at December 31,
1996, 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
- --------------------------------------------------------------------------------
[29]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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 Company adopted Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121") on January 1, 1996. The adoption of
SFAS 121 did not have any effect on the financial statements.
SETTLEMENT OBLIGATIONS Settlement obligations result from timing
differences in the Company's settlement processes with merchants.
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.
NOTE 2
____
Business Acquisitions
During the year ended December 31, 1996, and the 10-month period ending
December 31, 1995, the Company made similar purchases from various banks
and third parties for an aggregate purchase price of $4,095,000 and
$3,476,000, respectively.
During the fiscal year ended February 28, 1995, the Company purchased
the rights and interests under certain merchant credit card processing
agreements and the related assets and liabilities, primarily from the Bank
of Boulder ("Boulder") for a purchase price which aggregated approximately
$20,066,000.
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>
December 31, December 31, February 28,
----------------------------------------------------------------------------------
1996 1995 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ -- $ 157,000 $ 285,000
..................................................................................
Property and equipment -- 15,000 739,000
..................................................................................
Non-compete agreement 128,000 330,000 693,000
..................................................................................
Excess cost of businesses acquired -- 354,000 9,623,000
..................................................................................
Merchant and customer contracts 3,967,000 2,620,000 8,726,000
----------------------------------------------------------------------------------
4,095,000 3,476,000 20,066,000
..................................................................................
Liabilities assumed -- -- 459,000
..................................................................................
Notes payable to seller 128,000 174,000 2,976,000
----------------------------------------------------------------------------------
Net cash paid $ 3,967,000 $3,302,000 $16,631,000
----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[30]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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 as
if the acquisition had occurred at the beginning of fiscal 1995. 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 1995, or of the results which may
occur in the future.
<TABLE>
<CAPTION>
Year ended
February 28,
---------------------------------------------------------------------------
1995
---------------------------------------------------------------------------
<S> <C>
Revenues $128,157
...........................................................................
Net loss (908)
...........................................................................
Pro forma net loss per common share, assuming
conversion of Preferred Stock as described in Note 12 (0.11)
...........................................................................
</TABLE>
The pro forma net income per common share results do not include
adjustments for the expected reductions from certain third-party processing
costs which will be realized as the portfolios are converted to the NOVA
Network.
NOTE 3
_____
Property and Equipment
Property and equipment at December 31, 1996, and 1995, consist of:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Land and building $ 614,000 $ 343,000
...........................................................................
Equipment 13,247,000 10,293,000
...........................................................................
Furniture and fixtures 1,394,000 1,190,000
...........................................................................
Leasehold improvements 1,129,000 611,000
---------------------------------------------------------------------------
16,384,000 12,437,000
...........................................................................
Less accumulated depreciation and amortization (6,172,000) (5,034,000)
---------------------------------------------------------------------------
$10,212,000 $ 7,403,000
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[31]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 4
____
Income Taxes
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $2,174,000 for income tax purposes that will
expire in years 2010 through 2012. In the 10-month period 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 was included in the provision for
income taxes. In assessing the likelihood of utilization of existing net
deferred tax assets, management considered (a) its current operating
environment, (b) results of future operations to generate sufficient
taxable income 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, 1996, 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>
December 31,
-------------------------------------------------------------
1996 1995
-------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
.............................................................
Property and equipment $ 426,000 $ 129,000
.............................................................
Tax over book amortization 22,000 79,000
.............................................................
Other 411,000 305,000
-------------------------------------------------------------
Total deferred tax liabilities 859,000 513,000
.............................................................
DEFERRED TAX ASSETS:
Start-up expenses 10,000 74,000
.............................................................
Allowance for doubtful accounts 1,348,000 424,000
.............................................................
Accrued liabilities 305,000 130,000
.............................................................
Credit carryforwards 39,000 --
.............................................................
Net operating loss carryforwards 848,000 4,621,000
.............................................................
Total deferred tax assets 2,550,000 5,249,000
-------------------------------------------------------------
Net deferred taxes $1,691,000 $4,736,000
-------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[32]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended 10-month period ended Year ended
December 31, December 31, February 28,
--------------------------------------------------------------------------------------------------
1996 1995 1995
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
..................................................................................................
Federal $ 1,541,000 -- --
..................................................................................................
State 178,000 -- --
..................................................................................................
Deferred:
..................................................................................................
Federal 2,638,000 871,000 (262,000)
..................................................................................................
State 407,000 50,000 (21,000)
..................................................................................................
Change in valuation allowance -- (4,978,000) 283,000
--------------------------------------------------------------------------------------------------
$ 4,764,000 $ (4,057,000) $ --
--------------------------------------------------------------------------------------------------
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
by applying the federal statutory rate to income before provision for income
taxes for the following reasons:
<TABLE>
<CAPTION>
Year ended 10-month period ended Year ended
December 31, December 31, February 28,
--------------------------------------------------------------------------------------------------------------------------
1996 1995 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) for income taxes at statutory rate $ 4,211,000 $ 282,000 $(412,000)
..........................................................................................................................
Amortization of excess cost of businesses acquired 57,000 48,000 57,000
..........................................................................................................................
Change in valuation allowance -- (4,978,000) --
..........................................................................................................................
State income taxes, net of federal tax benefit 381,000 33,000 (14,000)
..........................................................................................................................
Other 115,000 558,000 369,000
--------------------------------------------------------------------------------------------------------------------------
$4,764,000 $(4,057,000) $ --
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 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.
On May 8, 1996, upon consummation of the Company's initial public
offering, the Series A, B and C Preferred Stock totaling 28,571 shares were
converted into 11,876,218 shares of Common Stock. In addition, the Company
redeemed the 5,000 shares of Series D Preferred Stock for $5,000,000 on May
8, 1996.
- --------------------------------------------------------------------------------
[33]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Cumulative dividends of $11,689,000 were paid to holders of Preferred
Stock concurrent upon the liquidation of all series of Preferred Stock.
Effective December 1, 1995, all outstanding warrants held by two
principal investors to purchase 1,177,600 shares 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.
NOTE 6
____
Long-Term Debt Obligations
Long-term debt obligations at December 31, 1996 and 1995, consist of:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------------
1996 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 $ -- $ 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 -- 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 -- 950,000
............................................................................................................
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 459,000 587,000
............................................................................................................
Note payable to former owner of a business acquired,
discounted at an effective rate of 9% and due in varying
payments through 1996 -- 574,000
............................................................................................................
Other 182,000 320,000
............................................................................................................
Capital lease obligations (Note 7) 725,000 1,808,000
------------------------------------------------------------------------------------------------------------
Total long-term debt obligations 1,366,000 22,922,000
------------------------------------------------------------------------------------------------------------
Less amounts due within one year 507,000 5,184,000
------------------------------------------------------------------------------------------------------------
Long-term debt obligations $ 859,000 $ 17,738,000
------------------------------------------------------------------------------------------------------------
</TABLE>
The annual aggregate maturities of long-term obligations, excluding
capital lease obligations, at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 227,000
............................................................................................................
1998 247,000
............................................................................................................
1999 167,000
------------------------------------------------------------------------------------------------------------
$ 641,000
------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[34]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The Company entered into an 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. Amounts drawn under the revolving loans and
letters of credit are not to exceed $20,000,000 and $5,000,000, respectively.
Funds may be drawn until June 30, 1999, or until the aggregate borrowing limit
has been reached. The Company pays a quarterly commitment fee in arrears at .25%
per annum on the average daily unused portion of the funds available for
revolving loans, letters of credit and acquisition loans, and .75% per annum on
the outstanding letter of credit balance. As of December 31, 1996, no borrowings
exist under this agreement.
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
(earnings before interest, taxes, depreciation and amortization) to fixed
charges and funded debt, minimum tangible net worth requirements and
restrictions on the payment of dividends and capital expenditures.
Note 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 year ended December 31, 1996, the 10-month period ended December 31,
1995, and year ended February 28, 1995, was approximately $912,000, $509,000 and
$363,000, respectively.
Asset balances for property acquired under capital leases included in
property and equipment consist of:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Building $ 273,000 $ 273,000
................................................................................
Equipment 1,658,000 2,573,000
................................................................................
1,931,000 2,846,000
................................................................................
Less accumulated depreciation 1,409,000 1,130,000
................................................................................
$ 522,000 $1,716,000
................................................................................
</TABLE>
- --------------------------------------------------------------------------------
[35]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Future minimum lease payments for all non-cancelable leases at December 31,
1996, are summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Operating Leases Capital Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 31,
1997 $1,234,000 $347,000
................................................................................
1998 1,275,000 160,000
................................................................................
1999 1,084,000 151,000
................................................................................
2000 1,081,000 95,000
................................................................................
2001 926,000 70,000
................................................................................
Thereafter 157,000 116,000
................................................................................
Total future minimum lease payments $5,757,000 $939,000
................................................................................
Less amount representing interest 214,000
................................................................................
Present value of minimum lease payments 725,000
................................................................................
Less amounts due within one year 280,000
................................................................................
Long-term obligations under capital leases $445,000
................................................................................
</TABLE>
Note 8
____
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 pending matters will not have a material effect on the
Company's financial position and results of operations.
- --------------------------------------------------------------------------------
[36]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 9
____
Supplemental Cash Flow Information
Supplemental cash flow disclosures, including non-cash investing and financing
activities, are:
<TABLE>
<CAPTION>
Year ended 10-month period ended Year ended
December 31, December 31, February 28,
- ------------------------------------------------------------------------------------------------------
1996 1995 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $1,178,000 $2,251,000 $ 971,000
......................................................................................................
Income taxes paid 230,000 -- --
......................................................................................................
Acquisition of equipment in exchange for
debt or capital leases -- 383,000 1,773,000
......................................................................................................
Note payable issued in conjunction with
business acquisition 128,000 174,000 2,976,000
......................................................................................................
Transfer of transaction processing assets,
primarily terminals at merchant locations,
in exchange for Common Stock -- 2,411,000 --
......................................................................................................
</TABLE>
Note 10
____
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model, with the following weighted-average
assumptions for 1996: risk-free interest rate of 6.08%; a dividend yield of 0%;
volatility factors of the expected market price of the Company's Common Stock of
0.692 and a weighted-average expected life of the option of seven years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
- --------------------------------------------------------------------------------
[37]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
<S> <C>
Pro forma net income $6,824,000
................................................................................
Pro forma earnings per share:
Primary and fully diluted .23
................................................................................
</TABLE>
The effect of applying Statement 123's fair-value method to the Company's
stock-based awards granted in 1995 results in net income and earnings per share
that are not materially different from amounts reported, because the Company
elected to use the minimum value method allowed under Statement 123 for
non-public companies. Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999.
A description and summary of the Company's stock option plans and activity
follows:
The Company has reserved 3,100,000 common shares related to options and
550,000 shares related to stock appreciation rights, pursuant to its 1991 stock
option and stock appreciation rights plan. The plan is administered by a
committee of the Board of Directors, which determines the number of shares to be
granted and the option price per share. Each option expires 10 years from the
grant date. The options may be exercised in 20% increments annually, beginning
on March 1 following the date of grant. No options or rights shall be granted
under the Plan after November 2, 2001. No appreciation rights have been granted.
A summary of the Company's stock option activity, and related information,
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Weighted-Average
Number of Options Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 1, 1994 1,927,808 $ 1.18
................................................................................
Granted 1,087,357 1.18
................................................................................
Terminated (142,976) 1.18
................................................................................
Balance at February 28, 1995 2,872,189 1.18
................................................................................
Granted 64,000 2.34
................................................................................
Terminated (24,320) 1.18
................................................................................
Balance at December 31, 1995 2,911,869 1.21
................................................................................
Terminated (31,029) 1.18
................................................................................
Exercised (1,673,432) 1.18
................................................................................
Balance at December 31, 1996 1,207,408 1.24
................................................................................
Exercisable at December 31, 1996 26,979 1.18
................................................................................
</TABLE>
- --------------------------------------------------------------------------------
[38]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Exercise prices for options outstanding as of December 31, 1996, ranged
from $1.18 to $2.34. The weighted-average remaining contractual life of those
options is 7.5 years.
The Company has reserved 2,000,000 shares of Common Stock for issuance
under the 1996 Employees Stock Incentive Plan related to Incentive Stock
Options, Non-qualified Stock Options, stock appreciation rights and restricted
stock awards. The shares subject to options can be purchased, and rights
exercised, in 25% increments at the end of each of the four years subsequent to
the date of grant. The option price per share for Incentive Stock Options cannot
be less than the fair market value of the Common Stock on the date the option is
granted. Each option expires 10 years after the date of grant.
A summary of the Company's stock option activity, and related information,
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Weighted-Average
Number of Options Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 --
................................................................................
Granted 666,890 $ 19.51
................................................................................
Terminated (57,420) 25.57
................................................................................
Balance at December 31, 1996 609,470 18.94
................................................................................
Exercisable at December 31, 1996 --
................................................................................
Weighted-average fair value of options
granted during the year 13.46
................................................................................
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged
from $18.75 to $19.00. The weighted-average remaining contractual life of those
options is ten years.
On October 17, 1996, the Company adopted the NOVA Corporation 1996
Directors Stock Option Plan, and reserved 150,000 shares of Common Stock for
issuance pursuant to this plan. Stock options granted under this plan are
exercisable in 25% increments at the end of each of the four years subsequent to
the date of grant. Options are granted at a purchase price per share no less
than the market value per share on the grant date. Options totaling 3,000 were
granted in 1996 at an option price of $30.50. The weighted-average fair value of
the options granted was $12.20. As of December 31, 1996, no options had been
exercised.
Note 11
____
Stock Subscriptions
Stock subscriptions for 768,000 shares of Common Stock were issued in 1992. The
Company canceled subscriptions for 384,000 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.
- --------------------------------------------------------------------------------
[39]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 12
____
Pro Forma Information
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 $230,000 and $489,000 and 535,000 for the year ended December
31, 1996, and the 10-month period ended December 31, 1995, and the year ended
February 28, 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 10 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 anti-dilutive. 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.
Note 13
____
Net Income (Loss) Per Share
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 Note 12, are as follows:
<TABLE>
<CAPTION>
Year ended 10-month period ended Year ended
(In thousands, except per share data) December 31, December 31, February 28,
- ------------------------------------------------------------------------------------------------------------
1996 1995 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 7,267 $ 4,887 $(1,213)
............................................................................................................
Less undeclared Preferred Stock dividends (1,486) (3,178) (3,507)
............................................................................................................
Net income (loss) applicable to common shares $ 5,781 $ 1,709 $(4,720)
............................................................................................................
Net income (loss) per common share - primary $ 0.24 $ 0.38 $ (2.73)
............................................................................................................
Weighted average common and common equivalent
shares outstanding - primary 24,483 4,454 1,727
............................................................................................................
Net income (loss) per common share - fully diluted $ 0.25 $ 0.27 $ (2.73)
............................................................................................................
Weighted average common and common equivalent
shares outstanding - fully diluted 28,604 16,330 1,727
............................................................................................................
</TABLE>
- --------------------------------------------------------------------------------
[40]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The effect of the Preferred Stock conversion in the calculation of the 1996
fully diluted income per common share is anti-dilutive. Accordingly, primary and
fully diluted income per common share for 1996 are the same.
Of the net proceeds from the sale of shares of Common Stock offered by the
Company in the Initial Public Offering, approximately $15.7 million were
used to repay aggregate bank borrowings, including accrued interest, $700,000 to
pay accrued Preferred Stock dividends on the Series D Preferred Stock earned
through March 1, 1995, and $5.0 million to redeem the Series D Preferred Stock.
In addition, upon consummation of the IPO, the Series A, B and C Preferred Stock
were converted into 11,876,218 shares of Common Stock. Assuming the conversion
of the Series A, B and C Preferred Stock and the issuance and sale of only that
number of shares of Common Stock which would generate net proceeds sufficient to
repay the above indebtedness and assuming that such indebtedness had been repaid
as of March 1, 1995, supplementary pro forma net income per common share for
1996 and 1995 would have been $0.26 and $0.36, respectively. For purposes of
this computation, the weighted-average number of shares of Common Stock
outstanding during the periods ended December 31, 1996, and 1995 is 28,994,500
and 17,455,859, respectively.
Note 14
____
Related Party Transactions
The Company paid one of its shareholders $1,817,000, $1,220,000 and $901,000 in
the year ended December 31, 1996, the 10-month period ended December 31, 1995,
and the year ended February 28, 1995, respectively, relating to the Company's
utilization of a shareholder's telecommunications network.
The Company paid another of its shareholders $9,532,000 and $943,000 in the
year ended December 31, 1996, and the 10-month period ended December 31, 1995,
respectively, relating to the Company's utilization of the shareholder's labor
force during conversion, as well as fees paid for certain transaction processing
expenses.
The Company received $1,154,000 of interest income from one of its
shareholders in the year ended December 31, 1996.
Note 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 December 31, 1996,
and the 10-month period ended December 31, 1995, contribution expenses related
to the Plan were not significant.
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[41]
<PAGE>
NOVA CORPORATION
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 16
____
Financial Instruments
The Company's financial instruments at December 31, 1996 and 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.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable
and cash investments. Concentrations of credit risk with respect to trade
accounts receivable are limited, due to the large number of entities comprising
the Company's customer base. The Company performs ongoing credit evaluations of
their customers' financial condition. The Company's cash and cash equivalents at
December 31, 1996, are primarily held at one financial institution. However, the
Company believes the credit risk is limited, due to the credit standing of the
financial institution. In addition, since the amounts are invested in cash
equivalents, there is limited market risk (such as a reduction in the fair value
of investment securities due to rising interest rates).
Note 17
____
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1996 calendar quarter ended 1995 calendar quarter ended
----------------------------------- ------------------------------------------
(in thousands) Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31/(1)/
----------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $60,199 $67,568 $70,459 $67,603 $29,841 $34,170 $37,554 $46,259
.......................................................................................................
Cost of service 46,634 52,624 55,223 53,114 23,754 26,724 29,162 35,660
.......................................................................................................
Net income (loss) 1,115 1,439 2,369 2,344 (1,599) (440) 400 5,221/(2)/
.......................................................................................................
Pro forma net income
(loss) per share 0.04 0.05 0.08 0.08 (0.13) (0.04) 0.02 0.26/(2)/
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) Includes a one-time tax benefit of $5.0 million or $0.24.
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.
- --------------------------------------------------------------------------------
[42]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Report of Independent Auditors
To the Board of Directors and Shareholders of NOVA Corporation:
We have audited the accompanying consolidated balance sheets of NOVA
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year ended
December 31, 1996, the 10-month period ended December 31, 1995, and for the year
ended February 28, 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 December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1996, the 10-month
period ended December 31, 1995, and for the year ended February 28, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 18, 1997
- --------------------------------------------------------------------------------
[43]
<PAGE>
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
Corporate Address and Phone
NOVA Corporation
One Concourse Parkway
Suite 300
Atlanta, Georgia 30328
(770) 396-1456
Website:www.novainfo.com
Independent Auditors
Ernst & Young LLP
600 Peachtree Street
Atlanta Georgia 30308
(404) 874-8300
Form 10-K and Investor Contact
A copy of NOVA's Annual Report on Form 10-K for 1996 (without exhibits) is
available from the Company at no charge. Requests for the Annual Report on
Form 10-K and other investor information should be addressed to
Susan Logan Howard
Manager, Shareholder Relations
NOVA Corporation
One Concourse Parkway
Suite 300
Atlanta, Georgia 30328
(770) 396-1456
Financial Inquires Contact
Financial analysts and professional investment managers are invited to
contact:
James M. Bahin,
Vice Chairman, Chief Financial Officer and Secretary
NOVA Corporation
One Concourse Parkway
Suite 300
Atlanta Georgia 50528
(770) 396-1456
Annual Shareholders Meeting
The 1997 Annual Meeting of Shareholders will be held on Monday May 14, 1997
at 10:00 a.m. at the offices of the Company. Proxies for the meeting of
Shareholders are being solicited by the Board of Directors. A formal notice
of the meeting, proxy statement and proxy card have been mailed with the
1996 Annual Report to Shareholders.
Common Stock Listing
The Common Stock of NOVA Corporation is traded on the New York Stock
Exchange under the ticker symbol "NIS". It appears in newspaper financial
listings as "NOVA Cpn."
Shareholders of Record and Shares Outstanding
As of March 14, 1997, there were approximately 55 shareholders of record
and 28,814,905 shares outstanding.
Transfer Agent and Registrar
First Union National Bank of North Carolina
230 South Tryon Street
CMC 11
Charlotte, North Carolina 28288
(704) 374-6718
Quarterly Stock Prices
The following table reflects the quarterly high and low closing sales
prices as reported in the listing of the NYSE composite transactions for
shares of the Company's Common Stock for fiscal 1996 beginning as of
May 8, 1996 (the first date of public trading on the New York Stock
Exchange).
The Company has never 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. The Company's loan agreement restricts the payment of dividends. See
Note 6 to the accompanying Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Quarter ended HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
June 30, 1996 $ 38.875 $ 26.250
September 30, 1996 $ 35.500 $ 28.250
December 31, 1996 $ 33.250 $ 18.250
</TABLE>
