<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1998
REGISTRATION NO. 333-45997
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
ON FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
NOVA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-2209575
(STATE OF 7375
INCORPORATION) (I.R.S. EMPLOYER
(PRIMARY STANDARD IDENTIFICATION NO.)
INDUSTRIAL
CLASSIFICATION CODE
NUMBER)
--------------
ONE CONCOURSE PARKWAY
SUITE 300
ATLANTA, GEORGIA 30328
(770) 396-1456
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES M. BAHIN
CHIEF FINANCIAL OFFICER
NOVA CORPORATION
ONE CONCOURSE PARKWAY
SUITE 300
ATLANTA, GEORGIA 30328
(770) 396-1456
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
THE COMMISSION IS REQUESTED TO MAIL COPIES OF ALL ORDERS, NOTICES AND
COMMUNICATIONS TO:
THOMAS WARDELL, ESQ. JEFFREY M. STEIN, ESQ.
DAVID M. CALHOUN, ESQ. KING & SPALDING
LONG ALDRIDGE & NORMAN LLP 191 PEACHTREE STREET, N.E.
5300 ONE PEACHTREE CENTER ATLANTA, GEORGIA 30303
303 PEACHTREE STREET (404) 572-4600
ATLANTA, GEORGIA 30308-3201
(404) 527-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest investment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectuses: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in a concurrent international offering outside
the United States and Canada (the "International Prospectus"). The U.S.
Prospectus and the International Prospectus are identical except for the front
and back cover pages. Each of the pages for the International Prospectus
included herein is labeled "Alternate Page."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 25, 1998
PROSPECTUS
7,100,000 SHARES
[LOGO OF NOVA CORPORATION APPEARS HERE]
COMMON STOCK
--------
Of the 7,100,000 shares of Common Stock being offered hereby, 5,300,000
shares are being sold by NOVA Corporation (the "Company") and 1,800,000 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders.
Of the 7,100,000 shares of Common Stock offered hereby, 5,680,000 shares are
being offered in the United States and Canada and 1,420,000 shares are being
offered in a concurrent international offering outside the United States and
Canada. The public offering price and the aggregate underwriting discount per
share will be identical for both offerings. See "Underwriting."
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "NIS." The last reported sale price of the Common
Stock on the NYSE on March 24, 1998, was $28.50 per share.
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
- - - ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- - - ---------------------------------------------------------------
Total(3) $ $ $ $
</TABLE>
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
(1) For information regarding indemnification, see "Underwriting".
(2) Before deducting expenses estimated at $515,000 payable by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters a 30-day option
to purchase up to 1,065,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Selling Shareholders will be $ ,
$ , and $ , respectively.
--------
The shares of Common Stock are being offered by the several U.S. Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
--------
SALOMON SMITH BARNEY BT ALEX. BROWN
THE ROBINSON-HUMPHREY COMPANY
, 1998
<PAGE>
GRAPHIC: MAP OF THE UNITED STATES SHOWING THE COMPANY'S MERCHANT LOCATIONS
AND BANK ALLIANCE LOCATIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes no exercise of
the U.S. Underwriters' over-allotment option. See "Underwriting." References in
this Prospectus to the dollar volume of transactions processed reflect only
VISA and MasterCard transactions, and references to the Company's ranking in
the industry are based on transaction processing volume.
THE COMPANY
The Company is an integrated provider of transaction processing services,
related software application products and value-added services primarily to
small- to medium-sized merchants. The Company provides transaction processing
support for all major credit and charge cards, including VISA, MasterCard,
American Express, Discover, Diner's Club and JCB, and also provides access to
debit card processing and check verification services. The Company believes it
is the nation's largest transaction processor focused primarily on small- to
medium-sized merchants, and that it was the fifth largest bankcard processor in
the United States at December 31, 1997, after giving pro forma effect to the
recent transactions completed during 1997 and in January 1998 discussed below.
On a pro forma basis giving effect to the recent transactions discussed below,
the aggregate dollar volume of VISA and MasterCard credit card transactions
processed by the Company in 1997 would have been over $24.0 billion.
The Company's objective is to deliver transaction processing services and
related software application products and services to its merchant customers on
a cost-effective basis, while increasing the size of its customer base through
its marketing and alliance, acquisition and joint venture programs. The Company
seeks to accomplish this objective by focusing on small- to medium-sized
merchants, providing high-quality, reliable service and support, and pursuing
purchases of merchant portfolios, strategic alliances and joint ventures to
facilitate growth, expand the Company's distribution channels and achieve
greater economies of scale. The Company generates revenues principally by
charging a fee based on a percentage of the dollar volume of each transaction
it processes and by charging fees for related services.
Card-based payment processing for merchants is one of the fastest growing
segments of the transaction processing industry. The proliferation in the uses
and types of credit, charge and debit cards, rapid technological advances in
transaction processing and financing incentives offered by credit card
associations and issuers have contributed greatly to wider merchant acceptance
and increased consumer use of such cards. Industry sources indicate that from
1991 to 1996, charge volume of VISA and MasterCard credit cards grew at a
compounded annual growth rate of approximately 18.7%.
In addition to experiencing growth in the dollar volume of transactions
processed, the industry has undergone rapid consolidation over the last several
years because of the increased demand for sophisticated products and services
and the requirements for capital expenditures necessary to support the
technical infrastructure needed to deliver these products and services. The
Company has been an active participant in this consolidation trend, having
consummated approximately 90 transactions since its inception in 1991,
including 20 transactions consummated since January 1997. See "Prospectus
Summary--Recent Transactions" and "Business--Recent Transactions." The Company
estimates that it would have processed approximately 4.2% of the total industry
charge volume in 1997 (after giving pro forma effect to the recent transactions
discussed below).
3
<PAGE>
RECENT TRANSACTIONS
The Company consummated the KeyBank Joint Venture (as defined below) in
January 1998, and three significant transactions in 1997, the MBNA portfolio
purchase, the Firstar Joint Venture and the Crestar portfolio purchase (each as
defined below), which in the aggregate add approximately $10.9 billion of
annualized transaction processing volume to the Company's network. The
transactions collectively represent increases of 91.4% over fiscal 1996
transaction processing volume of $11.9 billion. The aggregate maximum
consideration paid or to be paid by the Company in connection with these four
transactions is approximately $140.1 million. The Company also consummated
16 community bank transactions in 1997, for aggregate consideration of
approximately $10.0 million, which in the aggregate represented approximately
$774.0 million of transaction volume.
On January 21, 1998, the Company consummated a transaction (the "KeyBank
Joint Venture") with KeyBank National Association ("KeyBank") pursuant to which
the Company will provide transaction processing services to, and jointly own
and operate with KeyBank, a newly created limited liability company called Key
Merchant Services, LLC ("Key Merchant Services"). The KeyBank Joint Venture, on
the basis of anticipated processing volume, is the largest transaction in the
Company's history as it is expected to add approximately $5.1 billion in
annualized credit and debit card volume to the Company's operating platform.
Key Merchant Services will market transaction processing services with its own
employees throughout the United States. Further, KeyBank will market and
promote, on an exclusive basis, transaction processing services on behalf of
Key Merchant Services through KeyBank's bank branch locations. The Company owns
a 51% interest in Key Merchant Services. In addition to the Company's normal
conversion related expenses, the Company expects to accrue a non-recurring
charge of approximately $1.3 million, net of tax ($0.04 per share assuming
dilution and prior to giving effect to this offering), in the first quarter of
1998 principally to account for early termination of a contract for merchant
processing with a third party processor.
On December 30, 1997, the Company consummated a transaction with MBNA America
Bank, N.A. ("MBNA") pursuant to which the Company purchased substantially all
of MBNA's merchant portfolio. MBNA also agreed to cooperate with the Company in
marketing the Company's merchant transaction processing services and to refer
exclusively to the Company all merchants, trade associations, financial
institutions, independent sales organizations ("ISOs") and other organizations
that request or evidence an interest in merchant transaction processing
services. The Company estimates that the MBNA portfolio will add approximately
$1.0 billion in annualized credit and debit card volume.
Effective October 31, 1997, the Company consummated a transaction (the
"Firstar Joint Venture") with Firstar Bank U.S.A., N.A. ("Firstar") and Firstar
Bank Milwaukee, N.A. ("Firstar Milwaukee") pursuant to which the Company will
provide payment processing services to, and jointly own and operate with
Firstar, a newly created limited liability company called Elan Merchant
Services, LLC ("Elan Merchant Services"). In connection with the Firstar Joint
Venture, Firstar, Firstar Milwaukee and each of the other banking affiliates of
Firstar contributed substantially all of their then existing bankcard payment
processing contracts (representing approximately $3.0 billion in annualized
credit and debit card volume) to Elan Merchant Services. Further, Firstar will
market and promote, on an exclusive basis, transaction processing services on
behalf of Elan Merchant Services directly and through a network of over 850
correspondent financial institutions. The Company owns a 51% interest in Elan
Merchant Services.
4
<PAGE>
On May 29, 1997, the Company consummated a transaction with Crestar Bank to
form an exclusive marketing alliance and purchase substantially all of Crestar
Bank's merchant portfolio. The Company estimates that the Crestar portfolio
will add approximately $1.8 billion in annualized credit and debit card volume
to the Company's network. In addition, Crestar Bank will market and promote, on
an exclusive basis, the Company's transaction processing services through
Crestar Bank's approximately 500 branch bank locations.
The Company expects each of these transactions to provide significant
strategic and financial benefits, including: (i) enhanced distribution channels
to facilitate growth of the Company's processed transaction volume and number
of merchant locations served; (ii) further geographic diversification of the
Company's merchant portfolio into additional regions of the United States; and
(iii) economies of scale from substantial increases in transaction processing
volume once the merchant accounts and other services are fully integrated into
the Company's operating platform. See "Business--Recent Transactions."
The Company's predecessor was incorporated in February 1991. Unless the
context otherwise requires, references in this Prospectus to the "Company"
refer to NOVA Corporation and its subsidiaries. The address of the Company's
principal executive offices is One Concourse Parkway, Suite 300, Atlanta,
Georgia 30328. Its telephone number at such address is (770) 396-1456.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered(1):
By the Company............................ 5,300,000 shares
By the Selling Shareholders............... 1,800,000 shares
Common Stock to be outstanding after the
offering.................................. 34,410,147 shares(2)
Use of proceeds by the Company............. The net proceeds to the Company, estimated
at $143.7 million, will be used to retire
indebtedness, to finance potential future
acquisitions, to fund capital expenditures
and for general corporate purposes. See
"Use of Proceeds."
NYSE symbol................................ NIS
</TABLE>
- - - --------
(1) Of the 7,100,000 shares of Common Stock offered hereby, 5,680,000 shares
are being offered in the United States and Canada by the U.S. Underwriters
and 1,420,000 shares are being offered in a concurrent offering outside the
United States and Canada by the Managers.
(2) Excludes 1,824,082 shares of Common Stock issuable upon the exercise of
stock options and warrants outstanding as of March 19, 1998, at a weighted
average exercise price of $9.72 per share, of which options and warrants
for 1,033,906 shares were exercisable.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
TEN-MONTH YEAR ENDED
YEAR ENDED FEBRUARY 28, PERIOD ENDED DECEMBER 31,
------------------------ DECEMBER 31, -----------------------
1994 1995 1995(1) 1996 1997
----------- ----------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND MERCHANT LOCATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 68,213 $ 93,592 $ 129,035 $ 265,829 $ 335,625
Operating income (loss). (3,931) (245) 2,789 11,905 28,362
Net income (loss)....... (4,142) (1,213) 4,887(2) 7,267 17,385
Net income (loss) per
common share(3) $ (0.13) $ 0.24 $ 0.25 $ 0.60
=========== ========== =========== ===========
Net income (loss) per
common share assuming
dilution(3)............ $ (0.13) $ 0.24 $ 0.25 $ 0.58
=========== ========== =========== ===========
Weighted average common
shares outstanding(3).. 13,603 18,024 22,811 28,863
Weighted average common
shares outstanding
assuming dilution(3)... 13,603 18,024 28,604 30,116
OTHER DATA:
Merchant sales volume
processed.............. $ 2,871,793 $ 4,131,071 $5,975,013 $11,925,126 $14,980,287
Merchant locations at
period end............. 24,838 43,980 77,884 82,906 152,456
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets........................................... $170,528 $281,466
Long-term debt and capital lease obligations, less cur-
rent portion.......................................... 33,296 496
Total shareholders' equity............................. 102,937 246,675
</TABLE>
- - - --------
(1) The Company changed its fiscal year end from the last day of February to
December 31, effective December 31, 1995. For financial reporting purposes,
the ten month period ended December 31, 1995 is considered an annual
period. Revenues and net income for the 12 months ended December 31, 1995
were $147.8 million and $3.6 million, respectively.
(2) 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 prior to May 8, 1996. See Note 11 to the Company's Consolidated
Financial Statements.
(4) Adjusted to reflect the sale of 5,300,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom as
described in "Use of Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the
Common Stock offered by this Prospectus.
This Prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
which represent the Company's expectations or beliefs, including, but not
limited to, statements concerning transaction volume and the impact of
acquisitions, joint ventures and alliances. When used in this Prospectus, the
words "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control. The Company cautions that various factors, including the factors
described under the caption "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and those discussed
in the Company's filings with the Securities and Exchange Commission (the
"Commission"), as well as general economic conditions and industry trends
could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements of the Company. Any forward-
looking statement speaks only as of the date of this Prospectus and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of an unanticipated event. New
factors emerge from time to time, and it is not possible for the Company to
predict all of such factors. Further, the Company cannot assess the impact of
each such factor on its business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
VISA AND MASTERCARD REGISTRATION TERMINATION
The Company, along with all other nonbank transaction processors, must be
sponsored by a financial institution that is a principal member of the VISA
and MasterCard credit card associations in order to process bankcard
transactions. Through each of Regions Bank, Bank of the West, Mellon Bank,
N.A. ("Mellon Bank"), Firstar, KeyBank and First Union National Bank ("FUNB"),
a subsidiary of First Union Corporation ("First Union"), which serve as member
clearing banks for the Company, the Company is registered with VISA and
MasterCard as a certified processor and member service provider. The Company's
designation with VISA and MasterCard as a certified processor and its status
as a member service provider are dependent upon the Company's continuing
adherence to the standards of the VISA and MasterCard credit card
associations. These standards are set by the respective member financial
institutions of VISA and MasterCard, some of which are competitors of the
Company. In the event the Company fails to comply with these standards, the
Company's designation as a certified processor or status as a member service
provider could be suspended or terminated. There can be no assurance that VISA
and MasterCard will maintain the Company's registrations or that the current
VISA and MasterCard rules allowing the Company and other nonbank transaction
processors to market and provide transaction processing services will remain
in effect. The termination of the Company's member service provider
registrations or the Company's status as a certified processor, or any changes
in the VISA or MasterCard rules that prevent the Company's registration or
otherwise limit the Company's ability to provide transaction processing and
marketing services for VISA or MasterCard, would have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Merchant Accounting and Clearing Bank Relationships."
COMPETITION AND CONSOLIDATION
The market for credit, charge and debit card transaction processing services
is highly competitive. The level of competition has increased significantly in
recent years and this trend is expected to continue. According to industry
sources, the ten largest bankcard processors accounted for approximately 85%
of the total charge volume processed in 1997. The largest bankcard processor
accounted for approximately 38% of total charge volume processed in 1997. The
Company would have processed 4.2% of the total charge volume processed in
1997, after giving pro forma effect to the transactions discussed in
"Business--Recent Transactions." Several
7
<PAGE>
of the Company's competitors and potential competitors have greater financial,
technological, marketing and personnel resources than the Company, and there
can be no assurance that the Company will continue to be able to compete
successfully with such entities. In addition, the competitive pricing
pressures that would result from any increase in competition would adversely
affect the Company's margins and may have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Competition." The Company markets its services through several different
marketing channels, including through banks. In the event that there is
continued significant consolidation in the banking industry, banks that market
the Company's services may be acquired by banks that compete with the Company
or by banks that have a relationship or alliance with one or more competitors
of the Company, thus potentially depriving the Company of a distribution
channel.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
Increased Consolidation in the Marketplace. A material element of the
Company's growth strategy is the purchase of additional merchant portfolios
and acquisition of operating businesses and transaction processing assets in
order to facilitate growth, expand the Company's distribution channels and
create greater economies of scale. The Company faces significant competition
from other transaction processors for available acquisition, joint venture and
alliance opportunities. This competition has an impact on the price and
availability of acquisitions, joint ventures and alliances. In addition,
community and regional banks, whose transaction processing businesses have
been the Company's primary source of acquisition opportunities, in recent
years have been undergoing extensive consolidation reflective of underlying
trends in the financial institutions industry and unrelated to their
transaction processing businesses. As a result, smaller banks that may have
sought to divest themselves of their transaction processing businesses may be
acquired by banks that compete with the Company or banks that have a
relationship or alliance with one or more competitors of the Company, thus
potentially depriving the Company of acquisition opportunities. There can be
no assurance that the historical or current level of acquisition opportunities
will continue to exist, that the Company will be able to acquire merchant
portfolios, operating businesses and transaction processing assets that
satisfy the Company's criteria, or that any such acquisition will be on terms
favorable to the Company.
Complexity of Risk Analysis of Acquisition Targets. In evaluating any
potential purchase of a merchant portfolio or joint venture, the Company
conducts a due diligence review of the related merchant portfolio. The review
process includes analyzing the composition of the merchant portfolio, applying
uniform standards and underwriting guidelines developed by the Company to the
merchant portfolio and attempting to identify high-risk merchants contained in
the merchant portfolio. Notwithstanding these due diligence efforts, however,
there can be no assurance that the Company will properly assess the risk
attributes associated with an acquired portfolio or otherwise identify high-
risk merchants. Incorrect risk assessments may result in excessive losses from
chargebacks or merchant fraud in connection with any acquired portfolio.
Conversion of Purchased Portfolios. At the time of consummation of merchant
portfolio purchases or joint ventures, merchants in a purchased portfolio
typically are not operating on the Company's proprietary telecommunications
network (the "NOVA Network") and may not use the merchant accounting
processors used by the Company. Until the Company converts each newly-
purchased merchant to the NOVA Network and the Company's merchant accounting
processors, the Company has little, if any, control over the performance of
such other networks and processors and typically is unable to apply fully its
risk management and fraud avoidance practices to such merchants. The Company
also must continue to pay third parties for processing services until the
purchased portfolio is fully converted to the NOVA Network, reducing the
economic benefits to the Company during such time. Moreover, the merchant
customers that comprise a purchased portfolio may have been sold transaction
processing services by ISOs and financial institutions sponsored by a
principal member of the VISA and MasterCard credit card associations. ISOs are
independent agents that typically market and sell the full range of
transaction processing services to merchants, with such services primarily
being outsourced on a non-exclusive basis. Certain of these ISOs and financial
institutions may be unwilling to assist the Company in converting the
merchants to the NOVA Network and the Company's merchant accounting processors
and, in some cases, may solicit these merchants on behalf of a competing
processor. Further, the conversion of merchants may require
8
<PAGE>
that merchants learn new operating procedures and could result in problems,
causing merchants to seek verbal authorization of credit and debit card
transactions. As a condition to conversion, merchants also may seek to
negotiate lower fees.
As a result of the recent purchases of merchant portfolios undertaken by the
Company, the magnitude, scope, timing, duration and expense of the conversion
of the KeyBank Joint Venture, the Firstar Joint Venture and the MBNA portfolio
will, in the aggregate, be greater than any conversion previously undertaken
by the Company, and there can be no assurance that the Company can
successfully complete these conversions in a timely manner, either
concurrently or in series. Failure to complete these conversions in accordance
with management plans could have a material adverse effect on the Company's
financial condition and results of operations. Further, the terms of the
KeyBank Joint Venture provide that if the Company does not complete
substantially the conversion of the KeyBank merchant portfolio by March 31,
1999, KeyBank may terminate the KeyBank Joint Venture, which could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company's acquisition strategy and the resulting growth will require
that the Company continue to attract and retain qualified personnel, while
concurrently expanding its managerial and operational infrastructure. There
can be no assurance that the Company will be able to hire and retain qualified
personnel or that the Company will be able to expand successfully its
infrastructure as appropriate to accommodate future acquisitions or growth.
The Company's acquisitions may involve the hiring by the Company of certain
management and sales personnel affiliated with the acquired portfolio, and the
failure to integrate successfully such personnel into the Company's operations
and business culture may adversely affect the conversion process. As a result
of any of these factors and considerations, the Company may not realize the
expected economic benefits associated with its acquisitions, which may have a
material adverse effect on the Company's financial condition and results of
operations.
In connection with the formation of Key Merchant Services, the Company has
undertaken the conversion of merchant processing to the Company's operating
platform. In addition to the Company's normal conversion related expenses, the
Company expects to accrue a non-recurring charge of approximately $1.3
million, net of tax ($0.04 per share assuming dilution and prior to giving
effect to this offering), in the first quarter of 1998 principally to account
for early termination of a contract for merchant processing with a third party
processor.
There can be no assurance that future acquisitions will not have an adverse
effect upon the Company's operating results, particularly in the fiscal
quarters immediately following the completion of such transactions, while the
operations of the acquired entities are converted and integrated into the
Company's operations. The Company's acquisition strategy will require
substantial capital resources, and is likely to result in the Company
incurring additional indebtedness. There can be no assurance that financing
for future acquisitions will be available or will be obtained on terms
favorable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business--Acquisition Strategy" and "Certain Relationships and
Related Transactions--Transactions Related to the First Union Alliance."
Risks Associated with Joint Venture Alliances. The recently consummated
joint venture alliances with each of Firstar and KeyBank (collectively, the
"Joint Ventures") present certain risks to the Company in addition to the
risks normally associated with portfolio acquisitions which have been, and
continue to be, a material element of the Company's growth strategy. Because
each of the Joint Ventures involved the creation of a newly-formed limited
liability company jointly-owned, managed and serviced by the Company and
Firstar or KeyBank, as the case may be, continued cooperation with each of
Firstar and KeyBank is important to the success of the Joint Ventures. There
can be no assurance that the Company's relationships with each of Firstar and
KeyBank will continue to be cooperative and, accordingly, there can be no
assurance that the Company will realize the anticipated economic benefits from
the Joint Ventures. Further, in the event of a change in control of Firstar or
KeyBank, there can be no assurance that the resulting entity will support the
Joint Ventures in the same manner and to the same degree as its predecessor.
The management and provision of processing services to each of Elan Merchant
Services and Key Merchant Services imposes increased administrative,
managerial and technological
9
<PAGE>
demands on the Company's infrastructure and related systems, and there can be
no assurance that the Company will meet successfully such material demands and
requirements.
Each of the Joint Ventures has been formed for a definitive term (subject in
each case to renewal provisions), but is subject to earlier termination by the
Company or Firstar or KeyBank, as the case may be, under a variety of
circumstances. In the event of earlier termination, or upon termination of
either of the Joint Ventures upon expiration of its term in the absence of
renewal, the then-current assets and merchant portfolio of such Joint Venture
are subject to "repurchase rights" by either the Company or Firstar or
KeyBank, as the case may be, depending on the circumstances of termination.
For example, each of the Joint Ventures imposes upon the Company certain
standards with respect to the performance of its processing services. In the
event such standards are breached by the Company, Firstar or KeyBank, as the
case may be, would have the right to purchase the Company's interest in Elan
Merchant Services or Key Merchant Services, respectively. Any such purchase
would likely result in a significant decrease in the number of merchant
locations served, and the aggregate sales volume processed, by the Company,
which may have a material adverse effect on the Company's financial condition
and results of operations. Further, in valuing the Joint Ventures, and
establishing a purchase price in connection therewith, the Company assumes the
continuance of the Joint Venture for a minimum term. Earlier termination may
result in the Company not realizing the anticipated economic and marketing
benefits from the Joint Venture, which may have a material adverse effect on
the Company's financial condition and results of operations.
MERCHANT ATTRITION
The Company experiences attrition of its merchant base in the ordinary
course of business due to several factors, including business closures, losses
to competitors and conversion-related losses. In addition, substantially all
of the Company's contracts with its merchants may be terminated by either
party upon prior notice of 30 days or less. Increased merchant attrition may
have a material adverse effect on the Company's financial condition and
results of operations. There can be no assurance that the Company will not
experience higher rates of attrition in the future, particularly in connection
with acquired merchant portfolios. See "Business--Customer Base" and
"Business--Risk Management."
DEPENDENCE ON MERCHANT ACCOUNTING RELATIONSHIPS
The Company outsources certain merchant accounting services to Vital
Processing Services L.L.C. (formerly Total System Services, Inc.) ("Vital
Processing Services") and Mellon Bank. These services consist of reorganizing
and accumulating daily transaction data on a merchant-by-merchant and card
issuer-by-card issuer basis, and forwarding this data to the credit card
associations for ultimate payment. The failure of Vital Processing Services
and Mellon Bank to continue to perform these services efficiently and
effectively may adversely affect the Company's relationships with its merchant
customers and may result in the termination by merchants of their agreements
with the Company. The agreement with Vital Processing Services expires
April 30, 1999, and the agreement with Mellon Bank expires June 30, 1999. The
Company currently is negotiating a new agreement with Vital Processing
Services. Termination of either agreement would require the Company either to
seek alternative outsourcing arrangements or to make significant capital
expenditures to develop internal systems to provide these merchant accounting
services. Although management believes that in the event of termination of
either or both of these agreements the Company could locate alternative
outsourcing arrangements or develop internal systems, there can be no
assurance that such arrangements will be available on terms as favorable to
the Company as the existing contracts or that the Company could develop
internal systems on a timely or cost effective basis. Accordingly, termination
of either agreement could have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Merchant
Accounting and Clearing Bank Relationships."
ANNOUNCED INTERCHANGE RATE INCREASES
Each of VISA and MasterCard has announced increases in interchange rates
effective in April 1998. The increase in rates of approximately 5% is the
largest single increase for either association since 1991. The announced
change affects all transaction processing industry competitors. While the
Company intends to reflect the entire amount of the increase in its pricing to
merchants, there can be no assurance that merchants will
10
<PAGE>
assume the entire impact of the announced change or that transaction
processing volumes and merchant attrition will not be adversely affected by
the change.
CHARGEBACK RISK
When a billing dispute between a cardholder and a merchant is not resolved
in favor of the merchant, the transaction is "charged back" to the merchant
and that amount is credited to the cardholder. These billing disputes include,
among others: (i) nonreceipt of merchandise or services; (ii) unauthorized use
of a credit card; and (iii) general disputes between a customer and a merchant
as to the quality of the goods purchased or the services rendered by that
merchant. Some of the Company's merchant customers, including certain
merchants that generate high transaction processing volume, require full or
partial payment from debit and credit cardholders for products or services to
be delivered or rendered in the future. If the Company or its clearing banks
are unable to collect chargeback amounts from a merchant's account, and if the
merchant refuses or is unable due to bankruptcy or other reasons to reimburse
the Company for the chargeback, the Company bears the loss for the amount of
the refund paid to the cardholder. The Company attempts to reduce its exposure
to such losses by performing periodic credit reviews on its merchant customers
and adjusting the Company's rates based, in part, on the merchant's credit
risk, business or industry. There can be no assurance that the Company will
not experience significant losses from chargebacks in the future. Increases in
chargebacks not paid by merchants may have a material adverse effect on the
Company's financial condition and results of operations. See "Business--Risk
Management."
MERCHANT FRAUD
The Company bears the risk of losses caused by fraudulent credit card
transactions initiated by its merchant customers. Examples of merchant fraud
include inputting false sales transactions or false credits. The Company
monitors merchant transactions against a series of standards it has developed
to detect merchant fraud. Notwithstanding these measures, however, there can
be no assurance that the Company will not experience significant amounts of
merchant fraud in the future, which may have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Customer Base" and "Business--Risk Management."
TELECOMMUNICATIONS SERVICES PROVIDED BY WORLDCOM, INC.
The Company has developed a proprietary telecommunications network, the NOVA
Network, and maintains an operating relationship with WorldCom, Inc.
("WorldCom"). Pursuant to its agreement with the Company, WorldCom provides
long-distance and local telecommunications access, as well as technical
support, to the Company in connection with the NOVA Network. This agreement
expires February 28, 1999, subject to earlier termination by the Company if
WorldCom fails to meet certain agreed-upon performance objectives. If the
WorldCom agreement is terminated or not renewed, the Company would be required
to utilize the long-distance and local telecommunications access of another
long-distance provider, which may increase the Company's expenses for network
services, resulting in a material adverse effect on the financial condition
and results of operations of the Company. WorldCom owns approximately 8.1% of
the Company's outstanding Common Stock and has a designee on the Company's
Board of Directors. The shares of Common Stock offered hereby include 179,872
shares to be sold by WorldCom (291,571 shares if the U.S. Underwriters' over-
allotment option is exercised in full). As a result, upon completion of this
offering, WorldCom will own approximately 6.4% of the Company's outstanding
Common Stock (6.0% if the U.S. Underwriters' over-allotment option is
exercised in full). There can be no assurance that conflicts of interests
between WorldCom and the Company will not arise or that any such conflicts
will be resolved in a manner favorable to the Company. See "Business--
Technology" and "Certain Relationships and Related Transactions--Transactions
with WorldCom."
CERTAIN STATE TAX ISSUES
Transaction processing companies like the Company may be subject to state
taxation of certain portions of their fees charged to merchants for their
services. Application of this tax is an emerging issue in the industry and the
states have not yet adopted uniform guidelines implementing these regulations.
If the Company is required to pay such taxes and is unable to pass this tax
expense through to its merchant customers, the financial condition and results
of operations of the Company could be adversely affected.
11
<PAGE>
DEVELOPMENT AND MARKET ACCEPTANCE OF NEW PRODUCTS
Because the transaction processing industry and the software application
products and value-added services of the type offered by the Company have been
characterized by rapidly changing technology and the development of new
products and services, management believes that the future success of the
Company will depend, in part, on the Company's ability to continue to improve
its products and services and to offer its merchant customers new products and
services. There can be no assurance that the Company will continue to develop
successful new products and services or that the Company's newly-developed
products and services will perform satisfactorily or be widely accepted in the
marketplace. See "Business--Software Application Products and Value-Added
Services."
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues in the third calendar quarter and lower revenues in the first
calendar quarter, reflecting increased transaction volumes during the summer
months and a significant decrease in transaction volume during the period
immediately following the holiday season. Quarterly results also are affected
by the timing of purchases of merchant portfolios and joint ventures and the
timing and magnitude of expenses for merchant portfolio conversions.
Fluctuations in operating results may result in volatility in the price of the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Results."
DEPENDENCE ON KEY MANAGEMENT
The development of the Company's business and its operations has been
materially dependent upon the active participation of its executive officers
and other key employees. The loss of one or more of the Company's executive
officers or other key employees may have a material adverse effect on the
Company's financial condition and results of operations. See "Management."
SIGNIFICANT INTANGIBLE ASSETS
A substantial portion of the Company's assets are intangible assets related
to acquired merchant portfolios or business operations. In the event of a
material decline in revenues generated from any of such merchant portfolios or
business operations which would not be recovered from future cash flows, the
fair value and, as a result, the carrying value of the related intangible
asset will be reduced. Additionally, changes in accounting policies or rules
that affect the way in which such intangible assets are reflected in the
Company's financial statements, or the way in which they are treated for tax
purposes, could have a material adverse effect on the Company's financial
condition.
BANKING AND TERRITORIAL RESTRICTIONS
To facilitate First Union's compliance with applicable banking laws,
regulations and orders (collectively, the "Banking Laws"), and to allow First
Union to obtain any required consents or approvals, the Company has agreed to
notify, and obtain approval from, First Union before the Company enters into
any business activities substantially different from the business activities
the Company currently conducts. Pursuant to the KeyBank Joint Venture and the
Firstar Joint Venture and to the extent required by the Banking Laws, the
Company may be required to take certain measures in the event either the
Company or the limited liability companies formed pursuant to the transactions
enters into or acquires any other entity which is engaged in a business that
is substantially different from the business activities the Company, or the
limited liability companies, currently conduct. Such measures may include
applying for any required regulatory consents, or assisting either KeyBank,
Firstar, or the limited liability companies, as the case may be, to prepare
such applications. If the required consents and approvals are not received,
the Company may not engage in the new business activity (such restrictions,
including the restrictions relating to First Union, being collectively
referred to herein as the "Banking Restrictions").
12
<PAGE>
In connection with a December 1995 transaction between the Company and First
Union (the "First Union Alliance"), the Crestar portfolio purchase, the
Firstar Joint Venture, and the KeyBank Joint Venture, the Company agreed that
it would not, without the prior consent of the affected entity, enter into
certain marketing or, in certain instances, acquisition agreements with third
parties located in specified areas where any of First Union, Crestar Bank,
Firstar or KeyBank maintain a significant banking presence (such restrictions
being collectively referred to herein as the "Territorial Restrictions"). The
effect of the Banking Restrictions and the Territorial Restrictions is to
limit in certain respects the Company's ability to directly seek or take
advantage of certain business or marketing opportunities other than through a
venture with the Company's regional bank partners. The agreements generally do
not prohibit the Company from pursuing transactions indirectly through the
respective alliance or joint venture. See "Certain Relationships and Related
Transactions--Transactions Related to the First Union Alliance" and
"Business--Banking Regulation."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation authorize the Company to issue up to
5,000,000 shares of Preferred Stock with such designations, powers,
preferences and rights as may be fixed by the Board of Directors, without any
further vote or action by the shareholders. The issuance of Preferred Stock
could have the effect of delaying, deferring or preventing a change in control
of the Company.
CONTROLLING SHAREHOLDERS
After giving effect to the sale of the shares of Common Stock offered
hereby, Warburg, Pincus Investors, L.P. and its affiliates ("Warburg"), First
Union, executive officers and directors of the Company and their affiliates,
and WorldCom, Inc. will own beneficially 29.8%, 24.6%, 64.7%, and 6.4%,
respectively, of the Company's outstanding Common Stock (28.3%, 23.3%, 61.6%,
and 6.0% if the U.S. Underwriters' over-allotment option is exercised in
full). See "Management" and "Principal and Selling Shareholders." As a result
of such stock ownership, these shareholders, if acting together or in certain
combinations, would be able to control most matters requiring approval by the
Company's shareholders, including the election of directors.
POSSIBLE VOLATILITY OF STOCK PRICE
Since the Company's initial public offering in May 1996, there has been and
may continue to be significant volatility in the market for the Common Stock,
and there can be no assurance that an active market for the Common Stock can
be sustained. See "Price Range of Common Stock." Factors such as changes in
quarterly operating results, the gain or loss of significant contracts, the
entry of new competitors into the Company's markets, changes in management,
announcements of technological innovations or new products by the Company or
its competitors, and general events and circumstances beyond the Company's
control could have a significant impact on the future market prices of the
Common Stock and the relative volatility of such market prices.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the prevailing market price of
the Common Stock and could impair the Company's ability to raise additional
equity capital. Upon completion of this offering, the Company will have
outstanding 34,410,147 shares of Common Stock. Of these shares, the 7,100,000
shares offered hereby (8,165,000 shares if the U.S. Underwriters' over-
allotment option is exercised in full) and the 4,025,000 shares sold in the
Company's initial public offering will be freely tradeable without restriction
or further registration under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Rule 144"). Approximately 21,637,985 shares held by
directors, executive officers and Selling Shareholders will be subject to 60-
day lock-up agreements with the Underwriters. Following the expiration of the
lock-up period, such shares will be eligible for sale in the public market
subject to compliance with certain volume limitations and other conditions of
Rule 144. In addition, upon completion of this offering, the holders
13
<PAGE>
of a total of approximately 21,239,153 shares of Common Stock, including
21,019,084 of the shares that will be subject to the 60-day lock-up
agreements, have the right under certain circumstances to require the Company
to register under the Securities Act their shares for resale to the public.
See "Shares Eligible for Future Sale." An additional 3,039,439 shares that may
be issued in the future upon exercise of options granted and to be granted
under the Company's stock option plans have been registered under the
Securities Act and therefore will be freely tradeable when issued (subject to
the volume and certain other conditions of Rule 144 in the case of shares to
be sold by affiliates of the Company). Options and warrants for the purchase
of 1,824,082 shares were outstanding as of March 19, 1998, of which options
and warrants for 1,033,906 shares were exercisable.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, at an assumed public offering price of $28.50
per share, the last reported sale price of the Common Stock on the NYSE on
March 24, 1998, and after deducting estimated underwriting discounts and
commissions and expenses payable by the Company, are estimated to be
approximately $143.7 million. The Company anticipates that an aggregate of
$49.0 million of the net proceeds of this offering (approximately 34.1% of the
net proceeds to the Company) will be used for the repayment of indebtedness
under the Company's bank credit facility. The indebtedness has a weighted
average interest rate of 6.0%, and was incurred in connection with
acquisitions. The bank credit facility will terminate on September 30, 2002,
unless extended by consent of the lender.
The Company expects to use the balance of the net proceeds to the Company of
the offering, estimated to be approximately $94.7 million (65.9% of the net
proceeds to the Company) to satisfy existing purchase obligations relating to
completed acquisitions, to purchase merchant portfolios and enter into joint
ventures and alliances in the ordinary course of its business, to fund capital
expenditures (estimated at $20.0 million in 1998) and for general corporate
purposes. The Company continues to evaluate potential purchases of merchant
portfolios and to negotiate with several third parties that may be seeking
purchasers of their merchant portfolios, although, except as discussed in this
Prospectus, the Company currently is not a party to any agreements or
understandings with respect to any material purchases. The Company will have
broad discretion as to the use of the balance of the net proceeds to the
Company after the repayment of indebtedness. See "Business--Acquisition
Strategy."
Pending such uses, the net proceeds of the offering will be invested in U.S.
Treasury securities, certificates of deposit, commercial paper and/or
investment grade, interest-bearing securities. The Company will not receive
any proceeds from the sales of shares of Common Stock by the Selling
Shareholders.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the NYSE on May 8, 1996, under
the symbol "NIS." Prior to that date, there was no public market for the
Company's Common Stock. The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share for the Common Stock as
reported on the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996:
From May 8 to June 30, 1996................................. $39.875 $26.000
Quarter Ended September 30, 1996............................ 36.000 27.500
Quarter Ended December 31, 1996............................. 33.500 18.000
1997:
Quarter Ended March 31, 1997................................ $23.500 $12.875
Quarter Ended June 30, 1997................................. 26.563 15.625
Quarter Ended September 30, 1997............................ 29.125 23.500
Quarter Ended December 31, 1997............................. 30.813 23.250
1998:
Quarter Ended March 31, 1998 (through March 24, 1998)....... $33.500 $22.750
</TABLE>
The last reported sale price of the Common Stock on the NYSE on March 24,
1998, was $28.50 per share. As of March 24, 1998, the Company had
approximately 50 shareholders of record.
14
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The current policy of the Company's Board of Directors is to retain any
available earnings for use in the operation and expansion of the Company's
business. Therefore, no payment of cash dividends on the Common Stock is
likely in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will depend
upon the Company's earnings, capital requirements, financial condition, the
ability of the Company's subsidiaries to pay cash dividends to the Company and
any other factors deemed relevant by the Board of Directors. The Company's
loan agreements also restrict the payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and Note 6 to the Company's Consolidated
Financial Statements.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to reflect the sale by the Company of
5,300,000 shares of Common Stock in this offering and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion:
Bank notes payable(1)................................ $ 32,800 $ --
Other notes payable.................................. 167 167
Capital lease obligations............................ 329 329
----------- -----------
33,296 496
Shareholders' equity:
Preferred Stock, without par value, 5,000,000 shares
authorized, none issued and outstanding............. -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 29,031,000 issued and outstanding;
34,331,000 as adjusted(2)........................... 290 343
Additional paid-in capital........................... 99,967 243,652
Retained earnings.................................... 2,680 2,680
----------- -----------
Total shareholders' equity.......................... 102,937 246,675
----------- -----------
Total capitalization................................ $ 136,233 $ 247,171
=========== ===========
</TABLE>
- - - --------
(1) Does not include $16.2 million of indebtedness incurred subsequent to
December 31, 1997, which will be repaid with a portion of the proceeds to
the Company from this offering.
(2) Excludes 1,867,303 shares of Common Stock issuable upon the exercise of
stock options at a weighted average exercise price of $9.12 per share, of
which options for 822,364 shares were exercisable as of December 31, 1997.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial and other
data for the Company as of and for the two years ended February 28, 1995, the
ten-month period ended December 31, 1995 and the two years ended December 31,
1997. The selected consolidated financial data have been derived from the
Company's Consolidated Financial Statements and notes thereto, which have been
audited by Ernst & Young LLP, independent auditors. The following data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto appearing elsewhere in this Prospectus. The Company changed
its fiscal year end from the last day of February to December 31, effective
December 31, 1995. For financial reporting purposes, the ten-month period
ended December 31, 1995 is considered an annual period.
<TABLE>
<CAPTION>
TEN-MONTH YEAR ENDED
YEAR ENDED FEBRUARY 28, PERIOD ENDED DECEMBER 31,
------------------------ DECEMBER 31, ------------------------
1994 1995 1995(1) 1996 1997
----------- ----------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND MERCHANT LOCATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 68,213 $ 93,592 $ 129,035 $ 265,829 $ 335,625
Cost of service......... 54,984 74,032 100,375 207,595 260,058
Conversion costs........ 2,080 1,827 3,441 6,395 2,595
Selling, general and
administrative......... 12,419 14,091 17,795 32,952 33,952
Depreciation and
amortization........... 2,661 3,887 4,635 6,982 10,658
----------- ----------- ---------- ----------- -----------
Operating income (loss). (3,931) (245) 2,789 11,905 28,362
Interest expense
(income), net.......... 211 968 1,959 (126) (721)
Minority interest in
income of subsidiary... -- -- -- -- 776
----------- ----------- ---------- ----------- -----------
Income (loss) before
provision for income
taxes.................. (4,142) (1,213) 830 12,031 28,307
Provision (benefit) for
income taxes........... -- -- (4,057) 4,764 10,922
----------- ----------- ---------- ----------- -----------
Net income (loss)....... $ (4,142) $ (1,213) $ 4,887(2) $ 7,267 $ 17,385
=========== =========== ========== =========== ===========
Net income (loss) per
common share(3)........ -- $ (0.13) $ 0.24 $ 0.25 $ 0.60
Net income (loss) per
common share assuming
dilution(3)............ -- $ (0.13) $ 0.24 $ 0.25 $ 0.58
=========== =========== ========== =========== ===========
Weighted average common
shares outstanding(3).. -- 13,603 18,024 22,811 28,863
Weighted average common
shares outstanding
assuming dilution(3)... -- 13,603 18,024 28,604 30,116
=========== =========== ========== =========== ===========
OTHER DATA:
Merchant sales volume
processed.............. $ 2,871,793 $ 4,131,071 $5,975,013 $11,925,126 $14,980,287
Merchant locations at
period end............. 24,838 43,980 77,884 82,906 152,456
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............ $ 26,437 $ 47,823 $ 61,001 $ 107,705 $ 170,528
Long-term debt and
capital lease
obligations, less
current portion........ 1,950 16,694 17,738 859 33,296
Total shareholders'
equity................. 18,783 18,719 26,017 84,882 102,937
</TABLE>
- - - --------
(1) Revenues and net income for the 12 months ended December 31, 1995, were
$147.8 million and $3.6 million, respectively.
(2) 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 prior to May 8, 1996. See Note 11 to the Company's Consolidated
Financial Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's predecessor, NOVA Information Systems, Inc., was formed in
February 1991 to provide sophisticated and cost-effective transaction
processing and related services primarily to small- to medium-sized merchants
by effectively employing the latest advances in transaction processing and
telecommunications technology.
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 purchased
portfolios, combined with the cost of providing service, exceeded revenues
from its merchant portfolio. The Company's ongoing expansion of its merchant
and customer base resulted in the Company achieving profitability for the
first time in the ten-month 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 merchant
portfolio purchases, joint ventures and alliances that have produced
significant additional revenue in each year since formation. Since its
inception in 1991, the Company has consummated 90 transactions consisting of
84 merchant portfolio purchases, three operating business acquisitions, two
joint ventures and the First Union Alliance.
On January 21, 1998, the Company consummated the KeyBank Joint Venture with
KeyBank pursuant to which the Company will provide transaction processing
services to, and jointly own and operate with KeyBank, a newly created limited
liability company called Key Merchant Services. The KeyBank Joint Venture, on
the basis of anticipated processing volume, is the largest transaction in the
Company's history as it is expected to add approximately $5.1 billion in
annualized credit and debit card volume to the Company's operating platform.
Key Merchant Services will market transaction processing services with its own
employees throughout the United States. Further, KeyBank will market and
promote, on an exclusive basis, transaction processing services on behalf of
Key Merchant Services through KeyBank's bank branch locations. The Company
owns a 51% interest in Key Merchant Services. In connection with the formation
of Key Merchant Services, the Company has undertaken the conversion of
merchant processing to the Company's operating platform. In addition to the
Company's normal conversion related expenses, the Company expects to accrue a
non-recurring charge of approximately $1.3 million, net of tax ($0.04 per
share assuming dilution and prior to giving effect to this offering), in the
first quarter of 1998 principally to account for early termination of a
contract for merchant processing with a third party processor. The Company
anticipates increased efficiencies and cost savings will result from these
actions, any financial benefits of which will be reflected in later periods.
On December 30, 1997, the Company consummated the MBNA portfolio purchase
with MBNA pursuant to which the Company purchased substantially all of MBNA's
merchant portfolio. MBNA also agreed to cooperate with the Company in
marketing the Company's merchant transaction processing services and to refer
exclusively to the Company all merchants, trade associations, financial
institutions, ISOs and other organizations that request or evidence an
interest in merchant transaction processing services. The Company estimates
that the MBNA portfolio will add approximately $1.0 billion in annualized
credit and debit card transaction processing volume.
Effective October 31, 1997, the Company consummated the Firstar Joint
Venture with Firstar and Firstar Milwaukee pursuant to which the Company will
provide payment processing services to, and jointly own and operate with
Firstar, a newly created limited liability company called Elan Merchant
Services, LLC. In connection with the Firstar Joint Venture, Firstar, Firstar
Milwaukee and each of the other banking affiliates of Firstar contributed
substantially all of their then existing bankcard payment processing contracts
(representing approximately $3.0 billion in annualized credit and debit card
volume) to Elan Merchant Services. Further, Firstar will market and promote,
on an exclusive basis, transaction processing services on behalf of Elan
17
<PAGE>
Merchant Services directly and through a network of over 850 correspondent
financial institutions. The Company owns a 51% interest in Elan Merchant
Services.
On May 29, 1997, the Company consummated the Crestar portfolio purchase with
Crestar Bank to form an exclusive marketing alliance and acquire substantially
all of Crestar Bank's merchant portfolio. The Company estimates that the
Crestar portfolio will add approximately $1.8 billion in annualized credit and
debit card transaction processing volume to the Company's network. In
addition, Crestar Bank will market and promote, on an exclusive basis, the
Company's transaction processing services through Crestar Bank's approximately
500 branch bank locations.
The Company expects each of these transactions to provide significant
strategic and financial benefits, including: (i) enhanced distribution
channels to facilitate growth of the Company's processed transaction volume
and the number of merchant locations served; (ii) further geographic
diversification of the Company's portfolio into additional regions of the
United States; and (iii) economies of scale from substantial increases in
transaction processing volume once the merchant accounts and other services
are fully integrated into the Company's operating platform. See "Business--
Recent Transactions."
Historically, the Company has achieved savings through economies of scale
and operating efficiencies derived from the conversion and integration of its
purchased portfolios. The costs of these conversion activities are expensed as
incurred. As a result of the recent acquisition activity undertaken by the
Company, the magnitude, scope, timing, duration and expense of the conversion
of the KeyBank Joint Venture, the Firstar Joint Venture and the MBNA portfolio
purchase will, in the aggregate, be greater than any conversion previously
undertaken by the Company. Failure to complete these conversions in accordance
with management plans could have a material adverse effect on the Company's
financial condition and results of operations.
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 year ended
December 31, 1997 with the year ended December 31, 1996, and the year ended
December 31, 1996 with the ten-month period ended December 31, 1995.
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 and through third-party networks prior to conversion. 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, additional fees per transaction. These charges,
referred to as "discount fees," are individually negotiated with each merchant
and, in the aggregate, represented approximately 92.4%, 94.6% and 93.7% of the
Company's revenues for the years ended December 31, 1997 and 1996 and the ten-
month period ended December 31, 1995, respectively. Certain of the Company's
merchant customers are charged a flat fee per transaction, while others are
also charged miscellaneous fees, including fees assessed by the Company for
handling chargebacks, monthly minimums, equipment leases, rentals and sales,
and other miscellaneous services. The Company's revenues are reported net of
amounts paid to ISOs and agent banks under revenue sharing agreements pursuant
to which such parties receive payments based primarily on processing volume
for particular groups of merchants.
Expenses. Cost of service includes all costs directly attributable to the
Company's provision of services to its merchant customers. The most
significant component of cost of service includes interchange and assessment
fees, which are amounts charged by the credit card associations for clearing
services, advertising and other expenses. Interchange and assessment fees are
billed primarily as a percent of dollar volume processed and, to a lesser
extent, as a per-transaction fee. Cost of service also includes charges paid
to third parties for point-of-sale ("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 POS terminals at merchant locations, duplicate costs
to process transactions prior to conversion, unfavorable contract payments for
transaction authorizations and independent contractor fees.
18
<PAGE>
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.
Depreciation and amortization are related to the Company's capital
expenditures, merchant portfolio purchases 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.
Merchant portfolio purchases result in the capitalization of merchant and
customer contract values, which are amortized over ten years based upon the
Company's merchant attrition experience and projected revenue streams. Excess
cost of businesses acquired is amortized over 30 years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items on the Company's consolidated statements
of operations:
<TABLE>
<CAPTION>
TEN-MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, --------------
1995 1996 1997
------------ ------ ------
<S> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0%
Cost of service.................................... 77.8 78.1 77.5
Conversion costs................................... 2.7 2.4 0.8
Selling, general and administrative................ 13.8 12.4 10.1
Depreciation and amortization...................... 3.6 2.6 3.2
Operating income .................................. 2.2 4.5 8.4
Interest (income) expense, net..................... 1.5 0.0 (0.2)
Minority interest in income of subsidiary.......... -- -- 0.2
Income before provision for income taxes........... 0.6 4.5 8.4
Provision (benefit) for income taxes............... (3.1) 1.8 3.2
Net income ........................................ 3.8% 2.7% 5.2%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased 26.3% to $335.6 million for the year ended
December 31, 1997, compared with $265.8 million in 1996. The increase resulted
from a 25.6% increase in merchant sales volume processed to $15.0 billion for
1997, compared to $11.9 billion in 1996. Of these increases, $34.0 million in
revenues and $1.5 billion in sales volume processed are attributable to the
Firstar Joint Venture and the Crestar portfolio purchase, with the remainder
resulting primarily from internal sales efforts and other bank marketing
relationships.
Cost of Service. Cost of service increased 25.3% to $260.1 million for the
year ended December 31, 1997, compared with $207.6 million in 1996. 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 percentage of revenues declined from 78.1% to 77.5%, reflecting
continuing cost efficiencies. These cost efficiencies result from
proportionately lower payments to third-party networks as fewer Company
merchants utilize third-party networks and merchant accounting processors, as
well as increased economies of scale.
Conversion Costs. Conversion costs decreased 59.4% to $2.6 million for the
year ended December 31, 1997, compared with $6.4 million in 1996. The decrease
resulted primarily from the substantial completion of the conversion of the
First Union portfolio in 1996.
19
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 3.0% to $34.0 million for the year ended
December 31, 1997, compared with $33.0 million for the same period in 1996.
Higher expenses in 1997 resulted from the addition of personnel in the
Company's operations center to support the increased merchant sales volume
processed. Additionally, sales and marketing expenses increased to support the
Company's growing number of merchants and bank marketing relationships.
Selling, general and administrative expenses declined to 10.1% of revenues for
the year ended December 31, 1997, compared with 12.4% in 1996, reflecting
operational efficiencies.
Depreciation and Amortization. Depreciation and amortization increased 52.6%
to $10.7 million for the year ended December 31, 1997, compared with $7.0
million in 1996. This increase is attributable to increased depreciation from
significant investments in the Company's transaction processing network to
expand capacity and additional amortization from merchant portfolio purchases.
Operating Income. For the foregoing reasons, operating income for the year
ended December 31, 1997, increased 138.2% to $28.4 million compared with $11.9
million in 1996.
Interest Expense (Income)--Net. Net interest income increased to $721,000
for the year ended December 31, 1997, compared with $126,000 in 1996. This
increase relates to lower average bank debt during 1997 than existed during
1996. The Company used the net proceeds received from the initial public
offering in May 1996 to reduce the bank debt. Further, interest income was
generated from the investment of the remaining net proceeds of the offering
and cash flow from operations.
Income Taxes. Income tax expense was recorded at an effective tax rate of
38.6% in fiscal 1997. Income tax expense increased to $10.9 million for the
year ended December 31, 1997, compared to $4.8 million in 1996. This increase
resulted from increased pre-tax income.
Net Income. Net income increased $10.1 million to $17.4 million for the year
ended December 31, 1997, compared with net income of $7.3 million for the same
period in 1996, due to the factors discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE TEN-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 ten-month period ended
December 31, 1995. The increase resulted primarily from a 99.6%, or $5.9
billion, increase in sales volume processed for the year to $11.9 billion from
$6.0 billion in 1995. First Union's merchant processing portfolio, which was
acquired effective December 1, 1995, accounts for increases of $106.7 million
in revenues and $4.6 billion in sales volume processed. 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
ten month fiscal year. Additionally, the Company entered into 17 exclusive
bank marketing agreements in 1996.
Cost of Service. Cost of service increased 106.8% to $207.6 million for the
year ended December 31, 1996, from $100.4 million for the ten-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
ten-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 ten-month
period ended December 31, 1995. The increase resulted primarily from the
ongoing conversion of the First Union portfolio, acquired in December 1995.
20
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 85.2% to $33.0 million in the year ended
December 31, 1996 from $17.8 million for the ten-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 the Company'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. 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 ten-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 the Company's growth. To a
lesser extent, this expense increased due to additional amortization of
certain intangible assets related to merchant portfolio purchases.
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 ten-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 ten-month
period ended December 31, 1995. 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 fiscal 1996. During the ten-month period 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 ten-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.
QUARTERLY RESULTS
The following tables set forth certain unaudited financial data for each of
the Company's last 12 quarters and such data expressed as a percentage of the
Company's revenues for the respective quarters. The information has been
derived from unaudited combined financial statements that, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.
<TABLE>
<CAPTION>
1995 QUARTER ENDED 1996 QUARTER ENDED 1997 QUARTER ENDED
------------------------------------ -------------------------------- ---------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31(1) MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ---------- ------- ------- -------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $29,841 $34,170 $37,554 $46,259 $60,199 $67,568 $70,459 $67,603 $66,525 $78,044 $87,489 $103,567
Cost of service. 23,754 26,724 29,162 35,660 46,634 52,624 55,223 53,114 52,071 59,595 67,499 80,893
Conversion
costs.......... 1,281 998 969 1,092 1,573 2,034 1,737 1,051 491 499 813 792
Selling, general
and
administrative. 4,500 4,950 5,067 6,207 8,030 8,736 8,150 8,036 7,358 8,590 8,757 9,247
Depreciation and
amortization... 1,315 1,346 1,346 1,567 1,679 1,715 1,774 1,814 1,876 2,375 2,768 3,639
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Operating income
(loss)......... $(1,009) $ 152 $ 1,010 $ 1,733 $ 2,283 $ 2,459 $ 3,575 $ 3,588 $ 4,729 $ 6,985 $ 7,652 $ 8,996
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
1995 QUARTER ENDED 1996 QUARTER ENDED 1997 QUARTER ENDED
----------------------------------- -------------------------------- --------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31(1) MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ---------- ------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of service. 79.6 78.2 77.7 77.1 77.5 77.9 78.4 78.6 78.3 76.4 77.2 78.1
Conversion
costs.......... 4.3 2.9 2.6 2.4 2.6 3.0 2.5 1.6 0.7 0.6 0.9 0.8
Selling, general
and
administrative. 15.1 14.5 13.5 13.4 13.3 12.9 11.6 11.9 11.1 11.0 10.0 8.9
Depreciation and
amortization... 4.4 3.9 3.6 3.4 2.8 2.5 2.5 2.7 2.8 3.0 3.2 3.5
Operating income
(loss)......... (3.4) 0.4 2.7 3.7 3.8 3.6 5.1 5.3 7.1 9.0 8.7 8.7
</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.
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 also are affected
by the timing of acquisitions and the timing and magnitude of expenses for
merchant portfolio conversions. Therefore, the results reported in the table
above do not necessarily indicate the Company's normal seasonal trends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of its capital resources include purchases of
merchant portfolios, capital expenditures and working capital.
In October 1997, the Company obtained from a third party bank an $80.0
million credit facility, the proceeds of which may be used for acquisitions
(subject to certain restrictions) and other corporate purposes. The Company,
at its option and subject to the satisfaction of certain conditions, may
increase the aggregate amount available on the credit facility to $100.0
million. As of March 24, 1998, $49.0 million in borrowings were outstanding
under this facility, all of which will be repaid with a portion of the
proceeds from this offering.
Net cash provided by operating activities was $18.0 million for the year
ended December 31, 1997, as compared to $20.7 million for the year ended
December 31, 1996.
Net cash used in investing activities was $90.6 million for the year ended
December 31, 1997, as compared to $10.0 million for the year ended December
31, 1996, and $5.1 million for the ten-month period ended December 31, 1995.
The Company's investment expenditures primarily consist of merchant portfolio
purchases and investments in computer hardware and software necessary to
support the NOVA Network and the systems at the Company's operations center.
Other significant investment activities include facility expansions necessary
to accommodate the Company's growth. For the years ended December 31, 1997 and
1996 and the ten-month period ended December 31, 1995, the Company's capital
expenditures totaled approximately $15.2 million, $6.1 million and $1.6
million, respectively. In addition to capital expenditures, the Company
purchased various merchant processing portfolios for an aggregate price of
$75.4 million, $4.0 million and $3.3 million, for the years ended December 31,
1997 and 1996, and the ten-month period ended December 31, 1995, respectively.
Net cash provided by financing activities was $33.0 million and $28.9
million for the years ended December 31, 1997 and 1996, respectively. Net cash
provided in 1997 resulted from borrowings under the Company's credit facility
which were used for investing activities. Net cash provided in 1996 resulted
primarily from the Company's initial public offering. The proceeds received
from the initial public offering were used to reduce most of the Company's
then existing 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 with the liquidation of all series of
the Company's Preferred Stock.
22
<PAGE>
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 addition,
increasing acquisition activity may cause variations in working capital due to
conversion-period operating costs and the transition in the payment of
expenses and the collection of receivables from the former processor to the
Company. Such variations are particularly evident at December 31, 1997, in
their effect on trade receivables, which increased 119.1% over 1996, and
accounts payable, including accounts payable to affiliates, which, on a
combined basis, increased 80.1% over 1996. Typically, the changes in these
working capital accounts would more closely follow changes in the level of
processed volume, which from December 1996 to December 1997 increased 69.9%.
Because of the seasonality of the Company's business, capital requirements may
be greater in certain months.
The Company anticipates that it will incur approximately $20.0 million in
capital expenditures during 1998 for additional operations facilities and for
expansion of the Company's information systems, including $6.6 million for the
purchase and anticipated renovation of the Company's new operations center in
Knoxville, Tennessee, acquired in March 1998. Such investments relate directly
to recent portfolio purchases and joint venture investments described
elsewhere in this Prospectus. The Company anticipates that it will incur
substantially lower capital expenditures in 1999. However, no assurances can
be given that the Company will not incur additional capital expenditures
during 1998 and 1999.
The Company must address Year 2000 compliance for POS merchant activity,
internal operating systems and suppliers and vendors. In June 1997, the
Company was certified by VISA U.S.A. and Mastercard International as capable
of processing transactions for cards issued with expiration dates of 2000 and
beyond. All of the Company's customers have been upgraded with compliant
transaction processing software, and the Company's network and switch can
accommodate the Year 2000.
The Company has developed a plan to ensure all internal systems are
compliant with the Year 2000. These efforts are under way and are scheduled to
be completed by year end 1998. The Company's significant outside vendors and
suppliers also are scheduled to be Year 2000 compliant by year end 1998.
However, while the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
properly converted on a timely basis and will not have a material effect on
the Company. It is assumed that should any vendor not be compliant by January
1, 1999, the Company will have sufficient time to engage an alternative vendor
which is compliant. The cost of Year 2000 initiatives has not been and is not
expected to be material to the Company's results of operations or financial
position.
The Company intends to use net proceeds to the Company from this offering,
its existing cash and cash equivalents, cash generated from operations and
available credit facilities to fund future merchant portfolio purchases and
working capital requirements for the foreseeable future.
23
<PAGE>
BUSINESS
NOVA Corporation 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, Diner's Club and JCB,
and also provides access to debit card processing and check verification
services. The Company believes it is the nation's largest transaction
processor focused primarily on small- to medium-sized merchants, and that it
was the fifth largest bankcard processor in the United States at December 31,
1997, after giving pro forma effect to the recent transactions completed since
January 1997 discussed below. On a pro forma basis giving effect to the recent
transactions discussed below, the aggregate dollar volume of VISA and
MasterCard transactions processed by the Company in 1997 would have been over
$24.0 billion.
The Company provides merchants with a broad range of transaction processing
services, including authorizing card transactions at the POS, capturing and
transmitting transaction data, effecting the settlement of payments and
assisting merchants in resolving billing disputes with their customers. In
addition, the Company has developed several software applications that can be
delivered to its customers and updated via the NOVA Network. The NOVA Network
was developed in conjunction with WorldCom and is the principal conduit
through which the Company provides its services. The capabilities of the NOVA
Network result in rapid response time and its substantial bandwidth
facilitates the delivery of sophisticated value-added services. The Company's
ability to effectively employ technology, together with the capabilities of
the NOVA Network, allow the Company to respond quickly and effectively to the
changing and diverse needs of its merchant customers.
RECENT TRANSACTIONS
The Company consummated three significant transactions in 1997 and a fourth
in January 1998, which in the aggregate would have added approximately $10.9
billion of transaction processing volume to the Company's network if the
transactions had been consummated at the beginning of 1997. The transactions
collectively represent increases of 91.4% over fiscal 1996 transaction
processing volume of $11.9 billion. The aggregate maximum consideration paid
or to be paid by the Company in connection with these four transactions is
approximately $140.1 million. The Company also consummated 16 community bank
transactions in 1997, for an aggregate purchase price of approximately $10.0
million and which, in the aggregate, represent approximately $774.0 million of
transaction processing volume.
KeyBank Joint Venture. On January 21, 1998, the Company consummated the
KeyBank Joint Venture with KeyBank pursuant to which the Company and KeyBank
formed Key Merchant Services, a Delaware limited liability company jointly
owned and operated by Key Payment Services, Inc., a wholly owned subsidiary of
KeyBank, and the Company. In connection with the KeyBank Joint Venture,
KeyBank, Key Payment Services and POS Sales and Services, Inc., a wholly owned
subsidiary of KeyBank, contributed substantially all of their then existing
bankcard payment processing contracts (representing approximately $5.1 billion
in annualized credit and debit card volume) to Key Merchant Services. The
Company purchased a 51% interest in Key Merchant Services from KeyBank and POS
Sales and Services.
Key Merchant Services has an initial operating term expiring in January 2005
with automatic three-year extensions unless either Key Payment Services or the
Company, as the sole members of Key Merchant Services, gives notice of
termination at least 12 months prior to a scheduled expiration date. Although
certain authority is reserved exclusively in a Management Committee, a
Manager, who is a designated employee of the Company, has the power and
authority to make decisions and take actions on behalf of Key Merchant
Services in connection with its day-to-day operation and management in the
ordinary course of business. The Management Committee is comprised of five
persons, with two members selected by Key Payment Services and three members
selected by the Company. The Company also will provide to Key Merchant
Services transaction processing and other services for which the Company will
receive compensation. Key Merchant Services will market transaction processing
services with its own employees throughout the United States. Further, KeyBank
24
<PAGE>
will market and promote, on an exclusive basis, transaction processing
services on behalf of Key Merchant Services through KeyBank's bank branch
locations. KeyBank and its affiliate banks also agreed to provide certain
other services, including clearing and settlement services, to Key Merchant
Services for which KeyBank will receive compensation.
Upon termination or expiration of the KeyBank Joint Venture, either KeyBank
or the Company, depending on the circumstances of such termination or
expiration, may elect to purchase the other party's interest in Key Merchant
Services at "fair market value" determined pursuant to the terms of the
KeyBank Joint Venture.
In connection with the formation of Key Merchant Services, the Company has
undertaken the conversion of merchant processing to the Company's operating
platform. In addition to the Company's normal conversion related expenses, the
Company expects to accrue a non-recurring charge of approximately $1.3
million, net of tax ($0.04 per share assuming dilution and prior to giving
effect to this offering), in the first quarter of 1998 principally to account
for early termination of a contract for merchant processing with a third party
processor.
MBNA Portfolio. On December 30, 1997, the Company consummated a transaction
with MBNA pursuant to which the Company purchased substantially all of MBNA's
merchant portfolio. In connection with the MBNA transaction, MBNA has agreed
to cooperate with the Company in marketing the Company's merchant transaction
processing services and to refer exclusively to the Company all merchants,
trade associations, financial institutions, ISOs and other organizations that
request or evidence an interest in merchant transaction processing services.
The Company, among other things, is required to pay to MBNA a fee for each
merchant that enters into a merchant transaction processing contract with the
Company as a result of any such referral. In conjunction with the MBNA
transaction, the Company agreed to pay to MBNA a percentage of the portfolio's
net revenues. The Company's marketing agreement with MBNA has an initial term
of ten years (i.e., through December 31, 2007) subject to automatic two year
extensions unless either party gives notice of termination at least 75 days
prior to an expiration date. The Company estimates that the MBNA portfolio
will add approximately $1.0 billion in annualized credit and debit card
transaction processing volume.
Firstar Joint Venture. Effective on October 31, 1997, the Company
consummated the Firstar Joint Venture with Firstar and Firstar Milwaukee, each
of which are subsidiaries of Firstar Corporation, pursuant to which the
Company and Firstar jointly own and operate Elan Merchant Services, a newly
formed limited liability company. In connection with the Firstar Joint
Venture, Firstar, Firstar Milwaukee and the other banking affiliates of
Firstar contributed substantially all of their then existing bankcard payment
processing contracts (representing approximately $3.0 billion in annualized
credit and debit card volume) to Elan Merchant Services in return for a 49%
equity interest in Elan Merchant Services, and the Company purchased a 51%
interest in Elan Merchant Services.
Elan Merchant Services has an initial term expiring on August 31, 2008, with
automatic one year extensions unless either Firstar or the Company, as the
sole members of Elan Merchant Services, gives notice of termination at least
six months prior to a scheduled expiration date. Although certain powers are
reserved exclusively in a Management Committee, the Company, as Manager of
Elan Merchant Services, has the power and authority to make decisions and take
actions on behalf of Elan Merchant Services in connection with its day-to-day
operation and management in the ordinary course of business. The Management
Committee is comprised of four persons, with two members selected by each of
Firstar and the Company. Elan Merchant Services pays the Company an annual fee
for its managerial services. The Company also provides to Elan Merchant
Services transaction processing and other services for which the Company
receives compensation. Firstar will market and promote, on an exclusive basis,
transaction processing services on behalf of Elan Merchant Services directly
and through a network of over 850 correspondent financial institutions. Elan
Merchant Services, among other things, is required to pay to Firstar a fee for
each merchant that enters into a merchant transaction processing contract with
Elan Merchant Services as a result of any such referral, including a fixed
percentage of sales volume the referred merchant processes through the
25
<PAGE>
Company. Firstar and its affiliate banks also agreed to provide certain other
services, including clearing and settlement services, to Elan Merchant
Services for which Firstar receives compensation.
Upon termination or expiration of the Firstar Joint Venture, either Firstar
or the Company, depending on the circumstances of such termination or
expiration, may elect to purchase the other party's interest in Elan Merchant
Services at the "fair market value" determined through negotiations between
the parties at the time of termination. If Firstar and the Company are unable
to mutually agree upon the "fair market value," an independent appraiser shall
make such determination.
Crestar Portfolio . On May 29, 1997, the Company consummated a transaction
with Crestar Bank pursuant to which the Company purchased substantially all of
Crestar Bank's merchant portfolio. Crestar Bank has agreed that for an initial
term expiring May 1, 2002 (subject to automatic two year extensions unless
either party gives notice of termination at least 180 days prior to an
expiration date), Crestar Bank will cooperate with the Company in marketing
the Company's merchant transaction processing services and refer exclusively
to the Company all merchants, financial institutions, ISOs and other
organizations that request or evidence an interest in merchant transaction
processing services. The Company, among other things, is required to pay to
Crestar Bank a fee for each such referral, including a fixed percentage of
sales volume the referred merchant processes through the Company.
The Company estimates that the Crestar portfolio will add approximately $1.8
billion in annualized credit and debit card transaction processing volume.
Crestar Bank's 500 branch locations will offer the Company's transaction
processing services thereby expanding the Company's distribution network.
The Company expects each of these transactions to provide significant
strategic and financial benefits, including: (i) enhanced distribution
channels to facilitate growth of the Company's processed transaction volume
and number of merchant locations served; (ii) further geographic
diversification of the Company's merchant portfolio into additional regions of
the United States; and (iii) economies of scale from substantial increases in
transaction processing volume once the merchant accounts and other services
are fully integrated into the Company's operating platform.
INDUSTRY OVERVIEW
The transaction processing industry provides merchants with credit, charge
and debit card and other payment processing services, as well as related
information services. This industry has grown rapidly in recent years as a
result of wider merchant acceptance and increased consumer use of such cards,
and advances in transaction processing and telecommunications technology.
These factors, together with the efficiencies derived from economies of scale,
are causing the consolidation of transaction processing providers and the
availability of more sophisticated products and services to all market
segments.
Increased Growth in Card Use. The proliferation in the uses and types of
credit, charge and debit cards, rapid technological advances in transaction
processing and financial incentives offered by credit card associations and
issuers have contributed greatly to wider merchant acceptance and increased
consumer use of such cards. For example, industry sources indicate that for
the five years ended December 31, 1996, charge volume of VISA and MasterCard
credit cards grew at a compounded annual growth rate of approximately 18.7%.
The following chart sets forth consumer usage of VISA and MasterCard credit
cards for purchases and cash advances in the United States from 1986 to 1996:
26
<PAGE>
LOGO
[GRAPHIC OF U.S. CHARGE VOLUME FOR VISA AND MASTERCARD 1986-1996 APPEARS HERE]
Source: The Creditcard Management Industry Directory, 1997; editor: The Nilson
Report ($ in billions)
The growth in charge volume and the increase in the acceptance of credit
cards are expected to continue as consumers expand their use of such cards as
an alternative to cash and checks. VISA and MasterCard charge volume is
projected to exceed $1.0 trillion by the year 2000 (The Nilson Report--
September 1996).
Technology. Rapid technological advances in transaction processing,
particularly the transition from paper-based to electronic processing, have
contributed greatly to wider merchant acceptance and increased consumer use of
such cards. Electronic processing provides greater convenience to merchants
and consumers, reduces fees charged to merchants, and facilitates faster and
more accurate settlement of payments. According to industry sources,
approximately 87% of the dollar volume of credit card transactions was
processed electronically or by voice automation in 1995, up from approximately
77% in 1990. Increased card acceptance and usage, coupled with technological
advances in electronic processing, have created an opportunity for service
providers to offer a variety of sophisticated processing and information
services to merchants.
At present, many large transaction processors continue to provide customer
service and applications via legacy systems that are difficult and costly to
alter or otherwise customize. Accordingly, transaction processors that
continue to utilize these systems for customer service and applications find
it difficult to meet the increasing demands of small- to medium-sized
merchants for more sophisticated products and services tailored to their
diverse and changing needs. In contrast to more expensive and less flexible
legacy systems, advances in less costly, scalable and networked computer
systems, including distributed client/server architecture and relational
database management systems, afford transaction processors greatly improved
flexibility and responsiveness in providing customer service and applications.
In addition, the use of fiber optic cables and advanced switching technology
in telecommunications networks and competition among long-distance carriers
further enhance the ability of processors to provide faster and more reliable
service at lower per-transaction costs than previously possible.
Advances in personal computer ("PC") and POS terminal technology have
increasingly allowed access to a greater array and level of sophisticated
services at the POS and contributed to the demand for such services. In
addition, more sophisticated uses of integrated cash registers and networked
systems at the merchant site create
27
<PAGE>
further demand for comparably advanced and sophisticated products and services
accessible at the POS. These trends have created the opportunity for
transaction processors to leverage technologies by developing business
management and other software application products and services.
Segmentation of Merchants and Service Providers. The transaction processing
industry is characterized by a small number of large transaction processors
that primarily focus on servicing large merchants and by many smaller
transaction processors that provide a limited range of services to small- to
medium-sized merchants. Large merchants (i.e. those with multiple locations
and high volumes of card transactions) typically demand and receive the full
range of transaction processing services as well as customized information
services at low per-transaction costs. By contrast, small- to medium-sized
merchants historically have not been offered the same level of services as
large merchants and have incurred relatively higher per-transaction costs. The
growth in card transactions and the transition from paper-based to electronic
transaction processing have, however, caused small- to medium-sized merchants
increasingly to demand sophisticated transaction processing and information
services similar to those provided to large merchants.
Transaction processing services are marketed and sold to the small- to
medium-sized merchant market segment primarily by community and regional banks
and ISOs that outsource all or a portion of the transaction processing
services they offer. It is difficult, however, for banks and ISOs to customize
transaction processing services for the small- to medium-sized merchant on a
cost-effective basis or to provide sophisticated value-added services.
Accordingly, the small- to medium-sized merchant market segment historically
has been characterized by basic transaction processing without the
availability of the more sophisticated processing, information-based services
or customer service offered to large merchants.
Consolidation. The transaction processing industry has undergone rapid
consolidation over the last several years. The costs to convert from paper-
based to electronic processing, merchant requirements for improved customer
service, and the demands for additional customer applications have made it
difficult for community and regional banks and ISOs to remain competitive.
Many of these providers are unwilling or unable to invest the capital required
to meet these evolving demands, and are increasingly exiting the transaction
processing business or otherwise seeking alliance partners to provide
transaction processing for their customers. Despite this ongoing
consolidation, the industry remains fragmented with respect to the number of
entities providing merchant services. Industry sources indicate that in 1996,
although the ten largest bankcard processors accounted for approximately 82%
of the total charge volume processed and the largest accounted for
approximately 38% of the total volume, there were several hundred additional
registered service providers marketing and selling transaction processing
services to merchants. Management believes that these factors will result in
continuing industry consolidation opportunities over the next several years.
COMPANY STRATEGY
The Company's objective is to maintain its leadership in the transaction
processing industry by delivering transaction processing services and related
software application products and services to its merchant customers on a
cost-effective basis and by increasing the size of its customer base through
its marketing and acquisition programs. The Company seeks to accomplish this
objective through the following strategies:
Focus on Small- to Medium-Sized Merchants. Since inception, the Company has
focused its strategy on delivering to small- to medium-sized merchants the
variety and sophistication of products and services previously available only
to large merchants. The Company believes that its use of technology and
focused marketing strategy enable it to effectively compete for merchant
customers in this market segment. See "Business--Customer Base."
Leverage Available Technologies. One of the Company's principal strategies
is to maximize the benefits of available technologies to deliver transaction
processing services and related software application products and services on
a cost-effective basis. The ability to achieve this strategy is facilitated by
the Company's flexible systems architecture and the capabilities of the NOVA
Network. While the NOVA Network is a fast, efficient, reliable and
technologically advanced telecommunications network, the Company continues to
develop and
28
<PAGE>
pursue enhancements to its telecommunications network in order to allow the
Company to maintain the advantages derived from its network technology. The
Company continues to enhance its ability to provide customized and
sophisticated software application products and services through the ongoing
development of software for POS terminals and PC applications. See "Business--
Technology" and "Business--Software Application Products and Value-Added
Services."
Provide High-Quality, Reliable Service. The Company is dedicated to
providing reliable transaction processing services and effective customer
service and support. The Company maintains a 24-hours-a-day, seven-days-a-week
helpline staffed by full-time customer service representatives. The ability of
these customer service representatives to serve effectively and efficiently
the needs of the Company's merchants is enhanced greatly by the use of
networked systems that provide access to real-time customer transaction
information, a capability historically available only to large merchants. In
addition, the switching capabilities of the NOVA Network result in rapid
electronic transaction authorizations. See "Business--Merchant Services
Provided by the Company," "Business--Customer Service and Support" and
"Business--Technology."
Utilize Multiple Marketing Channels. To reach its target market segment in a
cost-effective manner and to further its market penetration, the Company
markets its services through three principal channels: (i) bank alliances,
including joint ventures, through which the Company offers its services to
merchants in cooperation with community, regional and super-regional banks,
allowing the Company to capitalize on the presence of those banks in
particular geographic markets; (ii) partnering with ISOs that market and sell
the Company's services to merchants, typically in areas where the Company does
not have bank alliances; and (iii) direct sales on behalf of and as a
supplement to the bank alliance and ISO partnering channels. In addition, the
Company engages in marketing efforts that include marketing agreements with
various trade and other associations and marketing through value-added
resellers ("VARs") that integrate the Company's transaction processing
services with specialized business management software. See "Business--
Marketing."
Develop and Provide Value-Added Products and Services. In comparison to
large merchants, small- to medium-sized merchants historically have not been
offered the same variety and sophistication of products and services and are
less capable of developing their own software application products and related
information systems. In response to the needs of its target market segment,
the Company continues to develop software application products and value-added
services that it can deliver directly to the merchant at the POS through the
NOVA Network. In addition, the Company works with a variety of value-added
resellers to integrate the Company's transaction processing services with
specialized business management software written for specific industries.
Management believes that these software application products and value-added
services allow the Company to strengthen its relationships with existing
customers and attract additional merchants. Management believes that these and
other efforts may result in the development of additional software application
products and value-added services. See "Business--Technology" and "Business--
Software Application Products and Value-Added Services."
Pursue Acquisitions, Joint Ventures and Strategic Alliances. The Company
will continue to pursue purchases of merchant portfolios and the formation of
joint ventures and strategic alliances with other financial institutions as a
principal component of its growth strategy in order to facilitate growth,
expand the Company's distribution channels and achieve greater economies of
scale. This strategy focuses on the merchant portfolios and assets of banks
and ISOs that no longer desire or are unable to provide efficient and cost-
effective transaction processing services. The Company attempts to structure
its acquisitions, joint ventures and alliances both to increase its merchant
base and to expand its distribution and marketing capabilities. The Company
accomplishes this objective principally by entering into an exclusive
marketing agreement, joint venture (generally in the form of a jointly owned
limited liability company) or alliance with a bank that sells its merchant
portfolio to, or forms a joint venture with, the Company. The acquisitions,
alliances and joint ventures offer banks the opportunity to transfer
management and operational responsibility for their merchant portfolios to the
Company, while continuing to offer transaction processing services on a co-
branded basis in cooperation with the Company or the joint venture. Banks are
therefore able to view the sale of their merchant portfolio or the joint
venture as a way to maintain a full-service relationship with their merchant
depositors. See "Business--Acquisition Strategy."
29
<PAGE>
MERCHANT SERVICES PROVIDED BY THE COMPANY
The following diagram (which is referenced in the text below) summarizes the
flow of information and services among the Company, the merchant, and certain
other parties involved in the Company's provision of services to its merchant
customers with respect to a typical credit card transaction:
[GRAPHIC OF FLOW OF INFORMATION SERVICES WITH RESPECT TO A TYPICAL CREDIT CARD
TRANSACTION APPEARS HERE]
Authorization Services. The Company provides electronic transaction
authorization services for all major credit and charge cards. Authorization
generally involves approving a cardholder's purchase at the POS after
verifying that the card is not lost or stolen and that the purchase amount is
within the cardholder's credit or account limit. The electronic authorization
process for a credit card transaction begins when the merchant "swipes" the
card through its POS terminal and enters the dollar amount of the purchase.
After capturing the data, the POS terminal transmits the authorization request
via the NOVA Network to the Company's switching center, where the data is
routed to the appropriate credit card association for authorization (see paths
"A" and "B" of the above diagram). The transaction is approved or declined by
the credit card association, and the response is transmitted back to the
Company's switching center, where it is routed to the appropriate merchant
(paths "B" and "A").
Data Capture and Reporting Services. At the time of authorization, data
relating to the transaction, such as the purchase price and card number, is
recorded electronically both at the merchant's POS terminal and by the
Company. This redundancy maximizes accurate transaction reconciliation with
each merchant and protects against potential loss of data. On a periodic basis
throughout the day, the merchant aggregates and organizes this transaction
data, using a software application that the Company has programmed into the
merchant's POS terminal, and transmits this information to the Company (path
"A") where it is organized into two files. One
30
<PAGE>
file is transmitted to either Vital Processing Services or Mellon Bank for
merchant accounting as described below (path "C"). The other file is
maintained by the Company in its database to allow the Company to run its
proprietary fraud detection software program against each of the day's
transactions processed via the NOVA Network (path "G"). This information also
allows the Company to provide merchants with information services such as
specialized management reports and to assist in its other customer service
operations (path "H"). Merchants can access this archived information through
customer service representatives (path "I") or through applications such as
NOVA ACS and NOVA Perks which allow the merchant direct access to the
Company's database through a PC (path "K"). See "Business--Risk Management"
and "Business--Customer Service and Support."
Settlement, Accounting and Clearing Services. Merchant accounting services
are performed on the Company's behalf by Vital Processing Services and Mellon
Bank, with each of the Company's merchant customers assigned to one of these
processors. No less often than once each day, the Company forwards to Vital
Processing Services and Mellon Bank, respectively, transaction data regarding
the Company's merchant customers (path "C"). Vital Processing Services and
Mellon Bank reorganize and accumulate this data on a merchant-by-merchant and
card issuer-by-card issuer basis and forward this data to the credit card
associations for ultimate payment (path "D"). On a monthly basis, Vital
Processing Services and Mellon Bank send statements to the Company's merchant
customers for whom they provide settlement and accounting services, detailing
the previous month's transaction activity.
Through each of Regions Bank, Bank of the West, Mellon Bank, Firstar,
KeyBank and FUNB, which serve as member clearing banks for the Company, the
Company is registered with VISA and MasterCard as a certified processor and
member service provider. The Company's clearing banks receive payment for
merchant transactions from credit card associations (net of fees payable to
the credit card associations and card issuing banks), from which the clearing
banks remit payment to the merchant for the gross amount of the merchant's
transactions (paths "E" and "F"). Once each month, the Company collects
applicable merchant discount and other fees from each merchant for
transactions effected and services provided during the preceding month. See
"Business--Merchant Accounting and Clearing Bank Relationships."
Chargeback Services. In the event of a billing dispute between a cardholder
and a merchant, the Company assists the merchant in investigating and
resolving the dispute. These billing disputes include, among others:
(i) nonreceipt of merchandise or services; (ii) unauthorized use of a credit
card; and (iii) general disputes between a customer and a merchant as to the
quality of the goods purchased or the services rendered by that merchant. The
Company provides a sophisticated chargeback control system for its merchants
that includes actively prescreening disputes and the use of proprietary
software programs to automate chargeback controls. These chargeback control
systems are designed to reduce the time and expense that the Company and
merchants spend on cardholder requests for chargebacks. In the event a billing
dispute between a cardholder and a merchant is not resolved in favor of the
merchant, the transaction is "charged back" to the merchant and that amount is
credited or otherwise refunded to the cardholder. If the Company or its
clearing banks are unable to collect such amounts from the merchant's account,
and if the merchant refuses or is unable due to bankruptcy or other reasons to
reimburse the Company for the chargeback, the Company bears the loss for the
amount of the refund paid to the cardholder. See "Business--Risk Management."
Customer Service and Support. The Company provides its merchant customers
with a variety of customer services and support. These services include
leasing, renting or selling POS terminals, downloading software application
products and services to POS terminals (path "J"), maintaining POS terminals,
and customizing software for merchant applications. In addition, the Company
maintains a 24-hours-a-day, seven-days-a-week helpline staffed by full-time
customer service representatives (path "I"). See "Business--Software
Application Products and Value-Added Services" and "Business--Customer Service
and Support."
31
<PAGE>
TECHNOLOGY
One of the Company's principal strategies is to maximize the benefits of
available technologies to deliver transaction processing and related software
application products and services on a cost-effective basis. Accordingly, the
Company regularly uses and adapts technologies developed for applications
outside the transaction processing industry. In particular, technologies
developed for networked PCs and the telecommunications market have been
important to the NOVA Network and the Company's service capabilities.
The Company exercises significant control over the development and
enhancement of the combination of hardware, software and network services that
comprise the Company's transaction processing and information delivery system.
This provides the Company with greater control over the functionality,
quality, reliability, cost and efficiency of its transaction processing
services and related software application products and services.
The NOVA Network. The NOVA Network, developed in conjunction with WorldCom,
is the Company's proprietary telecommunications network and the principal
conduit through which the Company provides its services. The design of the
NOVA Network provides efficient switching capabilities, resulting in rapid
response time for transaction authorizations. Fiber optic communications are
employed throughout the NOVA Network, providing the substantial bandwidth
capable of supporting sophisticated value-added services. In working with
WorldCom, the Company was able to design a network specifically tailored to
the services the Company desired to provide, the equipment the Company
intended to use in providing those services, and the functionality those
services were designed to achieve. As customer needs change and as technology
improves, management believes that it will be able to adapt and customize the
NOVA Network as necessary to achieve the functionality it desires. Pursuant to
its agreement with the Company, WorldCom provides long-distance and local
telecommunication access, as well as technical support, to the Company in
connection with the NOVA Network. This agreement expires February 28, 1999,
subject to earlier termination by the Company if WorldCom fails to meet
certain agreed-upon performance objectives.
The NOVA Network is the result of combining WorldCom's Common Channel
Signaling Specification Number Seven, commonly referred to as an "SS7"
switching system, with the use of advanced Integrated Services Digital Network
("ISDN") and Non-Facilities Associated Signaling ("NFAS") features. SS7 is a
high-speed call-switching technology utilized in telecommunications networks
and originally intended only for carrier-to-carrier use, such as a regional
phone company switching long-distance calls to WorldCom for transmission, as
opposed to use by end-users such as the Company and its merchants. With the
use of ISDN technology, however, end-users such as the Company can utilize an
SS7 switching system without sacrificing any of the enhanced performance
attributes derived from SS7 technology. Although significant hardware and
software obstacles currently are inherent to end-user utilization of an SS7
switching system, the Company developed a proprietary ISDN interface enabling
it effectively to employ SS7 technology as part of the NOVA Network. Further,
the NFAS features of the NOVA Network allow for a greater portability of the
NOVA Network to long-distance and local telecommunications access providers
other than WorldCom, which would reduce the Company's historical dependence on
WorldCom. The Company has developed and tested a network interface with AT&T
and management believes that, if necessary or convenient, the Company could
utilize the telecommunications access of AT&T in connection with the NOVA
Network. Management believes that transferring the NOVA Network to AT&T, or
another telecommunications access provider, can be accomplished without
sacrificing any significant performance or operational attributes of the NOVA
Network, although such a transfer may increase the Company's expenses for
network services.
The reliability of the NOVA Network is enhanced by the backup service
provided by AT&T. The existence and maintenance of this backup system, which
is designed so no single element is shared with the principal WorldCom system,
enhances the Company's ability to provide a high level of reliability in its
network service. Through an agreement with Electronic Data Systems
Corporation, the Company maintains a voice authorization backup system. This
backup system allows merchants to receive voice authorization of transactions
in the event of a POS terminal malfunction, network outage or other similar
circumstances.
32
<PAGE>
Software Development for POS Terminals and PCs. The Company is continuously
developing new software applications for POS terminals and PCs in an effort to
improve existing and create additional product and service offerings. This
software development capability is critical to the Company's ability to
respond flexibly to changing customer needs and improving technologies. Most
of the POS terminals utilized by the Company's merchant customers have been
programmed by the Company with specific applications. By programming POS
terminals, the Company can avoid the limitations of the preexisting
applications programmed into POS terminals, which are designed for broad
applicability to a wide range of users, and can provide its merchant customers
with specifically tailored applications at an increased level of
functionality. Distribution of software application products designed for use
through POS terminals generally is accomplished by downloading such
applications over the NOVA Network, enabling a merchant to utilize the
Company's products and services quickly and inexpensively.
As the use of PCs by merchants grows, and as merchants continue to move
toward fully-integrated cash registers and payment systems, the Company
continues its efforts to extend its POS terminal software application product
and service offerings to PCs. For instance, NOVA ACS, NOVA Perks, PC
Transact It, and NOVA Shadow Pay are PC-based applications, and the Company
intends to expand the number of its products and services available for PC use
or that otherwise allow the POS terminal to interface with a PC. While
merchant use of such products and services currently is limited, and there can
be no assurance that such products and services will be widely accepted, the
Company expects such use to increase. Further, the terms of the First Union
Alliance provide that, when feasible, the Company will assist First Union in
developing new products or services relating to transaction processing or in
otherwise supporting new business ventures. The Company and First Union are
actively pursuing initiatives relating to transaction processing via the
Internet and procurement and purchasing cards, and management believes that
these and other efforts may result in the development of additional software
application products and value-added services. See "Business--Software
Application Products and Value-Added Services."
The Company actively encourages third party software developers to write
applications to the Company's specifications and network protocols. These
applications, once certified by the Company, allow integration of the
Company's transaction processing services with the business management
software created by such developers for use at the merchant's POS. These
developers often function as value-added resellers for the Company as they
frequently market their business management software in connection with the
Company's services. For example, Squirrel Restaurant Products ("Squirrel"),
one of the leading VARs, provides software applications to accommodate the
specialized business management needs of the restaurant industry. Squirrel, in
cooperation with the Company, has modified its software to allow full
integration of the Company's transaction processing services. In this way,
VARs such as Squirrel indirectly perform a marketing function for the Company
since their software is often offered on a fully-integrated basis with the
Company's transaction processing services, creating additional opportunities
for the Company to reach small- to medium-sized merchants. The Company has
certified in excess of 30 third party software developers, including IC
Verify, Aluim Payment Groups, Southern DataCom, Inc., Datacap, Inc. and Smokey
Mountain Systems.
Use of Networked Systems for Customer Service. The information access and
retrieval capabilities of networked systems, where real-time information is
available to any of the Company's customer service representatives, allow the
Company to provide a level of customer service and support to small- to
medium-sized merchants previously available only to much larger merchants. For
example, any of the Company's customer service representatives may access, on
a real-time basis, all of the relevant information pertaining to any
particular merchant that may call and ask for assistance. The Company also
recently implemented an on-line, informational database that provides the
Company's customer services representatives user-friendly access to an array
of additional information relative to the Company's services, products and
systems, which often allows the Company to more quickly and effectively
resolve customer service inquiries. In addition to their customer service
capabilities, the Company's networked systems are highly automated and require
minimal staffing, which allows the Company to contain costs and achieve
greater operating efficiencies.
33
<PAGE>
SOFTWARE APPLICATION PRODUCTS AND VALUE-ADDED SERVICES
In addition to card transaction processing, the Company offers related
software application products and value-added services to its merchant
customers. These products and services are designed to run on existing POS
terminals and DOS- and Windows-based PCs. Offering a broad range of products
and services historically unavailable to small- to medium-sized merchants is
an integral part of the Company's strategy of focusing on these merchants and
differentiating itself among the banks and ISOs serving this market segment.
Management believes that the quality and reliability of its products and
services enhance the Company's ability to attract and retain merchant
customers.
The Company currently offers a variety of software application products and
value-added services, including the following core products and services that
are basic to the Company's network:
Encompass. Encompass is the latest generation of the Company's user
interface. The Company presently provides Encompass to all new merchant
customers, and generally charges a one-time fee to upgrade existing merchants
to Encompass. In addition to the Company's core transaction processing
services, Encompass enables merchants to access the Company's software
application products and value-added services, including those described
below. Encompass also allows the merchant to access other business management
applications, including customized end-of-day processing (allowing, for
instance, the performance by the merchant of daily audit functions) and other
review and reporting features (e.g., summary report generation). Designed as a
flexible "modular" system, Encompass allows the merchant to add features and
capability as its business needs evolve. Generally available since July 1994,
Encompass is a POS terminal application currently used by over 60,000
merchants.
NOVA Shadow Pay. NOVA Shadow Pay, introduced by the Company in February
1996, addresses the increasing use by merchants of integrated and modem-
enabled cash registers and PCs. NOVA Shadow Pay eliminates the necessity of a
traditional, stand-alone POS terminal. Typically, merchants accepting cards
for payment key-in or input transaction data at their cash register and then
key-in certain redundant transaction data to their POS terminal for
authorization and processing. This redundant keying of data increases both the
probability of human error as well as the amount of time it takes a merchant
to process a transaction. NOVA Shadow Pay is a PC application that allows the
merchant's modem-enabled cash register or PC to capture the transaction data
that is keyed or otherwise input into the cash register or PC, and transmits
such data for authorization and processing, eliminating both the need for a
stand-alone POS terminal and the redundant keying of transaction data
associated therewith. In addition, NOVA Shadow Pay provides the merchant
access to certain review and reporting features allowing, for instance, the
merchant to more easily reconcile transaction activity for any given period
with the data captured and stored by the merchant's cash register or PC. The
Company charges a one-time license fee for access to NOVA Shadow Pay. NOVA
Shadow Pay currently is used by approximately 1,000 merchants.
Mass Transact and PC Transact It. Mass Transact is a mainframe-to-mainframe
transaction processing application that the Company developed specifically for
businesses utilizing mainframe technology and processing large numbers of
credit card transactions on a batch basis. A merchant using Mass Transact
(typically one that accepts a large number of credit card transactions by
telephone or mail) assembles a batch file of transactions and the merchant's
mainframe transmits that information to the Company for processing. Insurance
companies and magazine publishers, each of which process large numbers of
transactions for recurring payments such as insurance premiums and
subscription renewals, respectively, are examples of the type of merchant
customers who currently utilize Mass Transact. Available since September 1994,
Mass Transact currently is used by approximately 300 of the Company's
merchants. PC Transact It is a similar application that allows PCs, rather
than mainframes, to process transactions on a batch basis. Available since
October 1994, PC Transact It currently is used by approximately 3,500 of the
Company's merchants. Merchants who subscribe to Mass Transact or PC
Transact It pay a one-time license fee and a percentage of the dollar amount
of each transaction processed.
34
<PAGE>
InnResponse and NOVALodge. InnResponse and NOVALodge are transaction
processing applications designed to address the special needs of the
hospitality industry. InnResponse is a PC-based lodging solution for small
hotels and motels and tracks check-in and check-out data by portfolio.
NOVALodge, the Company's most recent product release, is a PC-based
application for larger hospitality facilities and accommodates multiple
terminals at a front desk as well as multiple on-site locations such as
restaurants, gift shops or golf facilities. Enhanced reporting provides totals
and allows sorting by terminal or location. Over 4,000 merchants currently use
one of these applications.
Gratuit. Gratuit is a transaction processing application designed
specifically for use by restaurants. Gratuit tracks server data and includes
"tip" capability and enhanced reporting capabilities. Similar to Encompass,
Gratuit software integrates a time clock into the software as well as a
frequent diner program. Gratuit currently is used by over 6,000 NOVA
merchants.
In addition to the Company's core products and services, the Company offers
the following value-added software applications and services:
NOVA ACS. NOVA ACS (Automated Customer Service) is a PC-based system that
allows the Company's bank alliance and ISO partners access to the Company's
databases in order to track and compile the transaction processing activity of
their respective merchant customers. NOVA ACS also is utilized by the
Company's merchant customers to access the Company's databases to track and
compile information regarding their own transaction activity. Through such
access and related information retrieval capabilities, NOVA ACS expands
greatly the banks', ISOs' and merchants' ability to design and obtain
customized informational reports and, in the case of banks and ISOs, to
perform for their merchant customers a variety of customer service related
activities. NOVA ACS 2.5, which was introduced in 1997, incorporates retrieval
and chargeback information as well as on-line statements. These enhancements
give the ISO, bank or merchant the opportunity to retrieve information on-
line. Available since 1991, NOVA ACS currently is used by approximately 300 of
the Company's bank alliance and ISO partners.
SCAN Check Verification Services. Through an agreement with Deluxe Payment
Protection Systems, Inc. ("DPPS"), doing business as SCAN, the Company offers
check verification services to its customers. Specifically, the Company can
provide its customers with direct access via the NOVA Network to the SCAN
database managed by DPPS. The SCAN database is composed of information
relating to checks returned to subscribers of the SCAN database for
insufficient funds. This access allows merchants to compare the information
included in the database against any check presented to the merchant for
payment. This service is accessible to the merchant through the merchant's POS
terminal and was introduced in May 1995, with significant telemarketing of
SCAN to existing Company merchants commencing in January 1996. Merchants pay
per-transaction fees for access to such service. The service currently is used
by approximately 1,000 merchants.
In March 1997, the Company entered into an additional agreement with DPPS
pursuant to which DPPS agreed to refer to the Company prospective merchants
for credit, charge and debit card processing.
Cellular Digital Packet Data. The use of Cellular Digital Packet Data
("CDPD"), marketed under the name "Traverse," allows the Company to process
transactions utilizing cellular airwaves, as opposed to traditional phone
lines, enabling wireless transaction authorization and processing. The Company
currently has agreements with AT&T Wireless Services, GTE and Bell Atlantic
NYNEX Mobile to provide cellular transmission services. CDPD enables
transaction authorization and processing in environments where traditional
phone lines are unavailable, inconvenient and/or prohibitively expensive,
affording merchants increased flexibility, mobility and security in processing
card transactions. Further, CDPD will allow merchants that have relied on
paper-based processing, where the ability to check if a card is stolen or
credit limits exceeded is generally unavailable or inconvenient, to convert to
electronic processing. In so doing, such merchants can also avoid the higher
rates imposed by each of VISA and MasterCard for paper-based transactions.
35
<PAGE>
NOVA WEBWAY. Through an agreement with Harbinger Corporation, the Company
offers Internet services to merchant customers. NOVA WEBWAY is software
designed to allow small- to medium-sized merchants the opportunity to build a
functional commerce-ready web-site complete with up to a 99 page catalog.
Using a wizard interface, NOVA WEBWAY prompts a customer to describe its
business, load product descriptions, pricing and pictures and includes secure
on-line ordering and encrypted credit card payment capabilities. NOVA WEBWAY
is a total web page solution at an attractive price point specifically
designed for small business. The Company has several merchants testing this
product and began a marketing campaign in March 1998.
Internet Processing. The Company is actively pursuing development
initiatives relating to transaction processing services on the Internet and
other forms of electronic commerce. The Company is exploring with First Union
and other third parties several Internet-related opportunities, which include
processing transactions via the Internet, accepting merchant applications via
the Internet and developing, on behalf of merchants, "home-pages" on the
Internet. In addition, the Company has entered into an agreement with
CyberCash Inc. pursuant to which CyberCash will provide to the Company
encryption services (a security measure) for transactions processed via the
Internet. These Internet-related initiatives are still in formative stages and
security is the prevailing issue and concern. The Company, however, is active
in the development process and management believes that the Internet may,
ultimately, become another distribution channel for the Company's products and
services.
NOVA Perks. NOVA Perks is a PC-based application that allows a subscribing
merchant to design and operate a customized frequent shopper program. This
program enables the merchant to promote sales and to track, store and retrieve
detailed information about its customers and all of their purchases regardless
of the method of payment. Merchants who do not use the Company for transaction
processing services can still utilize NOVA Perks. NOVA Perks has not yet
achieved significant market usage although it is an attractive product to
prospective customers.
CUSTOMER BASE
The Company's merchant customer base consists primarily of small- to medium-
sized merchants, with a historic concentration in the restaurant, specialty
retail, furniture, automobile repair and lodging industries. In addition,
banks also are customers of the Company insofar as those banks accept credit
card cash advance transactions. While the Company's merchants vary
significantly in size, a typical merchant customer generates approximately
$140,000 in annual charge volume. Although the Company focuses on small- to
medium-sized merchants, the Company also serves a significant number of large
merchants and has in place the technical, operational and management
infrastructure necessary to continue to serve large merchants. For the years
ended December 31, 1997 and 1996, no merchant customer accounted for more than
2.5% of the Company's revenues. At December 31, 1997, the Company provided
transaction processing services to approximately 152,000 merchant locations
nationwide.
The Company enters into direct contractual relationships with its merchants,
which reduce the financial risks to the Company in the event any of the
Company's bank alliance partners no longer desire to utilize the Company's
services. In contrast to the Company's approach, the typical transaction
processor/bank relationship involves a processor negotiating with a bank to
serve all of the bank's merchants, with the bank maintaining direct control
over each merchant relationship. Such a structure exposes the processor to the
risk that each of the merchant relationships, and the revenues from those
relationships, easily could be jeopardized if, for example, the bank were to
sell its merchant business portfolio to an acquiror that provided its own
transaction processing services.
MARKETING
To reach its target market segment in a cost-effective manner and to further
its market penetration, the Company markets its services through three
principal channels: (i) bank alliances, including joint ventures, through
which the Company offers its services to merchants in cooperation with
community and regional banks,
36
<PAGE>
allowing the Company to capitalize on the presence of those banks in
particular geographic markets; (ii) partnering with ISOs that market and sell
the Company's services to merchants, typically in areas where the Company does
not have bank alliances; and (iii) direct sales on behalf of and as a
supplement to the bank alliance and ISO partnering channels. In addition, the
Company engages in marketing efforts that include marketing agreements with
various trade and other associations and marketing through VARs that integrate
the Company's transaction processing services with specialized business
management software. The KeyBank Joint Venture, the Firstar Joint Venture, the
Crestar transaction, the MBNA transaction and the First Union Alliance are the
Company's most significant examples of marketing through bank alliances, and
enhanced significantly the Company's ability to further its market penetration
and increase the size of its customer base through the marketing assistance,
support and exclusive merchant referrals provided by the participating banks.
Bank Alliances. The Company's principal marketing efforts are directed at
forming bank alliances. During 1997 and January 1998, the Company entered into
bank alliances in connection with the KeyBank Joint Venture, the Firstar Joint
Venture, the Crestar transaction and the MBNA transaction. Through its
relationships with its bank alliance partners, the Company offers its services
to merchants in cooperation with community and regional banks, allowing the
Company to capitalize on the presence of those banks in particular geographic
markets. The Company's bank alliances consist of four types of relationships:
(i) relationships created as a result of the Company's acquisition of a bank's
merchant portfolio, pursuant to which the Company provides transaction
processing services on a co-branded basis with such bank ("Acquisition
Alliances"); (ii) relationships created through a joint venture (generally in
the form of a limited liability company) owned jointly by the Company and a
bank, pursuant to which the Company provides transaction processing services
to the joint venture and the bank provides marketing and referral services to
the joint venture ("Joint Venture Alliances"); (iii) agent bank relationships
where the bank purchases the Company's services and markets and resells those
services directly to merchants ("Agent Bank Alliances"); and (iv) bank
referral relationships where the bank refers to the Company merchants who
desire or otherwise inquire about transaction processing services ("Bank
Referral Alliances").
Acquisition Alliances and Joint Venture Alliances are an integral part of
the Company's overall acquisition strategy pursuant to which the Company
offers banks the opportunity to transfer management and operational
responsibility for their merchant portfolios to the Company (either directly
or through the joint venture), while continuing to offer transaction
processing services on a co-branded basis in cooperation with the Company.
Because an Acquisition Alliance or a Joint Venture Alliance may involve the
Company (or the joint venture) maintaining transaction processing salespersons
on-site at the bank branch to service existing merchant customers and to
market and sell the Company's processing services to new merchant customers,
the Company can often effect a nondisruptive transition of services from the
merchants' perspective. To ease further this transition process and to assist
its Acquisition Alliance and Joint Venture Alliance partners, the Company has
created an intensive training program whereby the Company's personnel train
and educate its Acquisition Alliance and Joint Venture Alliance partners in
all aspects of the Company's transaction processing services, software
application products and value-added services. Additionally, the Company
utilizes its internal sales force to market transaction processing services on
behalf of the Acquisition Alliances and Joint Venture Alliances. The internal
sales force includes a National Account Sales team that supports Acquisition
Alliances and Joint Venture Alliances in signing larger and more
technologically sophisticated merchants.
The Company compensates its bank alliance partners through varying means.
Acquisition Alliance partners typically are compensated by the Company
remitting to them a residual for each transaction processed by the Company for
merchants attributable to the alliance. The Company compensates its Bank
Referral Alliance partners typically by paying them a one-time referral fee.
Agent Bank Alliance partners are not directly compensated by the Company;
rather, they derive revenue by reselling the Company's services to merchants
at a price determined by the Agent Bank. The Company is assisted in its
alliance efforts through a marketing agreement with Kessler Financial Services
L.P. ("Kessler"), an independent marketing organization. Pursuant to this
agreement, Kessler identifies potential alliance or acquisition prospects for
the Company. The Company's
37
<PAGE>
agreement with Kessler is scheduled to expire June 30, 2001, subject to
renewal for two additional years unless either the Company or Kessler gives
notice of termination prior to the expiration of the initial term.
The Company also employs a direct sales force that markets the services of
the Company on behalf of the Company's alliance, ISO and joint venture
partners.
ISO Partnering. With the acquisition of the merchant portfolio of the Bank
of Boulder in December 1994, which included 24 marketing agreements with ISOs,
the Company made its first significant entry into the ISO marketing channel.
ISOs are entities that market the Company's products in conjunction with other
products offered by the ISO, such as card readers and related equipment.
Generally, ISO partnering involves engaging an ISO to market and sell the
Company's products and services on a non-exclusive basis. An ISO that desires
to refer a merchant customer to the Company will procure the merchant's
application and submit it to the Company on the merchant's behalf. Thereafter,
if the application is approved, the ISO will sell or lease POS terminals and
related hardware and software to such merchant. The Company compensates ISOs
by paying them a residual for each transaction processed by the Company for
merchants referred to the Company by the ISO. The ISO's determination of
whether to refer a particular merchant to the Company depends on a variety of
factors, including the terms of the residual offered by the Company and the
industry in which the merchant conducts its business. As of March 19, 1998,
the Company had 40 marketing agreements with ISOs.
Association Marketing. Through its association marketing program, the
Company negotiates and enters into marketing agreements with various trade and
other associations. Pursuant to these relationships, associations endorse and
promote to their membership the transaction processing services provided by
the Company, creating additional opportunities for the Company to reach small-
to medium-sized merchants. The Company currently has agreements with 160
associations. The Company expects that the MBNA transaction will expand the
Company's association marketing opportunities.
Other Marketing Efforts. In addition to bank alliances, ISO partnering and
direct sales and telemarketing, the Company engages in other marketing efforts
that management believes complement and diversify further the Company's
overall marketing strategy:
Marketing Through VARs. The Company's marketing efforts are diversified
further through the integration of its transaction processing services with
the specialized business management software of a growing number of VARs. VARs
perform a marketing function for the Company since their software often is
offered on a fully-integrated basis with the Company's transaction processing
services, creating additional opportunities for the Company to reach small- to
medium-sized merchants. See "Business--Technology--Software Development for
POS terminals and PCs."
Procurement and Purchasing Cards. Corporate procurement and purchasing cards
are growing in popularity and flexibility of use, and the Company is exploring
opportunities intended to take advantage of this emergence. Procurement and
purchasing cards, although very similar in most respects to bank and charge
cards, are tailored to a specific business and functionality. Purchasing cards
may be used, for example, to replace the traditional use of paper-based
purchase orders, confirmations and invoices with electronically authorized,
processed and recorded transactions. Another illustrative use of a purchasing
card is an insurance company that issues purchasing cards to its policy
holders for the purchase by such policy holders of medical supplies,
prescriptions and services from certain health care providers, all of whom
have agreed, in advance, to accept the insurance company's purchasing cards.
The Company periodically reviews its marketing efforts and distribution
channels to minimize channel conflict. Although channel conflict among bank
alliances, ISO partnering and direct sales marketing may occur, to date the
Company has not experienced any significant conflict while pursuing its
overall sales strategy.
38
<PAGE>
ACQUISITION STRATEGY
The transaction processing industry has undergone rapid consolidation over
the last several years. The costs to convert from paper-based to electronic
processing, merchant requirements for improved customer service, and the
demands for additional customer applications have made it difficult for
community and regional banks and ISOs to remain competitive. Many of these
providers are unwilling or unable to invest the capital required to meet these
demands, and increasingly are exiting the transaction processing business or
otherwise seeking alliance partners to provide transaction processing for
their customers.
Since inception, the Company has pursued an active acquisition strategy,
including the formation of joint ventures and bank alliances, and has
consummated 90 transactions since its inception in 1991, consisting of 84
merchant portfolio purchases, three operating business acquisitions, two joint
ventures and the First Union Alliance. In 1996, the Company consummated 13
transactions, which added approximately $317.2 million in annualized
processing volume. Since January 1997, the Company has consummated 20
transactions, anticipated to add $11.7 billion in annualized processing
volume.
The Company intends to continue to pursue purchases of merchant portfolios
and the formation of joint ventures and alliances with other financial
institutions as a principal component of its growth strategy in order to
facilitate growth, expand the Company's distribution channels and achieve
greater economies of scale. This strategy focuses on the merchant portfolios
and related assets of banks and ISOs that no longer desire or are unable to
provide efficient and cost-effective transaction processing services. The
Company attempts to structure its acquisitions, joint ventures and alliances
both to increase its merchant base and to expand its distribution and
marketing capabilities. The Company accomplishes this objective principally by
entering into an exclusive marketing agreement with a bank that sells its
merchant portfolio to, or enters into a joint venture or alliance with, the
Company. The exclusive marketing agreement typically provides that the bank
will refer to the Company, on an exclusive basis and for a period of up to ten
years, any merchants that request or otherwise inquire about transaction
processing services. This agreement generally also provides that the bank will
not compete with the Company in the provision of transaction processing
services during the term of the agreement and, in some cases, for a period of
up to two years after expiration of the agreement. In addition, the Company or
the joint venture may continue to maintain on-site transaction processing
salespersons to service existing merchant customers and to market and sell the
Company's processing services to new merchant customers, often allowing the
Company to effect a nondisruptive transition of services from the merchants'
perspective. These purchases, joint ventures and alliances offer banks the
opportunity to transfer management and operational responsibility for their
merchant portfolios to the Company or the joint venture, while continuing to
offer transaction processing services on a co-branded basis in cooperation
with the Company. Banks are therefore able to view the purchase of their
merchant portfolio or the joint venture as a way to maintain a full-service
relationship with their merchant depositors.
The Company continues to evaluate potential purchases of merchant
portfolios, joint ventures and alliances and to negotiate with several third
parties that may be seeking purchasers of their merchant portfolios although
except as described in this Prospectus the Company currently is not a party to
any agreements or understandings with respect to any such material purchases.
In addition, each of the First Union Alliance and the Crestar marketing
relationship may create additional purchase opportunities for the Company, as
the Company and each of First Union and Crestar Bank have agreed that the
Company generally may, at its option and subject to agreement on price and
other terms, purchase from First Union or Crestar Bank any merchant portfolios
purchased by First Union or Crestar Bank through whole-bank or other
acquisitions. In November 1997, First Union announced that it had entered into
an agreement to acquire CoreStates Financial Corp ("CoreStates"), which has an
estimated $3.0 billion merchant transaction processing portfolio. In the event
this acquisition is consummated, the Company will consider entering into
negotiations with First Union to acquire the CoreStates transaction processing
portfolio. There can be no assurance that First Union will complete its
acquisition of CoreStates or, if completed, that the Company could purchase
the CoreStates transaction processing portfolio on terms acceptable to the
Company, if at all. There can be no assurances as to the timing of such
transactions.
39
<PAGE>
Further, there can be no assurance that the First Union Alliance or the
Crestar marketing relationship will provide any other acquisition
opportunities or that any such acquisition opportunities can be completed on
terms favorable to the Company, if at all.
RISK MANAGEMENT
The Company views its risk management and fraud avoidance practices as
integral to its operations and overall success because of the Company's
potential liability for merchant fraud, chargebacks and other losses. Risk
management and fraud avoidance occur initially at the application stage, when
merchant applications are reviewed by the Company against certain criteria to
determine acceptance or denial. The criteria used by the Company to determine
whether to accept or deny applications, and the rate structure charged to a
particular merchant, include the credit history of the applicant, the industry
in which the applicant conducts its business and various other relevant
factors. In certain instances, guarantees may be required before an
application is approved.
The Company's principal advantage in its risk management and fraud avoidance
capabilities is the ability to run its proprietary fraud detection software
program against each transaction electronically processed on the NOVA Network
before funds are transferred to the merchant in payment for such transaction.
This ability is critical to the Company's overall program to control fraud and
manage risk and is an example of the Company's strategy of leveraging
available technologies, and the NOVA Network, to competitive advantage.
Specifically, the NOVA Network allows the Company to send a file comprised of
the day's transaction activity to its operations center in Knoxville,
Tennessee at or prior to the time it sends that information to Vital
Processing Services or Mellon Bank for merchant accounting. In Knoxville, the
Company runs its proprietary rule-based fraud detection software program
against each of the day's transactions processed on the NOVA Network,
resulting in a computer-generated identification of potentially fraudulent
activity. Once identified, the Company analyzes and reviews the suspect
transactions to resolve potential problems. This can be accomplished before
funds are transferred to the merchant in payment for such transactions. If the
Company needs more time to review a transaction or series of transactions,
however, the Company can specify that the batches containing the identified
transactions be withheld from further processing to allow additional time to
attempt to verify the authenticity of such transactions. The NOVA Network also
allows the Company to review certain types of transactions on a real time
basis, as they are processed. Consequently, the Company has the ability to
intercept and review potentially fraudulent transactions and stop payment or
otherwise resolve them, as appropriate, prior to the time when financial
liability for such transactions has shifted to the Company. Despite the
Company's risk management and fraud avoidance capabilities, the Company is
unable to identify all fraudulent transactions resulting in financial exposure
to the Company. Further, until the Company converts each newly acquired
merchant account to the Company's merchant accounting processors, the Company
is unable to apply fully its risk management and fraud avoidance practices to
such merchant accounts.
In connection with portfolio purchases, the Company reviews any merchant
portfolio that it proposes to purchase. The review process includes analyzing
the composition of the portfolio, applying uniform standards and underwriting
guidelines developed by the Company to the portfolio and identifying any high-
risk merchants contained in the portfolio. Upon completion of this review, the
Company determines whether the portfolio meets the Company's standards and
guidelines and is otherwise a suitable acquisition target. If the Company
decides to proceed with the proposed purchase, the Company will focus on the
high-risk merchants identified by its review and attempt to manage the risk
associated with such merchants. Typically, the Company will seek to exclude
high-risk merchants from the portfolio purchase, require the seller of the
merchant portfolio to establish a reserve account or require the seller of the
merchant portfolio to indemnify the Company for any liability associated with
such merchants. The experience accumulated by the Company during the course of
its purchases is constantly drawn upon to refine the Company's due diligence
procedures and practices, and management expects to continue to improve its
due diligence efforts. Nevertheless, there can be no assurance that the
Company's due diligence process will consistently identify all high-risk
merchants or that the Company will otherwise assess properly the risk
attributes of any purchased portfolio.
40
<PAGE>
MERCHANT ACCOUNTING AND CLEARING BANK RELATIONSHIPS
The Company relies upon third parties to provide merchant accounting and
clearing bank services to the Company and its merchant customers. In each of
these instances, the Company has engaged multiple providers to safeguard
against the loss of services or quality of any one of these providers.
Merchant Accounting. Merchant accounting services consist of reorganizing
and accumulating daily transaction data on a merchant-by-merchant and card
issuer-by-card issuer basis, and forwarding this data to the credit card
associations for ultimate payment. These functions are performed on the
Company's behalf by each of Vital Processing Services and Mellon Bank under
agreements expiring April 30, 1999 and June 30, 1999, respectively. The
Company currently is negotiating the terms of a new agreement with Vital
Processing Services.
Clearing Bank Arrangements. The Company's clearing banks receive payment for
merchant transactions from credit card associations (net of fees payable to
the credit card associations and card issuing banks), from which the clearing
banks remit payment to the merchant for the gross amount of the merchant's
transactions. Once each month, the Company collects applicable merchant
discount and other fees from each merchant for transactions effected and
services provided during the preceding month. The Company, along with all
other nonbank transaction processors that process VISA and MasterCard
transactions, must be sponsored by a financial institution that is a principal
member of the VISA and MasterCard credit card associations in order to process
these bankcard transactions. Through each of Regions Bank, Bank of the West,
Mellon Bank, Firstar, KeyBank and FUNB, which serve as member clearing banks
for the Company, the Company is registered with VISA and MasterCard as a
certified processor and member service provider. While the Company's
registration as a certified processor and member service provider is necessary
in order for the Company to process VISA and MasterCard transactions,
management believes that the revocation of such registrations is unlikely and
inconsistent to the objectives of both the credit card associations and the
clearing banks because of the adverse effect such action would have on the
continuity of credit card acceptance.
Regions Bank and Mellon Bank clear most of the Company's transactions while
Bank of the West clears only those transactions originating from merchants
acquired by the Company as part of the October 1993 purchase of the merchant
portfolio of Bank of the West. Pursuant to the First Union Alliance, FUNB, a
subsidiary of First Union, acts as the exclusive clearing and settlement bank,
subject to certain exceptions and conditions, for merchant customers of First
Union. While the Company's Depositary and Settlement Agreement with First
Union does contain certain conditions relative to the Company's ability to
transfer clearing and settlement functions for the merchant customers of First
Union away from First Union, the Company's agreements with its principal
member clearing banks generally provide that the merchant relationship is
controlled by the Company. Accordingly, the Company generally is not obligated
to continue to utilize the clearing services of these banks, and may transfer
the clearing functions to another principal member clearing bank (i.e., any
member of the VISA and MasterCard associations), although there can be no
assurance that the Company would be able to find a financial institution to
sponsor it on terms acceptable to the Company. See "Certain Relationships and
Related Transactions--Transactions Related to the First Union Alliance."
Effective May 1, 1997, MasterCard approved changes to its Member Service
Provider ("MSP") rules to, among other things, differentiate between ISOs
which perform merchant and cardholder services and third party processors
("TPPs"), such as the Company, which provide transaction processing services.
The new MSP rules implement a Processor Certification Program requiring the
Company and other TPPs to register as a TPP with MasterCard. The Company has
filed its registration as a "Type I" TPP. Type I TPPs must satisfy certain
criteria including requirements as to the number of merchant accounts
serviced, processing volume and concentration of risk. All Type I TPPs must
undergo annual reviews by MasterCard, including a review of processing
performance, authorization host availability, authorization response time and
call referral merchant response. Type I TPPs also must be financially sound
and maintain adequate financial resources. The Company believes that it meets
or exceeds all of the criteria to qualify as a Type I TPP. The failure by the
Company to qualify as a Type I TPP, or to maintain its status as a Type I TPP,
could have a material adverse effect on the business or operations of the
Company.
41
<PAGE>
CUSTOMER SERVICE AND SUPPORT
The Company is dedicated to providing reliable and effective customer
service and support to its merchant customers. The information access and
retrieval capabilities of networked systems, where real-time information is
available to any of the Company's customer service representatives, allow the
Company to provide a level of customer service and support to small- to
medium-sized merchants historically available only to much larger merchants.
For example, any of the Company's customer service representatives may access,
on a real-time basis, all of the relevant information pertaining to any
particular merchant that may call and ask for assistance. The Company also has
implemented an on-line, informational database that provides the Company's
customer service representatives user-friendly access to an array of
additional information relative to the Company's services, products and
systems, which often allows the Company to more quickly and effectively
resolve customer service inquiries.
The Company maintains a 24-hours-a-day, seven-days-a-week helpline at its
operations center in Knoxville, Tennessee. The Company measures the efficiency
of its customer service through certain quantitative data such as the number
of rings prior to operator pick-up, the number of abandoned calls, the number
of calls per day and the number of calls per customer service representative.
The Company has developed comprehensive programs and procedures for training
its approximately 90 full-time customer service representatives to assist the
Company's merchant clients in a timely and efficient manner with any problems,
issues or concerns they may have. Management is dedicated to providing
outstanding customer service and support and continually reviews its policies
and procedures in an effort to improve these services.
PROPRIETARY RIGHTS
The Company has developed proprietary software for use in four principal
areas: (i) applications for POS terminals and PCs; (ii) transaction switching;
(iii) the NOVA Network; and (iv) customer service and chargebacks. The Company
regards its proprietary software as protected by trade secret and copyright
laws of general applicability. The Company attempts to safeguard its software
through the protection afforded by the above-referenced laws, employee and
third-party non-disclosure agreements, licensing agreements and other methods
of protection. Despite these precautions, it may be possible for unauthorized
third parties to copy, obtain or reverse engineer certain portions of the
Company's software or to otherwise obtain or use other information the Company
regards as proprietary. While the Company's competitive position may be
affected by its ability to protect its software and other proprietary
information, management believes that the protection afforded by trade secret
and copyright laws are less significant to the Company's success than other
factors such as the knowledge, ability and experience of the Company's
personnel and the continued pursuit and implementation of its operating
strategies.
As the number of software application products in the transaction processing
industry increases, and as the functionality of such products further
overlaps, third parties could assert that the Company's software application
products infringe or may infringe the proprietary rights of such entities.
These third parties may seek damages from the Company as a result of such
alleged infringement, demand that the Company license certain proprietary
rights from them or otherwise demand that the Company cease and desist from
its use and/or license of the allegedly infringing software. Although
management is not currently aware of any alleged infringement issues, any such
action, if it were to occur, may result in protracted and costly litigation or
royalty arrangements or otherwise have a material adverse effect on the
Company's financial condition and results of operations.
The Company currently licenses certain software from third parties to
supplement its internal software and technology development and to shorten
time-to-market software application product deliveries. For instance, the
Company licenses the software for NOVA Time. Management believes that it will
be necessary to continue this practice in the future, although there can be no
assurance that the Company will be able to do so on favorable terms or at all.
42
<PAGE>
The Company's trademarks include "NOVA," "NOVA Information Systems," "NOVA
ACS," "NOVA Remote ACS," "NOVA Time," "NOVA Clock," "NOVA Perks," "PC
Transact It" and "NOVA Shadow Pay". To date, however, the Company only has
sought to have "NOVA" and "NOVA Perks" registered on the federal level. The
Company's application to register "NOVA" was refused and allowed to lapse
without contesting the refusal.
COMPETITION
The market for providing credit, charge and debit card transaction services
to the small- to medium-sized merchant segment served by the Company is highly
competitive. The level of competitiveness has increased significantly since
the Company's inception and this trend is expected to continue. The Company
competes in this market segment on the basis of price, the availability of
related products and services, the quality of customer service and support,
and transaction processing speed, quality and reliability. The Company's
principal competitors in this market segment include other smaller vertically
integrated processors, community and regional banks and ISOs and,
increasingly, the ten largest bankcard processors. Several of the Company's
competitors and potential competitors have greater financial, technological,
marketing and personnel resources than the Company, and there can be no
assurance that the Company will continue to be able to compete successfully
with such entities.
According to industry sources, the ten largest bankcard processors accounted
for approximately 85% of the total charge volume processed in 1997. The
largest bankcard processor accounted for approximately 38% of the total charge
volume processed in 1997, and the Company processed approximately 4.2% of the
total charge volume for the same period after giving pro forma effect to the
Company's recent transactions discussed under "Business--Recent Transactions."
The Company believes that it has reached a sufficient size whereby economies
of scale allow it to offer competitive pricing. However, certain of the
Company's competitors may have lower costs which could potentially give them
an advantage. As a result of its experience in payment processing, the Company
has been able to develop operating efficiencies that the Company believes
allow it to competitively bid for new business. In addition, the Company has
continually made technological improvements and is thus able to respond to the
unique needs of merchants in various industries. Management believes that the
quality, speed and reliability of the NOVA Network and the breadth,
flexibility and user-friendliness of its software application products and
services constitute a competitive advantage. The Company intends to maintain
its strategy of focusing on small- to medium-sized merchants because
management believes this market segment is somewhat less price sensitive than
larger accounts.
The Company faces increasing competition from other transaction processors
for available acquisition opportunities. In addition, in recent years
community and regional banks, whose transaction processing businesses have
been the Company's primary source of acquisition opportunities, have been
undergoing extensive consolidation reflective of underlying trends in the
financial institutions industry and unrelated to their transaction processing
businesses. As a result, smaller banks that may have sought to divest
themselves of their transaction processing businesses may be acquired by banks
that compete with the Company or banks that have a relationship or alliance
with one or more competitors of the Company, thus potentially depriving the
Company of acquisition opportunities. The First Union Alliance and the Crestar
Alliance, however, may create additional acquisition opportunities for the
Company, as the Company and each of First Union and Crestar Bank have agreed
that the Company generally may, at its option and subject to agreement on
price and other terms, purchase from First Union or Crestar Bank any merchant
portfolios acquired by First Union or Crestar Bank through whole-bank or other
acquisitions. In November 1997, First Union announced that it had entered into
an agreement to acquire CoreStates, which has an estimated $3.0 billion
merchant transaction processing portfolio. In the event this acquisition is
consummated, the Company will consider entering into negotiations with First
Union to acquire the CoreStates transaction processing portfolio. There can be
no assurance that First Union will complete its acquisition of CoreStates or,
if completed, that the Company could acquire the CoreStates transaction
processing portfolio on terms acceptable to the Company, if at all. There can
be no assurances as to
43
<PAGE>
the timing of such transactions. Further, there can be no assurance that the
First Union Alliance or the Crestar Alliance will provide any other
acquisition opportunities or that any such acquisition opportunities can be
completed on terms favorable to the Company, if at all. See "Certain
Relationships and Related Transactions--Transactions Related to the First
Union Alliance."
BANKING REGULATION
As a result of First Union's ownership interest in the Company, the Company
has become subject to the Banking Laws. For example, the Company is now
subject to the supervision and examination of the Office of the Comptroller of
the Currency (the "OCC"), one of the principal banking regulatory bodies
(although management does not believe it is likely that the OCC would ever
exercise this supervisory and examination authority). In addition, the OCC
reviewed extensively the KeyBank Joint Venture, the First Union Alliance and
the Firstar Joint Venture and the terms thereof, and the OCC's written
approval was required in order to consummate those transactions. To facilitate
First Union's compliance with the Banking Laws, and to allow First Union to
obtain any required consents or approvals, the Company has agreed to notify,
and obtain approval from, First Union before the Company enters into any
business activities substantially different from the business activities the
Company currently conducts. Pursuant to the KeyBank Joint Venture and the
Firstar Joint Venture and to the extent required by the Banking Laws, the
Company may be required to take certain measures in the event either the
Company or the limited liability companies formed pursuant to the transactions
enters into or acquires any other entity which is engaged in a business that
is substantially different from the business activities the Company, or the
limited liability companies, currently conduct. Such measures may include
applying for any required regulatory consents, or assisting either KeyBank,
Firstar, or the limited liability companies, as the case may be, to prepare
such applications. If the required consents and approvals are not received,
the Company may not engage in the new business activity. See "Risk Factors--
Banking and Territorial Restrictions" and "Certain Relationships and Related
Transactions--Transactions Related to the First Union Alliance."
EMPLOYEES
At March 19, 1998, the Company had 614 full-time employees, of which 227
were in sales and marketing, 293 were in operations and 94 were corporate and
general administrative employees. Of these employees, 212 were based in
Atlanta, Georgia at the Company's principal executive offices, 221 were based
in Knoxville, Tennessee at the Company's operations center, seven were based
in Arvada, Colorado, and ten were based in Jacksonville, Florida in connection
with the First Union Alliance. The Company's 227 sales and marketing employees
include 164 salespersons located throughout the United States, of whom 53 were
based at branches of banks with which the Company has formed Acquisition
Alliances. None of the Company's employees are represented by a collective
bargaining agreement nor has the Company ever experienced any work stoppage.
Management believes that the Company's relationship with its employees is
good.
PROPERTIES
The Company's principal executive offices are located in Atlanta, Georgia
and consist of approximately 38,000 square feet that are leased pursuant to an
agreement scheduled to expire in 2001. The Company relocated its principal
executive offices in October 1996 to allow for the Company's continued growth.
In connection with this relocation, the Company transferred certain of its
operational functions, including the conversion management functions, from
Knoxville, Tennessee and Boulder, Colorado to Atlanta. The Company's
operations center is located in Knoxville, Tennessee and consists of
approximately 26,000 square feet. This facility is leased pursuant to a
sublease agreement scheduled to expire in 2003. The Company leases an
additional 9,000 square feet adjacent to the operations center which houses
files and deployment and programming functions. Certain of the Company's
operations are conducted in facilities located in Jacksonville, Florida and
Arvada, Colorado consisting of approximately 9,360 and 3,040 square feet of
space, respectively. The Jacksonville space is being leased pursuant to an
agreement scheduled to expire in 1998. The Arvada space is leased on a month
to month basis. Certain of the Company's employees also occupy other office
facilities at various locations under leases and various other agreements,
which require aggregate payments that are not material.
44
<PAGE>
In March 1998, NOVA Services Limited Partnership, a wholly-owned subsidiary
of the Company, purchased a 112,000 square-foot building in Knoxville,
Tennessee for $2.7 million. Prior to the Company's purchase of the property,
the facility was a retail shopping center. The Company intends to relocate its
current Knoxville operations center to approximately 84,000 square feet of
space in the newly acquired facility. The remaining 28,000 square feet will be
reserved for future expansion or sub-lease to third parties. The conversion of
the new facility into office space and the relocation to the new facility are
scheduled to be completed in the third quarter of 1998. The deployment and
programming functions will be relocated from the adjacent facilities to the
former operations center facility, and the adjacent facilities will be
reserved for future expansion or sub-lease to third parties.
LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation in the normal
course of its business. While management is aware of and dealing with certain
pending or threatened litigation, management does not believe such matters
will have a material adverse effect on the financial condition of the Company.
45
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edward Grzedzinski......... 43 Director, Chairman of the Board, President and
Chief Executive Officer
James M. Bahin............. 53 Director, Vice Chairman of the Board, Chief
Financial Officer and Secretary
Pamela A. Joseph........... 39 Executive Vice President and Chief Information
Officer
John M. Perry.............. 41 Executive Vice President--Sales and Marketing
Rebecca L. Powell.......... 45 Executive Vice President--Merchant Services and
Operations
Charles T. Cannada(1)...... 39 Director
Dr. James E. Carnes(1)..... 58 Director
U. Bertram Ellis(1)(2)..... 44 Director
Dr. Henry Kressel(2)....... 64 Director
Joseph P. Landy............ 36 Director
Maurice F. Terbrueggen, 52 Director
Jr........................
</TABLE>
- - - --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Grzedzinski has served with the Company or its predecessor since
February 1991, most recently as a director, Chairman of the Board, President
and Chief Executive Officer. He co-founded the Company's subsidiary and
predecessor, NOVA Information Systems, Inc., as its Chief Operating Officer in
1991 and was named Chief Executive Officer in September 1995. From October
1990 to February 1991, Mr. Grzedzinski served as an officer of Phoenix
Consulting Group, Inc., a transaction processing consulting company.
Mr. Grzedzinski has over 12 years experience in the bankcard industry.
Mr. Bahin has served with the Company or its predecessor since January 1992,
most recently as a director, Vice Chairman of the Board, Chief Financial
Officer and Secretary. Prior to joining the Company, Mr. Bahin served in
various officer capacities with Fuqua Industries, Inc., a diversified
manufacturing and service company, most recently as Senior Vice President of
Operations. Mr. Bahin has over 25 years of financial and management
experience.
Ms. Joseph has served with the Company or its predecessor since July 1994,
most recently as Executive Vice President and Chief Information Officer. Prior
to joining the Company, Ms. Joseph served for over two years as Director, New
Market Development, for VISA and for eight years in various management
positions at Wells Fargo Bank.
Mr. Perry joined the Company in April 1996 as Executive Vice President,
Sales and Marketing. Before coming to the Company, he served as Executive Vice
President and Chief Operating Officer of First Data Corporation's Client
Merchant Services Division. For over seven years prior to that, he held
various executive level management, sales and marketing positions with Card
Establishment Services, Harbridge Merchant Services, VISA USA and Wells Fargo
Bank. From 1980 to 1988, Mr. Perry served in the United States Army finishing
his career as a captain.
Ms. Powell has served with the Company or its predecessor since February
1991, most recently as Executive Vice President, Merchant Services and
Operations. Prior to joining the Company, Ms. Powell served for 20 years in
various management positions with National Data Corporation.
46
<PAGE>
Mr. Cannada has served as a director with the Company or its predecessor
since January 1995. Mr. Cannada has served with WorldCom, a publicly-held
long-distance telecommunications firm, since October 1989, most recently as
Senior Vice President.
Dr. Carnes has served as a director of the Company since November 1997. Dr.
Carnes is the President and Chief Executive Officer of Sarnoff Corporation, a
contract research and development company in the electronics and information
technology industry, and has held this position since 1990. He has served with
Sarnoff Corporation, and its predecessor, since 1969.
Mr. Ellis has served as a director of the Company since October 1996. Mr.
Ellis is the Chairman and Chief Executive Officer of IXL Holdings, Inc., the
parent company of iXL, Inc., a full-service provider of interactive
communication services, and has held this position since April 1996. Prior to
joining IXL Holdings, Mr. Ellis founded and served as the President and Chief
Executive Officer of Ellis Communications, a privately-held owner and operator
of television and radio stations, from 1993 to 1996. Prior to founding Ellis
Communications, Mr. Ellis served from 1986 to 1992 in the capacities of
President, Chief Executive Officer and Chief Operating Officer of Act III
Broadcasting, a television broadcast group. From 1992 to 1993, Mr. Ellis
served as the Chief Executive Officer of American Innovations, Inc., which
filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in
1993. Mr. Ellis is a director of OrthAlliance, a publicly-held provider of
orthodontic practice management services.
Dr. Kressel has served as a director of the Company or its predecessor since
November 1991. Dr. Kressel has served with E. M. Warburg, Pincus & Co., LLC,
an investment firm, since 1983, most recently as Managing Director. Dr.
Kressel serves as a director of Level One Communications, Inc. and Zilog,
Inc., each a publicly-held semi-conductor company, Maxis Inc., a publicly-held
software development company, TresCom International, Inc., a publicly-held
long-distance telephone company, IA Corporation, a publicly-held software
development company, and other privately held companies.
Mr. Landy has served as a director of the Company or its predecessor since
August 1994. Mr. Landy has served with E. M. Warburg, Pincus & Co., LLC, an
investment firm, since 1985, most recently as Managing Director. Mr. Landy
serves as a director of Level One Communications, Inc., a publicly-held semi-
conductor company, CN Biosciences, Inc., a publicly-held manufacturer of
specialty chemical reagents and pharmaceutical raw materials, Indus
International, a publicly-held developer of enterprise-wide maintenance
software systems and several privately held companies.
Mr. Terbrueggen has served as a director of the Company or its predecessor
since January 1996. Mr. Terbrueggen has served with First Union Corporation, a
bank holding company, since July 1973, most recently as Senior Vice President
and Division Manager of the First Union merchant acquiring business.
Mr. Terbrueggen has over 27 years of management experience in the financial
services industry, including over 22 years in the bankcard industry.
The Company's Articles of Incorporation provide that the Board of Directors
will consist of not less than seven persons, with all directors to be elected
by the holders of shares of the Company's Voting Stock, as defined below, at
the annual meeting of shareholders. Such directors shall serve until the
election of their successors at the next annual meeting of shareholders. The
Company's Articles of Incorporation authorize cumulative voting by holders of
the Company's Common Stock in the election of the Company's directors. The
Company's Articles of Incorporation further provide that no bylaw, resolution,
written consent or amendment to the Articles of Incorporation purporting to
create a classified or "staggered" Board of Directors or requiring prior
notice or qualification of members for director shall be effective.
47
<PAGE>
No family relationship exists among any of the directors and executive
officers of the Company.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The functions of the Audit Committee include recommending to the
Board of Directors the retention of independent public auditors, reviewing the
scope of the annual audit undertaken by the Company's independent public
auditors and the progress and results of their work, and reviewing the
financial statements of the Company and its internal accounting and auditing
procedures. The functions of the Compensation Committee include reviewing and
approving executive compensation policies and practices, reviewing salaries
and bonuses for certain officers of the Company, administering the Company's
1991 Stock Option Plan and 1996 Stock Incentive Plan, and considering other
matters referred to the Committee by the Board. The Compensation Committee has
full power to take any actions required or permitted to be taken under such
plans.
EXECUTIVE COMPENSATION
The following table summarizes the compensation awarded or paid for the
fiscal years ended December 31, 1996 and 1997 to the Company's Chief Executive
officer and the four other most highly compensated executive officers whose
total annual salary and bonus for the fiscal year ended December 31, 1997
exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- -------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) OPTIONS(#)(4) COMPENSATION
- - - ------------------ ---- --------- -------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edward Grzedzinski 1997 $298,077 $156,000 $-- 50,000 $--
Chairman, President and 1996 249,519 125,000 190 -- --
Chief Executive Officer
James M. Bahin 1997 $226,154 $116,480 $-- 50,000 --
Vice Chairman, Chief
Financial 1996 200,000 102,000 -- -- --
Officer and Secretary
Pamela A. Joseph 1997 $127,116 $43,750 $-- 50,000 $--
Executive Vice Presi-
dent and 1996 100,231 34,500 17 16,500 5,126(5)
Chief Information Offi-
cer
John M. Perry 1997 $202,308 $104,000 $-- 75,000 $--
Executive Vice Presi-
dent, 1996 121,154 90,000 -- 79,500 84,915(6)
Sales and Marketing
Rebecca L. Powell 1997 $110,192 $38,500 $-- 50,000 $--
Executive Vice Presi-
dent, 1996 95,000 25,000 337 15,500 8,214(7)
Merchant Services and
Operations
</TABLE>
- - - --------
(1) Amounts shown include cash compensation earned and received by the Named
Executive Officer as well as amounts earned but deferred at the election
of the officer pursuant to the NOVA Information Systems 401(k) and Profit
Sharing Plan.
(2) Amounts shown include bonus compensation attributable to the year shown,
although in certain cases such amounts are to be paid in the following
year.
(3) Represents employer matching contributions to the Named Executive
Officer's account pursuant to the NOVA Information Systems 401(k) and
Profit Sharing Plan. The matching contribution for 1997 has not yet been
determined.
(4) Represents employee stock options granted to the Named Executive Officer
for the fiscal years ended December 31, 1996 and 1997. The Company has not
issued any stock appreciation rights.
(5) Represents the reimbursement of additional income taxes attributable to
the relocation of Ms. Joseph to Atlanta, Georgia in connection with Ms.
Joseph's joining the Company in 1994.
(6) Represents reimbursed expenses attributable to the relocation of Mr. Perry
to Atlanta, Georgia in connection with Mr. Perry's joining the Company in
1996.
(7) Represents reimbursed expenses attributable to the relocation of Ms.
Powell from Knoxville, Tennessee to Atlanta, Georgia, including the
reimbursement of additional income taxes attributable to the relocation.
48
<PAGE>
EMPLOYMENT AGREEMENTS
Messrs. Grzedzinski, Bahin and Perry each has entered into a written
employment agreement with NOVA Information Systems dated October 21, 1995
(with respect to Messrs. Grzedzinski and Bahin) and April 4, 1997 (with
respect to Mr. Perry) (collectively, the "Employment Agreements"). Pursuant to
the Employment Agreements, Mr. Grzedzinski is employed by NOVA Information
Systems as President and Chief Executive Officer and serves as Chairman of the
Board of Directors of NOVA Information Systems; Mr. Bahin is employed by NOVA
Information Systems as Chief Financial Officer and serves as Vice Chairman of
the Board of Directors of NOVA Information Systems; and Mr. Perry is employed
by NOVA Information Systems as Executive Vice President, Sales and Marketing.
Currently, Messrs. Grzedzinski, Bahin and Perry receive an annual base salary
of $354,000, $257,600, and $230,000, respectively, as may be adjusted from
time to time by the Board of Directors (with respect to Messrs. Grzedzinski
and Bahin) and the Chief Executive Officer (with respect to Mr. Perry). In
addition, Messrs. Grzedzinski, Bahin and Perry each has the opportunity to
earn a percentage of his base salary as a cash bonus tied to the performance
of NOVA Information Systems. The Employment Agreements provide that each
employee is entitled to participate in all of NOVA Information Systems'
employee benefit plans and programs, including any stock option plans adopted
by the Board of Directors of NOVA Information Systems. Each of the Employment
Agreements is for an initial two-year term and automatically renews for
successive two-year terms unless either party provides written notice to the
other party at least 180 days before renewal.
Upon termination of employment other than as a result of the Termination
Exclusions, as defined below, each of the Employment Agreements provides for
cash severance compensation equal to two times the employee's annual base
salary to be paid in 24 equal monthly payments. In addition, stock options
granted to the employee as of the effective date of the Employment Agreement
will become vested and immediately exercisable. Such severance compensation is
triggered by, among other things, the occurrence of a "change in control" (as
defined in the Employment Agreements), a material diminution in the employee's
duties and responsibilities, or the failure of NOVA Information Systems to
automatically renew the Employment Agreement. The Termination Exclusions
consist of termination for cause, nonrenewal by the employee of his respective
Employment Agreement, or voluntary termination of employment by the employee.
In return for such severance compensation, Messrs. Grzedzinski, Bahin and
Perry each has agreed, for a period of two years after termination of
employment, (i) not to use or disclose any confidential information of NOVA
Information Systems, (ii) not to solicit the customers or employees of NOVA
Information Systems, and (iii) not to become employed by, or to have a
financial interest in, any other business which will compete with NOVA
Information Systems in providing credit card and debit card transaction
processing services within the United States. In the event that the employment
of Messrs. Grzedzinski, Bahin or Perry terminates as a result of one of the
Termination Exclusions, NOVA Information Systems has the option of requiring
the employee to comply with the non-disclosure and non-competition provisions
of his Employment Agreement for a period of either one year or two years, upon
payment of an amount equal to one year's base salary or two years' base
salary, respectively.
Ms. Powell entered into a written employment agreement with NOVA Information
Systems effective November 1, 1991. Pursuant to the terms of the agreement,
Ms. Powell receives an annual base salary (currently $143,000) and has the
opportunity to earn a percentage of her base salary as a cash bonus. The
agreement provides that Ms. Powell may participate in all NOVA Information
Systems employee benefit plans and programs, including any stock option or
incentive stock plans adopted by the Board of Directors of NOVA Information
Systems. The term of the agreement extends until Ms. Powell either terminates
her employment or enters into a new employment agreement with NOVA Information
Systems. The agreement provides for termination in the event of death,
disability or retirement. The agreement also may be terminated voluntarily by
Ms. Powell or by the Company, with or without cause, and provides for, under
certain circumstances, the payment of compensation equal to up to three months
of Ms. Powell's base salary. In addition to the foregoing, in the event that
Ms. Powell is terminated without cause, she is entitled to a severance payment
equal to one week's salary multiplied by the number of full years of service
she has completed at the time of termination. Ms. Powell has agreed, during
the term of her employment and for up to six months after termination of
employment, (i) not to become engaged in any business competitive to that of
the Company, (ii) not to solicit the customers or employees of the Company,
and (iii) not to use or disclose any confidential information of the Company.
49
<PAGE>
Ms. Joseph does not presently have a written employment agreement with NOVA
Information Systems, although the Company anticipates that such an agreement
will be executed in the second quarter of 1998. Her current base salary is
$156,250.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table summarizes (i) the aggregate number of options exercised
by the Named Executive Officers during the year ended December 31, 1997, and
(ii) the aggregate number and value of options held by the Named Executive
Officers at December 31, 1997. The Company has not issued any stock
appreciation rights.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
VALUE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES (MARKET PRICE AT OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
ACQUIRED ON EXERCISE LESS -------------------------------- -------------------------
NAME EXERCISE(#) EXERCISE PRICE)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------------ -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward Grzedzinski...... -0- -0- 133,300 226,031 3,175,206 4,761,808
James M. Bahin.......... -0- -0- 140,979 224,593 3,358,120 4,727,555
Pamela A. Joseph........ 13,000 224,885 35,594 97,355 774,592 1,476,974
John M. Perry........... -0- -0- 19,875 134,625 119,531 1,211,719
Rebecca L. Powell....... 17,236 383,422 750 79,197 4,688 1,057,628
</TABLE>
- - - --------
(1) Calculated based upon the closing sale price per share of the Common Stock
of $25.00 on the New York Stock Exchange on December 31, 1997.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Options were granted to each of the Named Executive Officers during the
fiscal year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- - - -------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES BASE PRICE -----------------------
NAME GRANTED(#)($) IN FISCAL YEAR(2) ($/SH)(3) EXPIRATION DATE 5%($) 10%($)
---- ------------- ------------------ ----------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edward Grzedzinski...... 50,000 9.92% $13.625 3/18/2007 $428,434 $1,085,737
James M. Bahin.......... 50,000 9.92% 13.625 3/18/2007 428,434 1,085,737
Pamela A. Joseph........ 50,000 9.92% 13.625 3/18/2007 428,434 1,085,737
John M. Perry........... 75,000 14.88% 13.625 3/18/2007 642,652 1,628,600
Rebecca L. Powell....... 50,000 9.92% 13.625 3/18/2007 428,434 1,085,737
</TABLE>
- - - --------
(1) These options were granted to the 1996 Option Plan "at market" on the date
of grant and first become exercisable on the first anniversary of the
grant date, with 25% of the underlying shares becoming exercisable at that
time, an additional 25% of the option shares becoming exercisable on each
successive anniversary date, and full vesting on the fourth anniversary
date. Under the terms of the 1996 Option Plan, the Compensation Committee
retains discretion, subject to plan limits, to modify the terms of
outstanding options and to reprice the options.
(2) Represents the percentage of total options granted to all employees in
1997.
(3) The exercise price and tax withholding obligations, related to exercise,
may be paid by delivery of already owned shares or by offset of the
underlying shares, subject to certain conditions.
50
<PAGE>
DIRECTOR COMPENSATION
Directors of the Company, other than employees of the Company (or its
subsidiaries) and director nominees of Warburg, First Union and WorldCom,
Inc., receive a retainer of $2,000 per month for service as a director.
Additionally, such directors are entitled to receive $1,000 for attendance and
participation at each Board of Directors meeting, and $500 for attendance and
participation in each committee meeting if such committee meeting is not held
on the same day as a Board of Directors meeting. Directors receive
reimbursement for their expenses incurred in connection with travel to and
from a meeting.
The NOVA Corporation 1996 Directors Stock Option Plan (the "Directors Plan")
provides for stock options to be granted to outside directors of the Company
other than the director nominees of Warburg, First Union and WorldCom, Inc.,
as partial compensation for their service on the Board. The number of options
to be granted to each such director is determined as follows: (i) upon an
eligible director's initial election to the Board, an option to purchase 2,000
shares of Common Stock; and (ii) upon beginning any term of service as a
director, an option to purchase a number of shares equal to a fraction, the
numerator of which is 2,000 multiplied by the number of full or partial months
to be served in such term, and the denominator of which shall be 12. Pursuant
to the Directors Plan, the Company granted to each of Mr. Ellis and Dr. Carnes
options to purchase 3,000 shares of Common Stock upon becoming a director. The
Board of Directors administers the Directors Plan subject to certain
limitations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH WORLDCOM
On February 28, 1996, the Company and WorldCom entered into an Agreement
(the "WorldCom Agreement"), effective as of March 1, 1996, pursuant to which
WorldCom provides long-distance and local telecommunications access, as well
as technical support, to the Company in connection with the NOVA Network. The
WorldCom Agreement expires February 28, 1999, subject to earlier termination
by the Company if WorldCom fails to meet certain agreed-upon performance
obligations. The Company paid WorldCom an aggregate of $606,000, $901,000,
$1.2 million, $1.8 million and $2.7 million during the fiscal years ended
February 28, 1994 and 1995, the ten-month period ended December 31, 1995 and
the years ended December 31, 1996 and 1997, respectively, for these services.
TRANSACTIONS RELATED TO THE FIRST UNION ALLIANCE
The First Union Alliance, which was effective December 1, 1995, represented
approximately $4.6 billion in annualized credit card charge volume during
1995. Pursuant to the First Union Alliance, First Union contributed its
transaction processing assets (the "First Union Assets"), including the
transaction processing assets of First Fidelity Bancorporation and its banking
subsidiaries (which merged with and into First Union effective January 1,
1996), to the Company. Concurrently, the then current shareholders of the
Company's predecessor (the "Original Shareholders"), contributed to the
Company all of the shares of capital stock of the Company's predecessor owned
by them, together with all of their rights to acquire shares of capital stock
of the Company's predecessor causing the Company's predecessor to become a
wholly-owned subsidiary of the Company. In exchange for their respective
contributions to the Company, First Union received 9,149,209 shares of the
Company's Common Stock, while the Original Shareholders collectively received
an aggregate of 2,228,911 shares of the Company Common Stock, together with
the right to acquire (through the exercise of options and the conversion of
Preferred Stock) an aggregate of 14,762,487 shares of Common Stock.
The Company reimbursed First Union for all taxes which First Union paid on
revenues generated by the First Union Assets between December 1, 1995 and
January 31, 1996. First Union, on behalf of and as requested by the Company,
agreed to continue to service the First Union Assets until such time as the
conversion and integration of the First Union Assets was complete, for which
the Company agreed to reimburse First Union for certain specified expenses. In
1996, the Company paid First Union an aggregate of approximately $9.5 million
for such expenses. The Company completed the conversion of the First Union
Assets to the NOVA Network in September 1996 and has reimbursed First Union
for all amounts owed in connection therewith.
51
<PAGE>
In connection with the First Union Alliance, First Union also agreed, until
January 31, 2003 and subject to certain specified exceptions and conditions,
not to solicit, contract or generally do business with merchants or ISOs with
whom the Company has a contractual relationship.
The Marketing Support Agreement. In connection with the First Union
Alliance, the Company and First Union entered into a Marketing Support
Agreement which provides, subject to certain exceptions, that the bank
affiliates of First Union, together with and through each of the more than
2,000 First Union branches, shall actively market the Company's transaction
processing services to merchants and shall refer merchants that request
transaction processing services exclusively to the Company. The marketing
services and assistance provided by the bank affiliates of First Union include
the distribution by each bank affiliate of First Union of promotional and
informational materials and supplies relating to the Company's transaction
processing services, and such other services and assistance as may mutually be
agreed upon by First Union and the Company. The Marketing Support Agreement
also provides that the Company will, when feasible, assist First Union in
developing new products or services relating to transaction processing or in
otherwise supporting new business ventures. The Marketing Support Agreement
also generally provides that the Company may not, without the prior consent of
First Union, enter into certain marketing agreements with third parties
generally located in specified areas where First Union currently maintains a
significant banking presence. The Marketing Support Agreement expires January
31, 2003.
The Depositary and Settlement Agreement. The Company and First Union also
entered into a Depositary and Settlement Agreement under which a subsidiary of
First Union generally will act as the exclusive clearing and settlement bank
for transactions originating from merchants maintaining a depository account
with First Union for receipt of payment of cleared transactions. The
Depositary and Settlement Agreement provides, however, that the Company may
solicit from one or more other member clearing banks proposals to provide
clearing and settlement services to such merchants, although First Union will
have the opportunity to match the terms and conditions of any such third party
proposal. The Depositary and Settlement Agreement expires January 31, 2003.
The Shareholders Agreement. Concurrently with the consummation of the First
Union Alliance, the Company, its shareholders and First Union entered into a
Shareholders Agreement (the "Shareholder Agreement") that sets forth, among
other things, provides that the Company may, at its option and subject to
agreement on price and other terms, purchase from First Union any merchant
portfolios acquired by First Union through whole-bank or other acquisitions.
See "Business--Acquisition Strategy." The Shareholders Agreement also imposes
restrictions on the Company's ability to engage in certain new business
activities or proceed with acquisitions of entities engaged in business
activities substantially different from those currently conducted by the
Company. Accordingly, the Company may be limited in its ability to seek or
take advantage of certain business opportunities or relationships which differ
substantially from the business activities the Company currently conducts. See
"Risk Factors--Banking and Territorial Restrictions," and "Business--Banking
Regulations."
52
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of the date of this Prospectus
of (i) each person known by the Company to own beneficially 5% or more of the
Common Stock, (ii) each director of the Company who beneficially owns shares
of Common Stock, (iii) each Named Executive Officer who beneficially owns
shares of Common Stock, and (iv) all directors and executive officers as a
group, and as adjusted to reflect the sale of the Common Stock offered hereby.
Except as otherwise indicated, the persons or entities listed below have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING NUMBER OF OFFERING
--------------------- SHARES ---------------------
NAME AND ADDRESS NUMBER(1) PERCENT(2) OFFERED NUMBER(1) PERCENT(2)
- - - ---------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PRINCIPAL SHAREHOLDERS
Warburg, Pincus Invest-
ors, L.P.(3).......... 11,086,770 38.1% 841,057 10,245,713 29.8%
First Union Corpora-
tion(4)............... 9,149,209 31.4 694,071 8,455,138 24.6
WorldCom, Inc.(5)...... 2,371,063 8.1 179,872 2,191,191 6.4
NAMED EXECUTIVE OFFICERS
AND DIRECTORS
Edward Grzedzinski(6).. 748,971 2.2 -0- 748,971 1.9
James M. Bahin(7)...... 723,872 2.1 85,000 638,872 1.6
Pamela A. Joseph(8).... 132,999 * -0- 132,999 *
John M. Perry(9)....... 154,500 * -0- 154,500 *
Rebecca L. Powell(10).. 102,925 * -0- 102,925 *
Charles T. Cannada(5).. 2,371,063 8.1 179,872 2,191,191 6.4
Dr. James E.
Carnes(11)............ 3,200 * -0- 3,200 *
U. Bertram Ellis(12)... 5,000 * -0- 5,000 *
Dr. Henry Kressel(3)... 11,086,770 38.1 841,057 10,245,713 29.8
Joseph P. Landy(3)..... 11,086,770 38.1 841,057 10,245,713 29.8
Maurice F. Terbrueggen,
Jr.(4)................ 9,149,209 31.4 694,071 8,455,138 24.6
All executive officers
and directors as a
group (11
persons)(13).......... 24,478,509 80.9 1,800,000 22,678,509 64.7
---------
Total.................. 1,800,000
---------
</TABLE>
- - - --------
* Less than 1% of the outstanding Common Stock.
(1) Includes shares of Common Stock which the named shareholder has a right to
acquire upon the exercise of vested and nonvested options.
(2) Includes shares of Common Stock which the named shareholder has a right to
acquire, upon the exercise of options, within 60 days of the date of this
Prospectus but not options that become exercisable after such date. Such
shares receivable upon the exercise of options are deemed outstanding for
purposes of completing the percentage ownership of the person holding such
shares, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person shown in the table.
(3) The shares shown are owned by Warburg, Pincus Investors, L.P.
("Investors"). The sole general partner of Investors is Warburg, Pincus &
Co., a New York general partnership ("WP"). E. M. Warburg, Pincus & Co.,
LLC, a New York limited liability company ("EMW LLC"), manages Investors.
The members of EMW LLC are substantially the same as the partners of WP.
Lionel I. Pincus is the managing partner of WP and the managing member of
EMW LLC and may be deemed to control both WP and EMW LLC. WP, as the sole
general partner of Investors, has a 20% interest in the profits of
Investors. Dr. Kressel and Mr. Landy, directors of the Company, are
Managing Directors and members of EMW LLC and general partners of WP. As
such, Dr. Kressel and Mr. Landy may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") in an indeterminate
portion of the shares beneficially owned by Investors and WP. Dr. Kressel
and
53
<PAGE>
Mr. Landy disclaim beneficial ownership of the shares. The named persons'
address is 477 Lexington Avenue, 10th Floor, New York, New York 10017. If
the U.S. Underwriters' over-allotment option is exercised in full, Investors
will sell an additional 522,289 shares and, as a result, would beneficially
own 9,723,424 shares, or 28.3%, after the Offering.
(4) The shares indicated are owned beneficially by indirect, wholly-owned
subsidiaries of First Union. Pursuant to the terms of a voting agreement
among FUNB and such subsidiaries, FUNB holds the proxy for each of such
subsidiaries with respect to such shares. Accordingly, each of First Union
and FUNB may be deemed to be the beneficial owner of all such shares within
the meaning of Rule 13d-3 under the Exchange Act. Such shares also may be
attributed to Mr. Terbrueggen, a director of the Company, who serves as
Senior Vice President of First Union. Mr. Terbrueggen disclaims beneficial
ownership of the shares. First Union's and Mr. Terbrueggen's address is Two
First Union Center, 301 South College Street, Charlotte, North Carolina
28288. If the U.S. Underwriters' over-allotment option is exercised in
full, FUNB and such subsidiaries will sell an additional 431,012 shares
and, as a result, would beneficially own 8,024,126 shares, or 23.3%, after
the Offering.
(5) The shares shown are owned by WorldCom. Mr. Cannada may be deemed to
beneficially own the shares within the meaning of Rule 13d-3 under the
Exchange Act due to his affiliation with WorldCom as a Senior Vice
President. Mr. Cannada disclaims beneficial ownership of these shares. Mr.
Cannada's and WorldCom's address is 515 East Amite, Jackson, Mississippi
39201. If the U.S. Underwriters' over-allotment option is exercised in
full, WorldCom will sell an additional 111,699 shares and, as a result,
would beneficially own 2,079,492 shares, or 6.0%, after the Offering.
(6) Includes 25,000 shares held in the name of Mr. Grzedzinski's spouse, 50
shares held by his spouse as custodian for a minor child, and 50 shares
held by Mr. Grzedzinski's daughter. Also includes 262,618 shares that Mr.
Grzedzinski may acquire, upon the exercise of options, within 60 days of
the date of this Prospectus, and 96,713 shares that Mr. Grzedzinski may
acquire upon the exercise of options which will not be exercisable within
the aforementioned 60 day period.
(7) Includes 268,859 shares that Mr. Bahin may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 96,713 shares
that Mr. Bahin may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(8) Includes 19,750 shares that Ms. Joseph may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 64,240 shares
that Ms. Joseph may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(9) Includes 57,375 shares that Mr. Perry may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 97,125 shares
that Mr. Perry may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(10) Includes 15,625 shares that Ms. Powell may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 53,506 shares
that Ms. Powell may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(11) Includes 3,000 shares that Dr. Carnes may acquire upon the exercise of
options that will not be exercisable within 60 days of the date of this
Prospectus.
(12) Includes 1,250 shares that Mr. Ellis may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 3,750 shares
that Mr. Ellis may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(13) Includes 625,477 shares which may be acquired upon the exercise of options
within 60 days of the date of this Prospectus, and 415,047 shares which
may be acquired upon the exercise of options that will not be exercisable
within 60 days of the date of this Prospectus. Includes 9,149,209 shares
owned by indirect wholly-owned subsidiaries of First Union Corporation and
are included due to the affiliation of Mr. Terbrueggen with First Union
Corporation. Includes 11,086,770 shares owned by Investors and included
due to the affiliation of Dr. Kressel and Mr. Landy with Investors.
Includes 2,371,063 shares owned by WorldCom and included due to Mr.
Cannada's affiliation with WorldCom.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value per share, and 5,000,000 shares of Preferred
Stock, without par value ("Preferred Stock").
COMMON STOCK
As of March 24, 1998, there were 29,110,147 shares of Common Stock
outstanding and held of record by approximately 50 shareholders. Immediately
following this offering, 34,410,147 shares of Common Stock will be
outstanding. Holders of Common Stock of the Company are entitled to one vote
for each share held of record on all matters submitted to a vote of the
shareholders, including the election of directors. The Company's Articles of
Incorporation provide that holders of Voting Stock (defined as stock entitled
to vote in the election of directors) may cumulate their votes. Accordingly,
holders of Common Stock are entitled to cumulate their votes in the election
of directors, and it is possible for the holders of less than a majority of
the shares of Common Stock to elect one or more of the Company's directors.
Subject to the preferences that may be applicable to any then outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board out of
funds legally available therefor. See "Dividend Policy." Upon any liquidation,
dissolution or winding up, whether voluntary or involuntary, of the Company,
holders of Common Stock are entitled to receive pro rata all assets available
for distribution to shareholders after payment or provision for payment of the
debts and other liabilities of the Company and the liquidation preferences of
any then outstanding Preferred Stock. There are no preemptive or other
subscription rights, conversion rights, or redemption or sinking fund
provisions with respect to shares of Common Stock. All outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
consummation of the offering will be, fully paid and nonassessable. For a
description of a provision eliminating certain personal liability of
directors, see "Description of Capital Stock--Certain Charter and Bylaw
Provisions--Limitation of Directors' Liability."
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Company is
authorized to issue up to 5,000,000 shares of Preferred Stock. No shares of
Preferred Stock currently are outstanding. The Preferred Stock may be issued
at any time or from time to time in one or more classes or series with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions (including dividend, conversion and voting rights) as may be
fixed by the Board of Directors, without any further vote or action by the
shareholders. Although the Company has no present plans to issue any Preferred
Stock, the ownership and control of the Company by the holders of the Common
Stock would be diluted if the Company were to issue Preferred Stock that had
voting rights or that was convertible into Common Stock. In addition, the
holders of Preferred Stock issued by the Company would be entitled by law to
vote on certain transactions such as a merger or consolidation, and thus the
issuance of Preferred Stock could dilute the voting rights of the holders of
the Common Stock on such issues. The issuance of Preferred Stock also could
have the effect of delaying, deferring or preventing a change in control of
the Company. See "Description of Capital Stock--Certain Charter and Bylaw
Provisions--Anti-Takeover Provisions."
AGREEMENTS AND RESTRICTIONS RELATING TO STOCK
In connection with the consummation of the First Union Alliance, the
Company, First Union, Warburg, WorldCom and each other original shareholder of
the Company (collectively, the "Original Shareholder") entered into the
Shareholders Agreement. Pursuant to the Shareholders Agreement, each Original
Shareholder agreed not to sell or transfer the Company's equity securities
except as expressly permitted by the Shareholders Agreement. The Shareholders
Agreement also provides that Warburg and First Union each has a right of first
refusal with respect to any security offered or sold by the Company which is
convertible into or exchangeable for Common Stock; this right of first refusal
does not extend to securities issued by the Company in connection with the
distribution of securities in an underwritten offering to the general public,
including in this offering.
55
<PAGE>
FIRST UNION VOTING AGREEMENT
The shares of the Company's Common Stock owned by First Union are held of
record by indirect, wholly-owned subsidiaries of First Union. Each of such
subsidiaries has entered into a voting agreement with FUNB that grants FUNB
the right to vote all of the shares of the Company's Common Stock held by such
subsidiaries. This proxy automatically terminates upon the transfer of such
shares to any person that is not an affiliate of First Union, and also may be
terminated by such subsidiaries upon written notice delivered to FUNB at least
15 days prior to the proposed date of termination.
CERTAIN CHARTER AND BYLAW PROVISIONS
Shareholders' rights and related matters are governed by the Georgia
Business Corporation Code and the Company's Articles of Incorporation and
Bylaws, as amended (the "Bylaws"). Certain provisions of the Articles of
Incorporation and Bylaws of the Company, which are summarized below, could
either alone or in combination with each other, have the effect of preventing
a change in control of the Company or making changes in management more
difficult.
Limitation of Directors' Liability. The Company's Articles of Incorporation
eliminate, subject to certain exceptions, the personal liability of directors
to the Company or its shareholders for monetary damages for breaches of each
director's duty of care or other duties as a director. The Articles do not
provide for the elimination of or any limitation on the personal liability of
a director for (i) any appropriation, in violation of the director's duties,
of any business opportunity of the Company, (ii) acts or omissions that
involve intentional misconduct or a knowing violation of law, (iii) unlawful
corporate distributions, or (iv) any transaction from which the director
received an improper benefit. In addition, the Company's Bylaws provide broad
indemnification rights to directors and officers so long as the director or
officer acted in a manner he or she believed in good faith to be in, or not
opposed to, the best interests of the Company, and with respect to criminal
proceedings, if the director had no reasonable cause to believe his or her
conduct was unlawful. The Company is also required to indemnify its directors
and officers against reasonable expenses incurred in the defense of any action
if the director or officer has been successful in such defense. The Company
may not indemnify any of its directors or officers, however, against any
liability incurred in connection with a proceeding in which the director or
officer was adjudged liable on the basis that personal benefit was improperly
received by him or her or in connection with a proceeding by or in the right
of the Company in which the director or officer was adjudged liable to the
Company. These provisions of the Articles and Bylaws will limit the remedies
available to a shareholder who is dissatisfied with a Board decision protected
by these provisions, and such shareholder's only remedy in that circumstance
may be to bring a suit to prevent the Board's action. In many situations, this
remedy may not be effective, as, for example, when shareholders have no prior
awareness of the Board's consideration of the particular transaction or event.
Anti-Takeover Provisions. The Company's Articles of Incorporation authorize
the Company to issue up to 5,000,000 shares of Preferred Stock with such
designations, powers, preferences and rights as may be fixed by the Board of
Directors, without any further vote or action by the shareholders. The
issuance of Preferred Stock could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Description of Capital
Stock--Preferred Stock."
Constituency Considerations. The Company's Articles of Incorporation provide
the Board of Directors the right to consider the interests of various
constituencies, including employees, customers, suppliers and creditors of the
Company, as well as the communities in which the Company is located, in
addition to the interest of the Company and its shareholders, in discharging
their duties in determining what is the Company's best interests.
Election, Term and Removal of Directors. The Company's Articles of
Incorporation provide that the Board of Directors will consist of not less
than seven persons, with all directors to be elected by the holders of shares
of the Company's Voting Stock at the annual meeting of shareholders. Such
directors shall serve until the election of their successors at the next
annual meeting of shareholders. Under Georgia law, the articles of
incorporation or a bylaw adopted by the shareholders may provide for
staggering the terms of the directors by
56
<PAGE>
dividing the total number of directors into two or more groups, with each
group containing, to the extent practicable, an equal number of directors. The
Company's Articles of Incorporation provide that no bylaw, resolution, written
consent or amendment to the Articles of Incorporation purporting to create a
classified or "staggered" Board of Directors or requiring prior notice or
qualification of members for director shall be effective.
The Company's Articles of Incorporation and Bylaws provide that directors
may be removed with or without cause at any annual or special meeting of the
shareholders. Under Georgia law, if cumulative voting is authorized, a
director may not be removed if the number of votes sufficient to elect him
under cumulative voting is voted against his removal; if cumulative voting is
not authorized, a director may be removed only by a majority of the votes
entitled to be cast. Accordingly, under the Company's Articles of
Incorporation, a director may not be removed if the number of votes sufficient
to elect him is voted against his removal.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is FUNB.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 34,410,147 shares of
Common Stock outstanding (assuming the U.S. Underwriters' over-allotment
option is not exercised). Of these shares, the shares sold in this offering
together with the 4,025,000 shares sold in the Company's initial public
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act, may
generally only be sold in compliance with the limitation of Rule 144 described
below. Approximately 21,637,985 shares held by directors, executive officers
and Selling Shareholders will be subject to 60-day lock-up agreements with the
Underwriters. Following the expiration of the lock-up period, such shares will
be eligible for sale in the public market subject to compliance with certain
volume limitations and other conditions of Rule 144.
REGISTRATION RIGHTS
In connection with the First Union Alliance, the Company, WorldCom and First
Union entered into a Registration Rights Agreement dated January 31, 1996, as
amended, pursuant to which each of the Original Shareholders of the Company's
predecessor, First Union, Warburg and WorldCom have certain rights with
respect to registration under the Securities Act of shares of Common Stock of
the Company (the "Registrable Securities"). If, at any time, the Company
proposes to register any of its securities under the Securities Act (with
certain exceptions), such shareholders will be entitled to notice of such
registration and to include their shares of Common Stock in such registration;
provided, however, that the number of Registrable Securities to be sold by a
shareholder who is a member of management pursuant to each such registration
statement shall not exceed 40% of the Registrable Securities owned by such
shareholder. The underwriters of any offering have the right to limit the
number of shares to be included in such registration by such shareholders if
the underwriters state in writing that they are unwilling to include any or
all of such securities in the proposed underwriting because such inclusion
will materially interfere with the orderly sale and distribution of the
securities being offered by the Company. Generally, the Company will be
required to bear the expenses of all such registrations, other than
underwriting discounts and selling commissions attributable to the inclusion
of such Registrable Securities in such registration statement.
In addition, each of First Union and Warburg (each, a "Principal
Shareholder" and collectively, the "Principal Shareholders") has the right to
require the Company on not more than two occasions to file a registration
statement under the Securities Act with respect to Registrable Securities
owned by the Principal Shareholders. Following notice by the Company to the
other holders of Registrable Securities that a Principal Shareholder has
exercised one of its demand registration rights, such other holders will have
the option of including their Registrable Securities in such registration
statement. The Company is required to use its best efforts to effect such
registration, subject to certain conditions and limitations. The Principal
Shareholders also are entitled to demand an unlimited number of registration
statements on a Form S-3 or "short-form" registration statement. In addition,
WorldCom has the right to demand on one occasion that the Company register
WorldCom's Registrable Securities on a Form S-3 or similar "short-form"
registration statement. Such demands for registration by holders of
Registrable Securities will not count as such until such registration has
become effective and unless the holders of the Registrable Securities are able
to register and sell at least 80% of the Registrable Securities requested to
be included in such registration statement. Generally, the Company will be
required to bear the expenses of all requested registration statements, except
that holders of Registrable Securities will be required to bear their pro rata
share of the underwriters' discounts and compensation attributable to the
inclusion of such Registrable Securities in such registration statement.
58
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the U.S. Underwriting
Agreement dated the date hereof, each of the underwriters of the United States
and Canadian offering of Common Stock named below (the "U.S. Underwriters"),
for whom Smith Barney Inc., BT Alex. Brown Incorporated and The Robinson-
Humphrey Company, LLC are acting as the Representatives (the
"Representatives"), has severally agreed to purchase, and the Company and the
Selling Shareholders have agreed to sell to each U.S. Underwriter, shares of
Common Stock which equal the number of shares set forth opposite the name of
such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- - - ---------------- ---------
<S> <C>
Smith Barney Inc......................................................
BT Alex. Brown Incorporated...........................................
The Robinson-Humphrey Company, LLC....................................
---------
Total............................................................... 5,680,000
=========
</TABLE>
Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated the date hereof, each of the managers of the
concurrent international offering of Common Stock named below (the
"Managers"), for whom Smith Barney Inc., BT Alex. Brown International, a
division of Bankers Trust International PLC, and The Robinson-Humphrey
Company, LLC are acting as lead managers (the "Lead Managers"), has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed
to sell to each Manager, shares of Common Stock which equal the number of
shares set forth opposite the name of such Manager below:
<TABLE>
<CAPTION>
NUMBER OF
MANAGER SHARES
- - - ------- ---------
<S> <C>
Smith Barney Inc.....................................................
BT Alex. Brown International, a division of Bankers Trust Interna-
tional PLC..........................................................
The Robinson-Humphrey Company, LLC...................................
---------
Total.............................................................. 1,420,000
=========
</TABLE>
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at a price that represents a concession
not in excess of $ per share below the public offering price. The U.S.
Underwriters and the Managers may allow, and such dealers may re-allow, a
concession not in excess of $ per share to the other U.S. Underwriters or
Managers, respectively, or to certain other dealers. After the initial
offering of shares to the public, the public offering price and such
concessions may be changed by the U.S. Underwriters and the Managers.
The Selling Shareholders have granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 1,065,000 additional shares of Common Stock at the public
offering price set forth on the cover page of this Prospectus less
underwriting discounts and commissions. The U.S. Underwriters may exercise
such option to purchase additional shares solely for the purpose of covering
over-allotments, if any, incurred in connection with the sale of the shares
offered hereby. To the extent such option is exercised, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such U.S. Underwriter's name in the preceding tables
bears to the total number of shares in such tables.
In connection with this offering and in compliance with applicable law, the
U.S. Underwriters may overallot (i.e., sell more shares of Common Stock than
the total amounts shown on the list of U.S. Underwriters and participations
that appears above) and may effect transactions that stabilize, maintain or
otherwise affect the market price of the shares of Common Stock at levels
above those that might otherwise prevail in the open
59
<PAGE>
market. Such transactions may include placing bids for the shares of Common
Stock or effecting purchases of the shares of Common Stock for the purpose of
pegging, fixing or maintaining the prices of the shares of Common Stock or for
the purpose of reducing a syndicate short position created in connection with
the offering. In addition, the contractual arrangements among the U.S.
Underwriters include a provision whereby, if Smith Barney, Inc. purchases
shares of Common Stock in the open market for the account of the underwriting
syndicate and the shares of Common Stock purchased can be traced to a
particular U.S. Underwriter or member of the selling group, the underwriting
syndicate may require the U.S. Underwriter or selling group member in question
to purchase the shares of Common Stock in question at the cost price to the
syndicate or may recover from (or decline to pay to) the U.S. Underwriter or
selling group member in question the selling concession applicable to the
shares of Common Stock in question. The U.S. Underwriters are not required to
engage in any of these activities and any such activities, if commenced, may
be discontinued at any time.
The Company, the Selling Shareholders, the U.S. Underwriters and the
Managers have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
The Company, certain officers and directors of the Company and the Selling
Shareholders, holding in the aggregate approximately 21,637,985 shares of
Common Stock following consummation of this offering, have agreed that, for a
period of 60 days after the date of this Prospectus, they will not, without
the prior written consent of Smith Barney Inc., offer, sell, contract to sell
or otherwise dispose of any Common Stock (or any securities convertible into
or exercisable or exchangeable for Common Stock) or grant any options or
warrants to purchase Common Stock.
The U.S. Underwriters and the Managers have entered into an Agreement
Between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the 5,680,000 shares offered
in the United States and Canadian offering (i) it is not purchasing any such
shares for the account of anyone other than a U.S. or Canadian Person and (ii)
it has not offered or sold, and will not, offer, sell, resell or deliver,
directly or indirectly, any of such shares or distribute any prospectus
relating to the United States and Canadian offering outside the United States
or Canada or to anyone other than a U.S. or Canadian Person. In addition, each
Manager has agreed that as part of the distribution of the 1,420,000 shares
offered in the international offering: (i) it is not purchasing any such
shares for the account of any U.S. or Canadian Person and (ii) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
international offering in the United States or Canada or to any U.S. or
Canadian Person. Each Manager has also agreed that it will offer to sell
shares only in compliance with all relevant requirements of any applicable
laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S.
Underwriters and Managers, including: (i) certain purchases and sales between
the U.S. Underwriters and the Managers, (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion, (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as Manager or by a Manager who is also acting
as a U.S. Underwriter and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is subject to United States or Canadian income taxation regardless of the
source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.
Each Manager agrees that (i) it will not offer or sell any shares to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as
60
<PAGE>
principal or agent) for the purposes of their businesses or otherwise in
circumstances which will not involve an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995
("the Regulations"); (ii) it will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulations with respect to anything done
by it in relation to the shares in, from, or otherwise involving the United
Kingdom; and (iii) it will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the offer of the shares
if that person is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Shareholders or the Managers that would permit an offering to the
general public of the shares offered hereby in any jurisdiction other than the
United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares as may be mutually agreed. The price of any shares so sold shall be the
public offering price as then in effect for shares being sold by the U.S.
Underwriters and the Managers, less all or any part of the selling concession,
unless otherwise determined by mutual agreement. To the extent that there are
sales between the U.S. Underwriters and the Managers pursuant to the Agreement
between U.S. Underwriters and Managers, the number of shares initially
available for sale by the U.S. Underwriters and by the Managers may be more or
less than the number of shares appearing on the front cover of this
Prospectus.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock will
be passed upon for the Company and the Selling Shareholders by Long Aldridge &
Norman LLP of Atlanta, Georgia. King & Spalding of Atlanta, Georgia is acting
as counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for the 10-month period ended December 31, 1995 and the years
ended December 31, 1996 and 1997 included elsewhere herein, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein. Such consolidated financial statements are
included herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 relating to the
Common Stock offered hereby with the Commission, Washington, D.C. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contracts or other
documents referred to are not necessarily complete and with respect to
contracts or other documents which the Company has filed with this
Registration Statement, reference is made to a copy of such contract or other
document filed as an exhibit to the Registration Statement. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such
61
<PAGE>
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof
may be obtained from the Commission upon payment of certain fees prescribed by
the Commission.
The Company is subject to the informational filing or submission
requirements of the Exchange Act, and in accordance therewith is required to
file or submit periodic reports and other information with the Commission
under the Exchange Act relating to its business, financial condition and other
matters. Such reports, proxy statements and other information may be
inspected, without charge, and copies may be obtained at prescribed rates, at
the Commission's public reference facility at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located
in Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may be obtained at prescribed rates. Such documents
filed by the Company can also be inspected at the offices of the New York
Stock Exchange located at 20 Broad Street, New York, New York 10005. The
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web site
is http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference certain documents that are not
presented herein or delivered herewith. Such documents are available without
charge upon request from: NOVA Corporation, One Concourse Parkway, Suite 300,
Atlanta, Georgia 30328, Attention: Kathryn J. Harris, Manager, Shareholder
Relations, (770) 396-1456.
The following documents filed by the Company (Commission File No. 1-14342)
with the Commission under Section 13(a) or 15(d) of the Exchange Act are
hereby incorporated by reference in this Prospectus:
(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
(ii) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
(iii) The Company's Current Reports on Form 8-K dated June 12, 1997 and
November 14, 1997; and
(iv) The description of the Common Stock as contained in the Company's
Registration Statement on Form 8-A (Registration No. 1-14342) as filed with
the Commission on April 23, 1996.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of the Registration Statement and
this Prospectus to the extent that a statement contained herein, in any
supplement hereto or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Registration
Statement, this Prospectus, or any supplement hereto.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NOVA CORPORATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............ F-3
Consolidated Statements of Operations for the years ended December 31,
1997 and 1996, and the ten month period ended December 31, 1995........ F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997 and 1996, and the ten month period ended December 31,
1995................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1996, and the ten month period ended December 31, 1995........ F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1997 and 1996, and the 10-month period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NOVA
Corporation at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
and the 10-month period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 17, 1998
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 739,000 $ 40,326,000
Trade receivables, less allowance for
doubtful accounts of $2,822,000 and
$2,707,000 at December 31, 1997 and
December 31, 1996, respectively............ 35,377,000 16,147,000
Inventory................................... 1,156,000 857,000
Deferred tax asset and other current assets. 5,373,000 3,160,000
------------ ------------
Total current assets...................... 42,645,000 60,490,000
Merchant and customer contracts............. 92,197,000 21,868,000
Property and equipment, net................. 21,017,000 10,212,000
Excess cost of businesses acquired.......... 12,805,000 13,301,000
Deferred tax asset and other non-current
assets..................................... 1,864,000 1,834,000
------------ ------------
$170,528,000 $107,705,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $ 8,015,000 $ 4,810,000
Accounts payable to affiliate............... 3,410,000 1,534,000
Accrued compensation and related costs...... 726,000 1,416,000
Settlement obligations...................... 10,896,000 7,691,000
Other accrued liabilities................... 7,010,000 5,157,000
Long-term debt obligations due within one
year....................................... 350,000 507,000
------------ ------------
Total current liabilities................. 30,407,000 21,115,000
Deferred tax liability...................... 3,112,000 849,000
Long-term debt obligations.................. 33,296,000 859,000
Minority interest in subsidiary............. 776,000 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000
shares authorized, 29,031,000 and
28,721,000 shares issued at December 31,
1997 and 1996, respectively................ 290,000 288,000
Additional paid in capital.................. 99,967,000 99,299,000
Retained earnings (accumulated deficit)..... 2,680,000 (14,705,000)
------------ ------------
Total shareholder's equity................ 102,937,000 84,882,000
------------ ------------
$170,528,000 $107,705,000
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
10-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES............................. $335,625,000 $265,829,000 $129,035,000
OPERATING EXPENSES:
Cost of service...................... 260,058,000 207,595,000 100,375,000
Conversion costs..................... 2,595,000 6,395,000 3,441,000
Selling, general and administrative.. 33,952,000 32,952,000 17,795,000
Depreciation and amortization........ 10,658,000 6,982,000 4,635,000
------------ ------------ ------------
OPERATING INCOME..................... 28,362,000 11,905,000 2,789,000
Interest (income) expense, net....... (721,000) (126,000) 1,959,000
Minority interest in income of
subsidiary.......................... 776,000 -- --
------------ ------------ ------------
Income before provision for income
taxes............................... 28,307,000 12,031,000 830,000
Provision (benefit) for income taxes. 10,922,000 4,764,000 (4,057,000)
------------ ------------ ------------
NET INCOME........................... $ 17,385,000 $ 7,267,000 $ 4,887,000
============ ============ ============
Net income per common share (pro
forma prior to May 8, 1996)......... $ 0.60 $ 0.25 $ 0.24
============ ============ ============
Net income per common share--assuming
dilution (pro forma prior to May 8,
1996)............................... $ 0.58 $ 0.25 $ 0.24
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- -------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK
------- ------------ ---------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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) --
Exercise of stock
options............... -- -- 310,000 2,000 668,000 -- --
Net income............. -- -- -- -- -- 17,385,000 --
------- ------------ ---------- -------- ----------- ------------ ---------
Balance at December 31,
1997................... -- -- 29,031,000 $290,000 $99,967,000 $ 2,680,000 $ --
======= ============ ========== ======== =========== ============ =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
10-MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------- DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $17,385,000 $ 7,267,000 $ 4,887,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 10,658,000 6,982,000 4,635,000
Deferred income taxes................. 2,331,000 3,045,000 (4,057,000)
Loss on disposal of equipment......... 12,000 -- --
Minority interest..................... 776,000 -- --
Gain on disposition of non-compete
agreement............................ -- (150,000) --
Changes in assets and liabilities, net
of the effects of business
acquisitions:
Trade receivables................... (19,230,000) (6,079,000) (4,606,000)
Inventory........................... (299,000) 223,000 (303,000)
Other assets........................ (3,057,000) (84,000) (348,000)
Accounts payable.................... 5,081,000 (719,000) 3,451,000
Accrued liabilities................. 4,368,000 10,242,000 1,260,000
----------- ------------ -----------
Net cash provided by operating
activities......................... 18,025,000 20,727,000 4,919,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of merchant contracts....... (75,410,000) (3,967,000) (3,302,000)
Additions to property and equipment... (15,152,000) (6,065,000) (1,624,000)
Other................................. -- 64,000 (130,000)
----------- ------------ -----------
Net cash used in investing activities. (90,562,000) (9,968,000) (5,056,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and notes
payable, net......................... 32,800,000 4,008,000 4,900,000
Payment of long-term debt and capital
leases............................... (520,000) (25,692,000) (5,129,000)
Payment of Preferred Stock dividends.. -- (11,689,000) --
Proceeds from stock options exercised. 670,000 1,982,000 --
Proceeds from IPO, net................ -- 65,328,000 --
Redemption of Preferred Stock......... -- (5,000,000) --
----------- ------------ -----------
Net cash provided by (used in)
financing activities................. 32,950,000 28,937,000 (229,000)
----------- ------------ -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.......................... (39,587,000) 39,696,000 (366,000)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR.............................. 40,326,000 630,000 996,000
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................. $ 739,000 $ 40,326,000 $ 630,000
=========== ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
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 ("POS"), 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. Also included in the
consolidated financial statements are the accounts of Elan Merchant Services,
LLC, a joint venture owned 51% by the Company. The operating results from the
joint venture are included from the date the Company purchased its membership
interest, October 31, 1997. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company has made
business and customer base purchases 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 purchase.
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
$8,153,000, $6,455,000 and $5,446,000 for the years ended December 31, 1997
and 1996 and 10-month period ended December 31, 1995, respectively.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, and December 31, 1996, included in property and equipment
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Cost of equipment..................................... $6,715,000 $5,796,000
Less accumulated depreciation......................... 4,490,000 2,939,000
---------- ----------
$2,225,000 $2,857,000
========== ==========
</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.
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 purchased 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. The Company
capitalizes costs associated with the development of software for the
Company's internal use. Such costs are depreciated over the useful life of the
software of up to seven years.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLES The excess cost of businesses acquired is amortized on the
straight-line basis over 30 years. Accumulated amortization at December 31,
1997 and 1996 was $2,048,000 and $1,552,000, 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
$13,255,000 and $8,174,000 at December 31, 1997 and 1996, 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 purchase 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
purchased. If this evaluation indicates that the intangible asset will not be
recoverable, as determined based on the undiscounted cash flows related to the
intangible asset over the remaining life of the asset, the carrying value of
the related intangible asset will be reduced to fair value.
The 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.
INCOME TAXES The Company accounts for income taxes under the liability method.
Under the liability method, deferred income taxes are recorded to reflect the
net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting and the amounts used for income
tax purposes.
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.
NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and, where appropriate, restated to conform
to the SFAS 128 requirements.
NOTE 2--MERCHANT PORTFOLIO PURCHASES AND BUSINESS ACQUISITIONS
During the years ended December 31, 1997 and 1996, and the 10-month period
ended December 31, 1995, the Company made purchases from various banks and
third parties, including investments in a joint venture, for an aggregate
purchase price of $75,660,000, $4,095,000 and $3,476,000, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant 1997 transactions include purchases of the Crestar Bank
("Crestar") merchant portfolio effective May 29, 1997 and the MBNA America
Bank, N.A. ("MBNA") merchant portfolio effective December 31, 1997. The
Company also entered into a joint venture with Firstar Bank, U.S.A., N.A.
("Firstar") effective October 31, 1997, whereby Firstar and each of the other
banking affiliates of Firstar contributed substantially all merchant portfolio
contracts to the joint venture. The Company owns 51% of the joint venture and
will perform the transaction processing services for the joint venture's
merchant contracts. Estimated annual processing volume for the Crestar, MBNA
and Firstar merchant contracts are $1.8 billion, $1.0 billion and $3.0
billion, respectively. The Company's operating results reflect each of these
purchases from the effective dates of the transactions.
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,
---------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Current assets............................. $ -- $ -- $ 157,000
Property and equipment................... -- -- 15,000
Non-compete agreement.................... 250,000 128,000 330,000
Excess cost of businesses acquired....... -- -- 354,000
Merchant contracts....................... 75,410,000 3,967,000 2,620,000
----------- ---------- ----------
75,660,000 4,095,000 3,476,000
Liabilities assumed........................ -- -- --
Notes payable to seller.................... -- 128,000 174,000
----------- ---------- ----------
Net cash paid.............................. $75,660,000 $3,967,000 $3,302,000
=========== ========== ==========
</TABLE>
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996, consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land and building.................................. $ 744,000 $ 614,000
Equipment.......................................... 20,641,000 13,179,000
Software, internally developed..................... 4,125,000 68,000
Furniture and fixtures............................. 1,934,000 1,394,000
Leasehold improvements............................. 1,375,000 1,129,000
Work-in-progress................................... 2,701,000 --
----------- -----------
31,520,000 16,384,000
Less accumulated depreciation and amortization..... (10,503,000) (6,172,000)
----------- -----------
$21,017,000 $10,212,000
=========== ===========
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--INCOME TAXES
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,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Property and equipment............................... $2,576,000 $ 426,000
Tax over book amortization........................... -- 22,000
Other................................................ 540,000 411,000
---------- ----------
Total deferred tax liabilities..................... 3,116,000 859,000
========== ==========
DEFERRED TAX ASSETS:
Start-up expenses.................................... 4,000 10,000
Allowance for doubtful accounts...................... 1,590,000 1,348,000
Accrued liabilities.................................. 761,000 305,000
Book over tax amortization........................... 121,000 --
Credit carryforwards................................. -- 39,000
Net operating loss carryforwards..................... -- 848,000
---------- ----------
Total deferred tax assets.......................... 2,476,000 2,550,000
---------- ----------
Net deferred taxes................................... $ (640,000) $1,691,000
========== ==========
</TABLE>
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 will be realized.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 10-MONTH
31, PERIOD ENDED
---------------------- DECEMBER 31,
1997 1996 1995
----------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal............................... $ 7,922,000 $1,541,000 $ --
State................................. 669,000 178,000 --
Deferred:
Federal............................... 2,149,000 2,638,000 871,000
State................................. 182,000 407,000 50,000
Change in valuation allowance......... -- -- (4,978,000)
----------- ---------- -----------
$10,922,000 $4,764,000 $(4,057,000)
=========== ========== ===========
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 DECEMBER 10-MONTH
31, PERIOD ENDED
---------------------- DECEMBER 31,
1997 1996 1995
----------- ---------- ------------
<S> <C> <C> <C>
Provision for income taxes at statutory
rate................................... $ 9,907,000 $4,211,000 $ 282,000
Amortization of excess cost of
businesses acquired.................... 57,000 57,000 48,000
Change in valuation allowance........... -- -- (4,978,000)
State income taxes, net of federal tax
benefit................................ 494,000 381,000 33,000
Other................................... 464,000 115,000 558,000
----------- ---------- -----------
$10,922,000 $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.
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.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations at December 31, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
Revolving loans due September 30, 2002............... $32,800,000 $ --
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.. 320,000 459,000
Other................................................ 94,000 182,000
Capital lease obligations (Note 7)................... 432,000 725,000
----------- ----------
Total long-term debt obligations..................... 33,646,000 1,366,000
Less amounts due within one year..................... 350,000 507,000
----------- ----------
Long-term debt obligations........................... $33,296,000 $ 859,000
=========== ==========
</TABLE>
The annual aggregate maturities of long-term obligations, excluding capital
lease obligations, at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 247,000
1999............................................................. 167,000
2000............................................................. --
2001............................................................. --
2002............................................................. 32,800,000
-----------
$33,214,000
===========
</TABLE>
In October 1997, the Company entered into an agreement with a bank for
aggregate loans of up to $80 million. The Company, at its option and subject
to the satisfaction of certain conditions, may increase the aggregate amount
available on the credit facility to $100 million. On September 30, 2000, all
outstanding borrowings in excess of $50 million convert to term loans due in
eight equal quarterly installments commencing December 31, 2000 and ending
September 30, 2002. All outstanding borrowings under the then remaining $50
million revolving loan commitment are due September 30, 2002.
The Company pays a quarterly commitment fee in arrears on the average daily
unused portion of the funds available for revolving loans and letters of
credit. This commitment fee ranges from .125% to .200% depending on certain
financial ratios. The Company also pays commitment fees for outstanding
letters of credit. Such fees range from .35% to .65% depending on certain
financial ratios. Interest on outstanding borrowings is charged using, at the
Company's option, either the bank's base rate, as defined, or the prevailing
Eurodollar rate plus a margin determined from certain financial ratios. At
December 31, 1997, outstanding borrowings included $22.8 million at the bank's
base rate of 8.5% and $10.0 million in Eurodollar-based loans as a weighted-
average rate of 6.2%. Concurrent with entering the above credit agreement, the
Company cancelled its previous credit facility, which had available borrowings
of $10.0 million. There were no borrowings outstanding under the previous
facility at the date of cancellation.
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 and restrictions on the payment of dividends.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996 and the 10-month
period ended December 31, 1995, was approximately $1,454,000, $912,000 and
$509,000, respectively.
Asset balances for property acquired under capital leases included in
property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Building........................................ $ 273,000 $ 273,000
Equipment....................................... 1,658,000 1,658,000
---------- ---------
1,931,000 1,931,000
Less accumulated depreciation................... 1,468,000 1,409,000
---------- ---------
$ 463,000 $ 522,000
========== =========
Future minimum lease payments for all non-cancelable leases at December 31,
1997, are summarized below:
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
Year ending December 31, 1998................. $1,434,000 $ 159,000
1999......................................... 1,163,000 151,000
2000......................................... 1,081,000 95,000
2001......................................... 926,000 70,000
2002......................................... 157,000 70,000
Thereafter.................................... -- 45,000
---------- ---------
Total future minimum lease payments........... $4,761,000 $ 590,000
==========
Less amount representing interest............. 158,000
---------
Present value of minimum lease payments....... 432,000
Less amounts due within one year.............. 103,000
---------
Long-term obligations under capital leases.... $ 329,000
=========
</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.
F-14
<PAGE>
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
DECEMBER 31,
----------------------
10-MONTH PERIOD ENDED
DECEMBER 31,
1997 1996 1995
----------- ---------- ---------------------
<S> <C> <C> <C>
Interest paid..................... $ 300,000 $1,178,000 $2,251,000
Income taxes paid................. 10,350,000 230,000 --
Acquisition of equipment in
exchange for debt or capital
leases........................... -- -- 383,000
Note payable issued in conjunction
with business acquisition........ -- 128,000 174,000
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 1997: risk-free interest rate of 5.70%; a dividend
yield of 0%; volatility factors of the expected market price of the Company's
Common Stock of 0.544 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 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.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1997 1996
-------- --------
<S> <C> <C> <C>
Pro forma net income............................ $16,245,000 $6,824,000
Pro forma net income per share.................. 0.56 0.23
Pro forma net income per share--assuming
dilution....................................... 0.54 0.23
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. Because 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 under the 1991 Plan, and
related information, follows:
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- ----------------
<S> <C> <C> <C>
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
Terminated.................. (20,736) 1.47
Exercises................... (289,673) 1.25
Balance at December 31, 1997.. 896,999 1.18
==========
Exercisable at December 31,
1997......................... 710,139 1.18
==========
</TABLE>
Exercise prices for options outstanding as of December 31, 1997, ranged from
$1.18 to $2.34. The weighted-average remaining contractual life of those
options is 6.4 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.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option activity under the 1996 employee
plan, 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
Granted................................ 504,090 13.74
Terminated............................. (118,202) 17.53
Exercised.............................. (33,054) 18.99
--------
Balance at December 31, 1997............. 962,304 16.37
========
Exercisable at December 31, 1997......... 111,475 18.93
========
Weighted-average fair value of options
granted during 1996..................... 13.46
Weighted-average fair value of options
granted during 1997..................... 8.49
</TABLE>
Exercise prices for options outstanding as of December 31, 1997, ranged from
$13.63 to $19.00. The weighted-average remaining contractual life of those
options is 8.8 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. The weighted-average remaining
contractual life of those options is 9.3 years.
A summary of the Company's stock option activity under the 1996 Directors
Plan, and related information follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at December 31, 1995....................... --
Granted ......................................... 3,000 $30.50
Terminated....................................... -- --
-----
Balance at December 31, 1996....................... 3,000 30.50
Granted.......................................... 5,000 23.49
Terminated....................................... -- --
-----
Balance at December 31, 1997....................... 8,000 26.12
=====
Exercisable at December 31, 1997................... 750 30.50
=====
</TABLE>
NOTE 11 -- PRO FORMA INFORMATION
Pro forma net income 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 for the year ended December 31, 1996
and the 10-month period ended December 31, 1995, respectively) and the
weighted-average number of common and common equivalent shares outstanding
during the respective periods, assuming the conversion of Series A, B and C
Convertible Preferred Stock into Common Stock. Dilutive common equivalents
consist of stock options (calculated using the treasury-stock method).
Pursuant to the requirements of the Securities and Exchange Commission, common
shares and common equivalent shares issued at prices below the public offering
price of $19.00 per share during the 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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -- NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share in accordance with SFAS 128:
<TABLE>
<CAPTION>
YEARS ENDED 10-MONTH PERIOD
DECEMBER 31, ENDED
------------------------- DECEMBER 31,
1997 1996 1995
------------ ------------ --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income...................... $ 17,385 $ 7,267 $ 4,887
Preferred stock dividends....... -- (1,486) (3,178)
------------ ------------ ------------
Numerator for basic net income
per share--income available to
common shareholders............ $ 17,385 $ 5,781 $ 1,709
Effect of diluted securities:
Preferred stock dividends for
Series A, B and C preferred
stock........................ -- 1,256 2,689
------------ ------------ ------------
Numerator for diluted net
income per share--income
available to common
shareholders after assumed
conversions.................. 17,385 7,037 4,398
Denominator:
Denominator for basic net income
per share--weighted-average
shares......................... 28,863 22,811 2,646
Effect of dilutive securities:
Employee stock options........ 1,253 1,672 1,756
Cheap stock................... -- -- 52
Convertible preferred stock... -- -- 11,876
Effect of conversion of
preferred stock.............. -- 4,121 --
------------ ------------ ------------
1,253 5,793 13,684
Dilutive potential common shares
Denominator for diluted net
income per share--adjusted
weighted-average shares and
assumed conversions.......... 30,116 28,604 16,330
============ ============ ============
Basic net income per share........ $ 0.60 $ 0.25 $ 0.65
============ ============ ============
Diluted net income per share...... $ 0.58 $ 0.25 $ 0.27
============ ============ ============
</TABLE>
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company paid one of its shareholders $2,730,000, $1,817,000 and $1,220,000
in the years ended December 31, 1997 and 1996, and the 10-month period ended
December 31, 1995, respectively, relating to the Company's utilization of the
shareholder's telecommunications network.
The Company paid another of its shareholders $2,595,000, $9,532,000 and
$943,000 in the years ended December 31, 1997 and 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 $850,000 and $1,154,000 of interest income from one of
its shareholders in the years ended December 31, 1997 and 1996, respectively.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- 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 years ended December 31, 1997
and 1996, and the 10-month period ended December 31, 1995, contribution
expenses related to the Plan were not significant.
NOTE 15 -- FINANCIAL INSTRUMENTS
The Company's financial instruments at December 31, 1997 and 1996, 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, 1997, 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 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 CALENDAR QUARTER ENDED 1996 CALENDAR QUARTER ENDED
--------------------------------- --------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $66,525 $78,044 $87,489 $103,567 $60,199 $67,568 $70,459 $67,603
Cost of service......... 52,071 59,595 67,499 80,893 46,634 52,624 55,223 53,114
Net income.............. 3,145 4,416 4,757 5,067 1,115 1,439 2,369 2,344
Net income per share.... 0.11 0.15 0.16 0.17 0.01 0.04 0.08 0.08
Net income per share--
assuming dilution...... 0.11 0.15 0.16 0.17 0.04 0.05 0.08 0.08
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 17 -- SUBSEQUENT EVENT
On January 21, 1998, the Company consummated a transaction (the "KeyBank
Joint Venture") with KeyBank National Association ("KeyBank") pursuant to
which the Company will provide transaction processing services to, and jointly
own and operate with KeyBank, a newly created limited liability company called
Key Merchant Services, LLC ("KMS"). The purchase price of the Company's
membership interest is payable over a three year period and is contingent upon
achieving certain levels of credit and debit card transaction processing
volume. The maximum consideration payable is $74 million. The Company owns a
51% interest in KMS.
F-20
<PAGE>
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING SHAREHOLDERS OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PRO-
SPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 24
Management................................................................ 46
Certain Relationships and Related Transactions............................ 51
Principal and Selling Shareholders........................................ 53
Description of Capital Stock.............................................. 55
Shares Eligible for Future Sale........................................... 58
Underwriting.............................................................. 59
Legal Matters............................................................. 61
Experts................................................................... 61
Available Information..................................................... 61
Incorporation of Certain Information by Reference......................... 62
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
7,100,000 SHARES
[LOGO OF NOVA CORPORATION APPEARS HERE]
COMMON STOCK
--------
PROSPECTUS
, 1998
--------
SALOMON SMITH BARNEY
BT ALEX. BROWN
THE ROBINSON-HUMPHREY
COMPANY
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 25, 1998
PROSPECTUS
7,100,000 SHARES
LOGO
COMMON STOCK
--------
Of the 7,100,000 shares of Common Stock being offered hereby, 5,300,000
shares are being sold by NOVA Corporation (the "Company") and 1,800,000 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders.
Of the 7,100,000 shares of Common Stock offered hereby, 5,680,000 are being
offered in the United States and Canada and 1,420,000 shares are being offered
in a concurrent international offering outside the United States and Canada.
The public offering price and the aggregate underwriting discount per share
will be identical for both offerings. See "Underwriting."
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "NIS." The last reported sale price of the Common
Stock on the NYSE on March 24, 1998, was $28.50 per share.
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
- - - --------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- - - --------------------------------------------------------------
Total(3) $ $ $ $
</TABLE>
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
(1) For information regarding indemnification, see "Underwriting."
(2) Before deducting expenses estimated at $515,000 payable by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters a 30-day option
to purchase up to 1,065,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions, and Proceeds to the Selling Shareholders will be $ ,
$ , and $ , respectively.
--------
The shares of Common Stock are being offered by the several Managers named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about , 1998,
at the office of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
--------
SALOMON SMITH BARNEY INTERNATIONAL BT ALEX. BROWN INTERNATIONAL
THE ROBINSON-HUMPHREY COMPANY
, 1998
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING SHAREHOLDERS OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PRO-
SPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 24
Management................................................................ 46
Certain Relationships and Related Transactions............................ 51
Principal and Selling Shareholders........................................ 53
Description of Capital Stock.............................................. 55
Shares Eligible for Future Sale........................................... 58
Underwriting.............................................................. 59
Legal Matters............................................................. 61
Experts................................................................... 61
Available Information..................................................... 61
Incorporation of Certain Information by Reference......................... 62
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
7,100,000 SHARES
[LOGO OF NOVA CORPORATION APPEARS HERE]
COMMON STOCK
-------
PROSPECTUS
, 1998
-------
SALOMON SMITH BARNEY
INTERNATIONAL
BT ALEX. BROWN
INTERNATIONAL
THE ROBINSON-HUMPHREY
COMPANY
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses of the offering, other than underwriting discounts and
commissions, are:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 71,000
NASD filing fee.................................................... 24,000
NYSE listing fee................................................... 51,000
Blue sky fees and expenses......................................... 1,500
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 125,000
Accounting fees and expenses....................................... 80,000
Transfer agent and registrar fees.................................. 2,500
Miscellaneous expenses............................................. 10,000
--------
Total............................................................ $515,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14-2-202(b)(4) of the Georgia Business Corporation Code (the
"Georgia Code") provides that a corporation's Articles of Incorporation may
include a provision that eliminates or limits the personal liability of
directors for monetary damages to the corporation or its shareholders for
breach of their duty of care and other duties as directors; provided, however,
that the Section does not permit a corporation to eliminate or limit the
liability of a director for appropriating, in violation of his duties, any
business opportunity of the corporation, engaging in intentional misconduct or
a knowing violation of law, obtaining an improper personal benefit, or voting
for or assenting to an unlawful distribution (whether as a dividend, stock
repurchase or redemption or otherwise) as provided in Section 14-2-832 of the
Georgia Code. Section 14-2-202(b)(4) also does not eliminate or limit the
rights of a corporation or any shareholder to seek an injunction or other non-
monetary relief in the event of a breach of a director's fiduciary duty. In
addition, Section 14-2-202(b)(4) applies only to claims against a director
arising out of his role as a director and does not relieve a director from
liability arising from his role as an officer or in any other capacity. The
provisions of Article VII of the Registrant's Articles of Incorporation (the
"Articles") are similar in all substantive respects to those contained in
Section 14-2-202(b)(4) of the Georgia Code outlined above, and provides that
the liability of directors of the Registrant shall be limited to the fullest
extent permitted by amendments to Georgia law.
Sections 14-2-850 to 14-2-859, inclusive, of the Georgia Code govern the
indemnification of directors, officers, employees and agents. Section 14-2-851
of the Georgia Code provides for indemnification of a director of the
Registrant for liability incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including civil actions brought as derivative
actions by or in the right of the Registrant) in which he may become involved
by reason of being a director of the Registrant. Section 14-2-851 also
provides such indemnity for directors who, at the request of the Registrant,
act as directors, officers, partners, trustees, employees or agents of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan or another enterprise. The Section permits indemnification if the
director acted in a manner he believed in good faith to be in or not opposed
to the best interest of the Registrant and, in addition, in criminal
proceedings, if he had no reasonable cause to believe his conduct was
unlawful. If the required standard of conduct is met, indemnification may
include judgments, settlements, penalties, fines or reasonable expenses
(including attorneys' fees) incurred with respect to a proceeding. However, if
the director is adjudged liable to the Registrant in a derivative action or on
the basis that personal benefit was improperly received by him, the director
will only be entitled to such indemnification for reasonable expenses as a
court finds to be proper in accordance with the provisions of Section 14-2-
854.
II-1
<PAGE>
Section 14-2-852 of the Georgia Code provides that directors who are
successful with respect to any claim brought against them, which claim is
brought because they are or were directors of the Registrant, are entitled to
indemnification against reasonable expenses as of right. Conversely, if the
charges made in any action are sustained, the determination of whether the
required standard of conduct has been met will be made, in accordance with the
provisions of Section 14-2-855 of the Georgia Code, as follows: (i) by the
majority vote of a quorum of the disinterested members of the board of
directors, (ii) if a quorum cannot be obtained, by a committee thereof duly
designated by the board of directors, consisting of two or more disinterested
directors, (iii) by special legal counsel, or (iv) by the shareholders, but,
in such event, the shares owned by or voted under the control of directors
seeking indemnification may not be voted.
Section 14-2-857 of the Georgia Code provides that an officer of the
Registrant (but not an employee or agent generally) who is not a director has
the mandatory right of indemnification granted to directors under Section 14-
2-852, as described above. In addition, the Registrant may, as provided by its
Articles, Bylaws, general or specific actions by its Board of Directors, or by
contract, indemnify and advance expenses to an officer, employee or agent who
is not a director to the extent that such indemnification is consistent with
public policy.
The provisions of Article IX of the Registrant' Bylaws provide for
indemnification by the Registrant to the full extent permitted by, the
foregoing provisions of the Georgia Code outlined above.
Officers and directors of the Registrant are presently covered by insurance
which (with certain exceptions and within certain limitations) indemnifies
them against any losses or liabilities arising from any alleged "wrongful act"
including any alleged breach of duty, neglect, error, misstatement, misleading
statement, omissions or other act done or wrongfully attempted. The cost of
such insurance is borne by the Registrant as permitted by the Bylaws of the
Registrant and the laws of the State of Georgia.
Reference is hereby made to Section 9 of the Underwriting Agreement, the
form of which is filed as Exhibit 1 hereto, in which the Underwriters agree to
indemnify the directors and officers of the Registrant and certain other
persons against certain civil liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On July 21, 1995, in connection with the acquisition of the bankcard
processing operations of the Bank of Boulder, NOVA Information Systems, Inc.
("NOVA Information Systems") granted options to acquire an aggregate of 25,600
shares of common stock of NOVA Information Systems having an original exercise
price of $1.18 per share to an employee of Boulder Bankcard Processing, Inc.
and options to acquire an aggregate of 38,400 shares of common stock of NOVA
Information Systems having an original exercise price of $2.34 per share to
employees of NOVA Information Systems, pursuant to the 1991 Stock Option Plan
(as defined herein). This transaction was effected in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act.
On January 31, 1996, in connection with the First Union Alliance with First
Union Corporation and various banking subsidiaries of First Union Corporation
(the "First Union Banks") (First Union Corporation and the First Union Banks
are collectively referred to herein as "First Union"), the Registrant acquired
all of the outstanding capital stock of NOVA Information Systems and issued
the following securities:
(i) an aggregate of 9,149,209 shares of common stock of the Registrant to
the First Union Banks in exchange for the transaction processing assets of
First Union (the "First Union Assets");
(ii) 1,168,291 shares of common stock of the Registrant, 14,832 shares of
Series A Convertible Preferred Stock, 10,027 shares of Series B Convertible
Preferred Stock of the Registrant and 5,000 shares of Series D Preferred
Stock to Warburg, Pincus Investors, L.P. ("Warburg") in exchange for
768,000 shares of common stock of NOVA Information Systems, a warrant to
purchase 512,000 shares of common stock of NOVA Information Systems, 14,832
shares of Series A Convertible Preferred Stock of NOVA Information Systems,
10,027 shares of Series B Convertible Preferred Stock of NOVA Information
Systems, and 5,000 shares of Series D Preferred Stock of NOVA Information
Systems;
II-2
<PAGE>
(iii) 413,324 shares of common stock of the Registrant, 683.34 shares of
Series A Convertible Preferred Stock of the Registrant and 3,029 shares of
Series C Convertible Preferred Stock of the Registrant to WorldCom in
exchange for 256,000 shares of common stock of NOVA Information Systems, a
warrant to purchase 665,600 shares of common stock of NOVA Information
Systems, 683.34 shares of Series A Convertible Preferred Stock of NOVA
Information Systems, and 3,029 shares of Series C Convertible Preferred
Stock of NOVA Information Systems;
(iv) 192,000 shares, 153,600 shares and 54,912 shares of common stock of
the Registrant, respectively, to Edward Grzedzinski, James M. Bahin, and
Paul Bowers in exchange for 192,000 shares, 153,600 shares and 54,912
shares of common stock, respectively of NOVA Information Systems; and
(v) an aggregate of 246,784 shares of common stock of the Registrant to
eight members of management of NOVA Information Systems in exchange for an
aggregate of 246,784 shares of common stock of NOVA Information Systems.
This transaction was effected in reliance upon the exemption from
registration set forth in Rule 506 of Regulation D under the Securities Act.
In addition, on January 31, 1996, the Registrant assumed all obligations
under each outstanding option representing the right to purchase shares of
common stock of NOVA Information Systems granted under the terms of the 1991
Employees' Stock Option and Stock Appreciation Rights Plan of NOVA Information
Systems (the "1991 Stock Option Plan"). Such options were converted into
options representing the right to purchase an equal number of shares of common
stock of the Registrant at the same exercise price. This transaction was
effected in reliance upon the exemption from registration set forth in Section
4(2) of the Securities Act.
In March 1996, the Registrant issued an aggregate of 986,116 shares of
common stock of the Registrant to certain employees in connection with the
exercise of stock options previously granted by NOVA Information Systems
pursuant to the 1991 Stock Option Plan for aggregate consideration of
$1,163,616.88 ($1.18 per share). These transactions were effected in reliance
upon the exemption from registration set forth in Section 4(2) of the
Securities Act.
In April 1996, the Registrant issued an aggregate of 641,532 shares of
common stock of the Registrant to certain employees in connection with the
exercise of stock options previously granted by NOVA Information Systems
pursuant to the 1991 Stock Option Plan for aggregate consideration of $764,431
($1.18 to $2.34 per share). These transactions were effected in reliance upon
the exemption from registration set forth in Section 4(2) of the Securities
Act.
In May 1996, the Registrant issued an aggregate of 8,000 shares of common
stock of the Registrant to one employee in connection with the exercise of
stock options previously granted by NOVA Information Systems pursuant to the
1991 Stock Option Plan for aggregate consideration of $9,440 ($1.18 per
share). This transaction was effected in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
In January 1998, the Registrant granted Kessler Financial Services, L.P.
("Kessler") warrants to purchase 50,000 shares of common stock of the
Registrant (the "Kessler Warrants"). The Kessler Warrants were granted as
consideration for Kessler providing to the Registrant certain marketing and
referral services pursuant to a marketing agreement. The transaction was
effected in reliance upon the exemption from registration set forth in Section
4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this Registration Statement:
1.1 Form of U.S. Underwriting Agreement among the Registrant and Smith
Barney Inc., BT Alex. Brown Incorporated and The Robinson-Humphrey
Company, LLC as Representatives of the several Underwriters.
1.2 Form of International Underwriting Agreement among the Registrant,
Smith Barney Inc., BT Alex. Brown International, a division of Bankers
Trust International PLC, and The Robinson-Humphrey Company, LLC, as
Lead Managers.
II-3
<PAGE>
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.(1)
2.2 Contribution Agreement, dated October 30, 1995, among the Registrant
(formerly NOVA Holdings, Inc.), NOVA Information Systems, Inc., the
then-current shareholders of NOVA Information Systems, Inc., First
Union Corporation, the First Union Banks, and First Fidelity
Bancorporation and its banking subsidiaries.(1)
4.1 Articles of Incorporation of the Registrant, as amended.(1)
4.2 Bylaws of the Registrant, as amended.(2)
4.3 Form of specimen Common Stock certificate.(1)
4.4 Shareholders Agreement dated January 31, 1996, among the Registrant
(formerly NOVA Holdings, Inc.), NOVA Information Systems, Inc., First
Union, WorldCom, Warburg and each of the other Original
Shareholders(1), as amended by supplements dated as of August 15,
1997, August 22, 1997 and September 8, 1997.
4.5 Registration Rights Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), Warburg, WorldCom, and
First Union.(1)
5 Opinion of Long Aldridge & Norman LLP.
11.1 Statement re: Computation of Pro Forma Earnings Per Share.
23.1 Consent of Long Aldridge & Norman LLP (included in its opinion filed
as Exhibit 5).
23.2 Consent of Ernst & Young LLP.
24 Powers of Attorney.(3)
27 Financial Data Schedule.
- - - --------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 333-3287) and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
(3) Previously filed.
ITEM 17. UNDERTAKINGS.
(a) Filings Incorporating Subsequent Exchange Act Documents by
Reference. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Acceleration of Effectiveness. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of the
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
(c) Rule 430A Prospectuses. The undersigned registrant hereby undertakes
that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF
GEORGIA, ON MARCH 25, 1998.
NOVA Corporation
(Registrant)
/s/ Edward Grzedzinski
By: _________________________________
EDWARD GRZEDZINSKI
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON MARCH 25, 1998.
SIGNATURE TITLE
/s/ Edward Grzedzinski Chairman of the Board, President and
_____________________________________ Chief Executive Officer (Principal
EDWARD GRZEDZINSKI Executive Officer)
/s/ James M. Bahin Vice Chairman of the Board, Chief
_____________________________________ Financial Officer and Secretary
JAMES M. BAHIN (Principal Accounting Officer)
Director
/s/ Charles T. Cannada*
_____________________________________
CHARLES T. CANNADA
Director
/s/ Dr. James E. Carnes*
_____________________________________
DR. JAMES E. CARNES
Director
/s/ U. Bertram Ellis, Jr.*
_____________________________________
U. BERTRAM ELLIS, JR.
Director
/s/ Dr. Henry Kressel*
_____________________________________
DR. HENRY KRESSEL
Director
/s/ Joseph P. Landy*
_____________________________________
JOSEPH P. LANDY
Director
/s/ Maurice F. Terbrueggen, Jr.*
_____________________________________
MAURICE F. TERBRUEGGEN, JR.
/s/ James M. Bahin
*By: ___________________________
JAMES M. BAHIN
AS ATTORNEY-IN-FACT
II-6
<PAGE>
INDEX OF EXHIBITS
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Registrant and Smith
Barney Inc., BT Alex. Brown Incorporated and The Robinson-
Humphrey Company, LLC as Representatives of the several
Underwriters.
1.2 Form of International Underwriting Agreement among the
Registrant, Smith Barney Inc., BT Alex. Brown International, a
division of Bankers Trust International PLC, and The Robinson-
Humphrey Company, LLC, as Lead Managers.
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.(1)
2.2 Contribution Agreement, dated October 30, 1995, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information
Systems, Inc., the then-current shareholders of NOVA
Information Systems, Inc., First Union Corporation, the First
Union Banks, and First Fidelity Bancorporation and its banking
subsidiaries.(1)
4.1 Articles of Incorporation of the Registrant, as amended.(1)
4.2 Bylaws of the Registrant, as amended.(2)
4.3 Form of specimen Common Stock certificate.(1)
4.4 Shareholders Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information
Systems, Inc., First Union, WorldCom, Warburg and each of the
other Original Shareholders(1), as amended by supplements dated
August 15, 1997, August 22, 1997 and September 8, 1997.
4.5 Registration Rights Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), Warburg, WorldCom,
and First Union.(1)
5 Opinion of Long Aldridge & Norman LLP.
11.1 Statement re: Computation of Pro Forma Earnings Per Share.
23.1 Consent of Long Aldridge & Norman LLP (included in its opinion
filed as Exhibit 5).
23.2 Consent of Ernst & Young LLP.
24 Powers of Attorney.(3)
27 Financial Data Schedule.
</TABLE>
- - - --------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 333-3287) and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
(3) Previously filed.
II-7
<PAGE>
EXHIBIT 1.1
5,680,000 Shares
NOVA CORPORATION
Common Stock
U.S. UNDERWRITING AGREEMENT
---------------------------
__________, 1998
SMITH BARNEY INC.
BT ALEX. BROWN INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, LLC
As Representatives of the Several U.S. Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Nova Corporation, a Georgia corporation (the "Company"), proposes to issue
and sell an aggregate of 4,240,000 shares of its common stock, $.01 par value
per share, to the several Underwriters named in Schedule II hereto (the "U.S.
Underwriters") and the persons named in Part A of Schedule I hereto (the
"Selling Stockholders") propose to sell to the several U.S. Underwriters an
aggregate of 1,440,000 shares of common stock of the Company. The Company and
the Selling Stockholders are hereinafter sometimes referred to as the "Sellers".
The Company's common stock, $.01 par value, is hereinafter referred to as the
"Common Stock" and the 4,240,000 shares of Common Stock to be issued and sold to
the U.S. Underwriters by the Company and the 1,440,000 shares of Common Stock to
be sold to the U.S. Underwriters by the Selling Stockholders are hereinafter
referred to as the "Firm Shares". The Selling Stockholders listed in Part B of
Schedule I hereto also propose to sell to the U.S. Underwriters, upon the terms
and conditions set forth in Section 2 hereof, up to an additional 1,065,000
shares (the "Additional Shares") of Common Stock. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares".
It is understood that the Company and the Selling Stockholders are
concurrently entering into an International Underwriting Agreement, dated the
<PAGE>
date hereof (the "International Underwriting Agreement"), providing for the sale
of 1,420,000 shares of Common Stock (the "International Shares"), of which
1,060,000 shares will be sold by the Company and 360,000 will be sold by the
Selling Stockholders through arrangements with certain underwriters outside the
United States and Canada (the "Managers"), for whom Smith Barney, Inc., BT Alex.
Brown International, a division of Bankers Trust International PLC, and The
Robinson-Humphrey Company, LLC are acting as lead Managers (the "Lead
Managers"). The International Shares and the Shares, collectively, are herein
called the "Underwritten Shares."
The Company and the Selling Stockholders also understand that the
Representatives (as defined herein) and the Lead Managers have entered into an
agreement (the "Agreement Between U.S. Underwriters and Managers") contemplating
the coordination of certain transactions between the U.S. Underwriters and the
Managers and that, pursuant thereto and subject to the conditions set forth
therein, the U.S. Underwriters may purchase from the Managers a portion of the
International Shares or sell to the Managers a portion of the Shares. The
Company and the Selling Stockholders understand that any such purchases and
sales between the U.S. Underwriters and the Managers shall be governed by the
Agreement Between U.S. Underwriters and Managers and shall not be governed by
the terms of this Agreement or the International Underwriting Agreement.
The Company and the Selling Stockholders wish to confirm as follows their
respective agreements with you (the "Representatives") and the other several
Underwriters on whose behalf you are acting, in connection with the several
purchases of the Shares by the Underwriters.
1. Registration Statement and Prospectuses. The Company has prepared and
---------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including prospectuses subject to completion relating to the
Underwritten Shares. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a post-
effective amendment to the registration statement will be filed and must be
declared effective before the offering of the Underwritten Shares may commence,
the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If an
abbreviated registration statement is prepared and filed with the Commission in
accordance with Rule 462(b) under the Act (an "Abbreviated Registration
Statement"), the term "Registration Statement" as used in this Agreement
includes the Abbreviated Registration Statement. The term "Prospectuses" as
used in this Agreement means the prospectuses in the forms included in the
Registration Statement, or, if the prospectuses included in the Registration
Statement omit information in reliance on Rule 430A under the Act and such
information is included in prospectuses filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectuses" as used in this Agreement
means the prospectuses in the forms included in the Registration Statement as
-2-
<PAGE>
supplemented by the addition of the Rule 430A information contained in the
prospectuses filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectuses" as used in this Agreement means the prospectuses
subject to completion in the forms included in the Registration Statement at the
time of the initial filing of the Registration Statement with the Commission,
and as such prospectuses shall have been amended from time to time prior to the
date of the Prospectuses. Any reference in this Agreement to the registration
statement, the Registration Statement, any Prepricing Prospectuses or the
Prospectuses shall be deemed to refer to and include the documents incorporated
by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the
date of the registration statement, the Registration Statement, such Prepricing
Prospectuses or the Prospectuses, as the case may be, and any reference to any
amendment or supplement to the registration statement, the Registration
Statement, any Prepricing Prospectuses or the Prospectuses shall be deemed to
refer to and include any documents filed after such date under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") which, upon filing, are
incorporated by reference therein, as required by paragraph (b) of Item 12 of
Form S-3. As used herein, the term "Incorporated Documents" means the documents
which at the time are incorporated by reference in the registration statement,
the Registration Statement, any Prepricing Prospectuses, the Prospectuses, or
any amendment or supplement thereto.
It is understood that two forms of Prepricing Prospectus and two forms of
Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
Shares that are to be offered and sold in the United States (as defined herein)
or Canada (as defined herein) to U.S. or Canadian Persons (the "U.S. Prepricing
Prospectus" and the "U.S. Prospectus," respectively), and a Prepricing
Prospectus and a Prospectus relating to the International Shares which are to be
offered and sold outside the United States or Canada to persons other than U.S.
or Canadian Persons (the "International Prepricing Prospectus" and the
"International Prospectus," respectively). The U.S. Prospectus and the
International Prospectus are herein collectively called the "Prospectuses," and
the U.S. Prepricing Prospectus and the International Prepricing Prospectus are
herein called the "Prepricing Prospectuses." For purposes of this Agreement:
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable; "U.S. or Canadian Person" means any
resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction; and "Canada" means Canada and its
territories, its possessions and other areas subject to its jurisdiction.
2. Agreements to Sell and Purchase. Subject to such adjustments as you
-------------------------------
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each U.S. Underwriter and, upon the basis of the representations, warranties and
-3-
<PAGE>
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, each U.S. Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $____ per Share (the "purchase price per share"), the number of Firm
Shares which bears the same proportion to the aggregate number of Firm Shares to
be issued and sold by the Company as the number of Firm Shares set forth
opposite the name of such U.S. Underwriter in Schedule II hereto (or such number
of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the Selling
Stockholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Stockholder agrees, subject to all the terms and
conditions set forth herein, to sell to each U.S. Underwriter and, upon the
basis of the representations, warranties and agreements of the Company and the
Selling Stockholders herein contained and subject to all the terms and
conditions set forth herein, each U.S. Underwriter, severally and not jointly,
agrees to purchase from each Selling Stockholder, at the purchase price per
share, the number of Firm Shares which bears the same proportion to the number
of Firm Shares set forth opposite the name of such Selling Stockholder in
Schedule I hereto as the number of Firm Shares set forth opposite the name of
such U.S. Underwriter in Schedule II hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company and the Selling Stockholders.
The Selling Stockholders listed in Part B of Schedule I hereto also agree,
subject to all the terms and conditions set forth herein, to sell to the U.S.
Underwriters, and, upon the basis of the representations, warranties and
agreements of the Selling Stockholders herein contained and subject to all the
terms and conditions set forth herein, the U.S. Underwriters shall have the
right to purchase from the Selling Stockholders listed in Part B of Schedule I
hereto, at the purchase price per share, pursuant to an option (the "over-
allotment option") which may be exercised at any time and from time to time
prior to 9:00 P.M., New York City time, on the 30th day after the date of the
U.S. Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange is
open for trading), up to an aggregate of 1,065,000 Additional Shares from the
Selling Stockholders listed in Part B of Schedule I hereto (the maximum number
of Additional Shares which each of them agrees to sell upon the exercise by the
U.S. Underwriters of the over-allotment option is set forth opposite their
respective names in Part B of Schedule I). Additional Shares may be purchased
only for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. The number of Additional Shares which the U.S.
Underwriters elect to purchase upon any exercise of the over-allotment option
shall be provided by each Selling Stockholder who has agreed to sell Additional
Shares in proportion to the respective maximum numbers of Additional Shares
which each such Selling Stockholder has agreed to sell. Upon any exercise of
the over-allotment option, each U.S. Underwriter, severally and not jointly,
agrees to purchase from each Selling Stockholder who has agreed to sell
Additional Shares the number of Additional Shares (subject to such adjustments
as you may determine in order to avoid fractional shares) which bears the same
proportion to the number of Additional Shares to be sold by each Selling
Stockholder who has agreed to sell Additional Shares as the number of Firm
Shares set forth opposite the name of such U.S. Underwriter in Schedule II
-4-
<PAGE>
hereto (or such number of Firm Shares increased as set forth in Section 12
hereof) bears to the aggregate number of Firm Shares to be sold by the Selling
Stockholders.
Certificates in transferable form for the Shares (including any Additional
Shares) which each of the Selling Stockholders agrees to sell pursuant to this
Agreement have been placed in custody with First Union National Bank of North
Carolina (the "Custodian") for delivery under this Agreement pursuant to a
Custody Agreement and Power of Attorney (the "Custody Agreement") executed by
each of the Selling Stockholders appointing Edward Grzedzinski and James M.
Bahin as agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling
Stockholder agrees that (i) the Shares represented by the certificates held in
custody pursuant to the Custody Agreement are subject to the interests of the
U.S. Underwriters, the Company and each other Selling Stockholder, (ii) the
arrangements made by the Selling Stockholders for such custody are, except as
specifically provided in the Custody Agreement, irrevocable, and (iii) the
obligations of the Selling Stockholders hereunder and under the Custody
Agreement shall not be terminated by any act of such Selling Stockholder or by
operation of law, whether by the death or incapacity of any Selling Stockholder
or the occurrence of any other event or, if the Selling Stockholder is not a
natural person, upon any dissolution, winding up, distribution of assets or
other event affecting the legal existence of such Selling Stockholder. If any
Selling Stockholder shall die or be incapacitated or if any other event shall
occur before the delivery of the Shares hereunder or if the Selling Stockholder
is not a natural person, shall dissolve, wind up, distribute assets or if any
other event affecting the legal existence of such Selling Stockholder shall
occur before the delivery of the Shares hereunder, certificates for the Shares
of such Selling Stockholder shall be delivered to the Underwriters by the
Attorneys-in-Fact in accordance with the terms and conditions of this Agreement
and the Custody Agreement as if such death or incapacity, dissolution, winding
up or distribution of assets or other event had not occurred, regardless of
whether or not the Attorneys-in-Fact or any U.S. Underwriter shall have received
notice of such death, incapacity, dissolution, winding up or distribution of
assets or other event. Each Attorney-in-Fact is authorized, on behalf of each
of the Selling Stockholders, to execute this Agreement and any other documents
necessary or desirable in connection with the sale of the Shares to be sold
hereunder by such Selling Stockholder, to make delivery of the certificates for
such Shares, to receive the proceeds of the sale of such Shares, to give
receipts for such proceeds, to pay therefrom any expenses to be borne by such
Selling Stockholder in connection with the sale and public offering of such
Shares, to distribute the balance thereof to such Selling Stockholder, and to
take such other action as may be necessary or desirable in connection with the
transactions contemplated by this Agreement. Each Attorney-in-Fact agrees to
perform his duties under the Custody Agreement.
Each U.S. Underwriter represents, warrants, covenants and agrees that,
except as contemplated under Section 2 of the Agreement Between U.S.
Underwriters and Managers dated the date hereof, (i) it is not purchasing any
Shares for the account of anyone other than a U.S. or Canadian Person, (ii) it
has not offered or sold, and will not offer, sell, resell or deliver, directly
or indirectly, any Shares or distribute any U.S. Prospectus outside the United
States or Canada or to anyone other than a U.S. or Canadian Person, and (iii)
any offer of Shares in Canada will be made only pursuant to an exemption from
-5-
<PAGE>
the requirement to file a prospectus in the relevant province of Canada in which
such offer is made.
3. Terms of Public Offering. The Sellers have been advised by you that
------------------------
the U.S. Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the U.S. Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the U.S.
-------------------------------------------
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on , 1998 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement among you,
the Company and the Attorneys-in-Fact.
Delivery to the U.S. Underwriters of and payment for any Additional Shares
to be purchased by the U.S. Underwriters shall be made at the aforementioned
office of Smith Barney Inc. at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the U.S. Underwriters to the
Company and the Attorneys-in-Fact of the U.S. Underwriters' determination to
purchase a number, specified in such notice, of Additional Shares. The place of
closing for any Additional Shares and the Option Closing Date for such Shares
may be varied by agreement among you, the Company and the Attorneys-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several U.S.
-------------------------
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
-6-
<PAGE>
(b) The Company will advise you promptly and, if requested by you, will
confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectuses or the Prospectuses or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, including the filing of any information, documents or reports
pursuant to the Exchange Act, that makes any statement of a material fact made
in the Registration Statement or the Prospectuses (as then amended or
supplemented) untrue or which requires the making of any additions to or changes
in the Registration Statement or the Prospectuses (as then amended or
supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectuses (as then amended or supplemented) to comply with the Act or any
other law. If at any time the Commission shall issue any stop order suspending
the effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Company will furnish to you, without charge (i) four signed copies
of the Registration Statement as originally filed with the Commission and of
each amendment thereto, including financial statements and all exhibits to the
Registration Statement, (ii) such number of conformed copies of the Registration
Statement as originally filed and of each amendment thereto, but without
exhibits, as you may request, (iii) such number of copies of the Incorporated
Documents, without exhibits, as you may request and (iv) four copies of the
exhibits to the Incorporated Documents.
(d) The Company will not file any amendment to the Registration Statement
or make any amendment or supplement to the Prospectuses or, prior to the end of
the period of time referred to in the first sentence in subsection (f) below,
file any document which, upon filing becomes an Incorporated Document, of which
you shall not previously have been advised or to which, after you shall have
received a copy of the document proposed to be filed, you shall reasonably
object.
(e) Prior to the execution and delivery of this Agreement, the Company has
delivered or will deliver to you, without charge, in such quantities as you have
requested or may hereafter request, copies of each form of the U.S. Prepricing
Prospectus. The Company consents to the use, in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several U.S. Underwriters and by dealers,
prior to the date of the U.S. Prospectus, of each U.S. Prepricing Prospectus so
furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as possible
and thereafter from time to time for such period as in the opinion of counsel
-7-
<PAGE>
for the U.S. Underwriters a U.S. Prospectus is required by the Act to be
delivered in connection with sales by any U.S. Underwriter or dealer, the
Company will expeditiously deliver to each U.S. Underwriter and each dealer,
without charge, as many copies of the U.S. Prospectus (and of any amendment or
supplement thereto) as you may reasonably request. The Company consents to the
use of the U.S. Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several U.S.
Underwriters and by all dealers to whom Shares may be sold, both in connection
with the offering and sale of the Shares and for such period of time thereafter
as the U.S. Prospectus is required by the Act to be delivered in connection with
sales by any U.S. Underwriter or dealer. If during such period of time any
event shall occur that in the judgment of the Company or in the opinion of
counsel for the U.S. Underwriters is required to be set forth in the U.S.
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the U.S. Prospectus (or to file under the Exchange Act any document which,
upon filing, becomes an Incorporated Document) in order to comply with the Act
or any other law, the Company will forthwith prepare and, subject to the
provisions of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto (or to such document), and will expeditiously
furnish to the U.S. Underwriters and dealers a reasonable number of copies
thereof. In the event that the Company and you, as Representatives of the
several U.S. Underwriters, agree that the U.S. Prospectus should be amended or
supplemented, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for the U.S.
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several U.S. Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may reasonably
designate and will file such consents to service of process or other documents
necessary or appropriate in order to effect such registration or qualification;
provided that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to service of process in suits, other than those
arising out of the offering or sale of the Shares, in any jurisdiction where it
is not now so subject.
(h) The Company will make generally available to its security holders a
consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section ll(a) of the Act.
(i) During the period of five years hereafter, the Company will furnish to
you (i) as soon as available, a copy of each report of the Company mailed to
stockholders or filed with the Commission or the NYSE and (ii) from time to time
such other information concerning the Company as you may request.
-8-
<PAGE>
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating this
Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement
shall be terminated by the U.S. Underwriters because of any failure or refusal
on the part of the Company or any of the Selling Stockholders to comply, in any
material respect, with the terms or fulfill, in any material respect, any of the
conditions of this Agreement, the Company agrees to reimburse the
Representatives for all reasonable out-of-pocket expenses (including reasonable
fees and expenses of counsel for the U.S. Underwriters) incurred by you in
connection herewith.
(k) The Company will apply the net proceeds from the sale of the Shares to
be sold by it hereunder substantially in accordance with the description set
forth in the Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely file the
Prospectuses pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
(m) Except as provided in this Agreement and the International Underwriting
Agreement, the Company will not offer, sell, contract to sell or otherwise
dispose of any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant any options or warrants to purchase
Common Stock, except for sales to the U.S. Underwriters pursuant to this
Agreement and to the Managers pursuant to the International Underwriting
Agreement, for a period of 60 days after the date of the Prospectuses, without
the prior written consent of Smith Barney Inc.
(n) The Company has furnished or will furnish to you "lock-up" letters, in
form and substance satisfactory to you, signed by each of its current officers
and directors and each of its stockholders listed in Schedule III.
(o) Except as stated in this Agreement and in the International
Underwriting Agreement and in the Prepricing Prospectuses and Prospectuses, the
Company has not taken, nor will it take, directly or indirectly, any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(p) The Company will use its best efforts to have the shares of Common
Stock which it agrees to sell under this Agreement listed, subject to notice of
issuance, on the New York Stock Exchange on or before the Closing Date.
6. Agreements of the Selling Stockholders. Each of the Selling
--------------------------------------
Stockholders agrees with the several U.S. Underwriters as follows:
(a) Such Selling Stockholder will cooperate to the extent necessary to
cause the registration statement or any post-effective amendment thereto to
become effective at the earliest possible time.
-9-
<PAGE>
(b) Such Selling Stockholder will pay all Federal and other taxes, if any
on the transfer or sale of the Shares being sold by the Selling Stockholder to
the U.S. Underwriters.
(c) Such Selling Stockholder will do or perform all things required to be
done or performed by the Selling Stockholder prior to the Closing Date or any
Option Closing Date, as the case may be, to satisfy all conditions precedent to
the delivery of the Shares pursuant to this Agreement.
(d) Such Selling Stockholder has executed or will execute a Alock-up@
letter as provided in Section 5(n) above and will not sell, contract to sell or
otherwise dispose of any Common Stock, except for the sale of Shares to the U.S.
Underwriters pursuant to this Agreement or to the Managers pursuant to the
International Underwriting Agreement, prior to the expiration of 60 days after
the date of the Prospectuses, without the prior written consent of Smith Barney
Inc.
(e) Except as stated in this Agreement and the International Underwriting
Agreement and in the Prepricing Prospectuses and the Prospectuses, such Selling
Stockholder has not taken and will not take, directly or indirectly, any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(f) Such Selling Stockholder will advise you promptly, and if requested by
you, will confirm such advice in writing, within the period of time referred to
in Section 5(f) hereof, of any change in the Company's condition (financial or
other), business, prospects, properties, net worth or results of operations or
of any change in information relating to such Selling Stockholder or the Company
or any new information relating to the Company or relating to any matter stated
in the Prospectus or any amendment or supplement thereto which comes to the
attention of such Selling Stockholder that suggests that any statement made in
the Registration Statement or the Prospectuses (as then amended or supplemented,
if amended or supplemented) is or may be untrue in any material respect or that
the Registration Statement or Prospectuses (as then amended or supplemented, if
amended or supplemented) omits or may omit to state a material fact or a fact
necessary to be stated therein in order to make the statements therein not
misleading in any material respect, or of the necessity to amend or supplement
the Prospectuses (as then amended or supplemented, if amended or supplemented)
in order to comply with the Act or any other law.
7. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each U.S. Underwriter that:
(a) Each U.S. Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
-10-
<PAGE>
(b) The Company and the transactions contemplated by this Agreement meet
the requirements for using Form S-3 under the Act. The Registration Statement
in the form in which it became or becomes effective and also in such form as it
may be when any post-effective amendment thereto shall become effective and the
Prospectuses and any supplement or amendment thereto when filed with the
Commission under Rule 424(b) under the Act, complied or will comply in all
material respects with the provisions of the Act and will not at any such times
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; except that this representation and warranty does not apply to
statements in or omissions from the Registration Statement or the Prospectuses
made in reliance upon and in conformity with information relating to any U.S.
Underwriter or Manager furnished to the Company in writing by a U.S. Underwriter
through you or by a Manager through the Lead Managers expressly for use therein.
(c) The Incorporated Documents heretofore filed, when they were filed (or,
if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder, and any future
Incorporated Documents so filed will, when they are filed, conform in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was filed),
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; and no such further document, when it is filed, will
contain an untrue statement of a material fact or will omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading.
(d) All the outstanding shares of Common Stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and are
free of any preemptive or similar rights; the Shares to be issued and sold by
the Company have been duly authorized and, when issued and delivered to the U.S.
Underwriters against payment therefor in accordance with the terms hereof, will
be validly issued, fully paid and nonassessable and free of any preemptive or
similar rights; and the capital stock of the Company conforms to the description
thereof in the Registration Statement and the Prospectuses.
(e) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Georgia with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectuses, and is duly registered and qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) taken as a whole.
-11-
<PAGE>
(f) All the Company's subsidiaries (collectively, the "Subsidiaries") are
listed in an exhibit to the Company's Annual Report on Form 10-K which is
incorporated by reference into the Registration Statement. Each Subsidiary is
duly organized, is validly existing as a corporation and in good standing in the
jurisdiction of its incorporation, with full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectuses, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of such Subsidiary; all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and are owned by the Company directly, or indirectly through one
of the other Subsidiaries, free and clear of any lien, adverse claim, security
interest, equity or other encumbrance, except for the pledge of outstanding
shares of capital stock of each of the Subsidiaries to the Bank of America (the
"Bank of America Pledge"); and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the
Subsidiaries are outstanding.
(g) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectuses but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectuses or to be filed as an exhibit to the Registration Statement or
any Incorporated Document that are not described or filed as required by the Act
or the Exchange Act.
(h) Neither the Company nor any of the Subsidiaries is in violation of its
certificate or articles of incorporation or by-laws, or other organizational
documents, or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which any of them or any of their respective
properties may be bound.
(i) Neither the issuance and sale of the Shares, the execution, delivery or
performance of this Agreement or the International Underwriting Agreement by the
Company nor the consummation by the Company of the transactions contemplated
hereby and thereby (i) requires any consent, approval, authorization or other
order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
-12-
<PAGE>
such as may be required for the registration of the Shares under the Act and the
Exchange Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective properties may be
bound, or violates or will violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to the terms of any
agreement or instrument to which any of them is a party or by which any of them
may be bound or to which any of the property or assets of any of them is
subject.
(j) The accountants, Ernst & Young LLP, who have certified or shall certify
the financial statements included or incorporated by reference in the
Registration Statement and the Prospectuses (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(k) The financial statements, together with related schedules and notes,
included or incorporated by reference in the Registration Statement and the
Prospectuses (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and the Subsidiaries on the basis stated in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
or incorporated by reference in the Registration Statement and the Prospectuses
(and any amendment or supplement thereto) are accurately presented and prepared
on a basis consistent with such financial statements and the books and records
of the Company and the Subsidiaries.
(l) The execution and delivery of, and the performance by the Company of
its obligations under, each of this Agreement and the International Underwriting
Agreement have been duly and validly authorized by the Company, and each of this
Agreement and the International Underwriting Agreement have been duly executed
and delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except as rights to indemnity and contribution hereunder may be limited
by federal or state securities laws.
(m) Except as disclosed in the Registration Statement and the Prospectuses
(or any amendment or supplement thereto), subsequent to the respective dates as
of which such information is given in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto), neither the Company nor
any of the Subsidiaries has incurred any liability or obligation, direct or
-13-
<PAGE>
contingent, or entered into any transaction, not in the ordinary course of
business, that is material to the Company and the Subsidiaries taken as a whole,
and there has not been any change in the capital stock, or material increase in
the short-term debt or long-term debt, of the Company or any of the
Subsidiaries, or any material adverse change, or any development involving or
which may reasonably be expected to involve, a prospective material adverse
change, in the condition (financial or other), business, net worth or results of
operations of the Company and the Subsidiaries taken as a whole.
(n) Each of the Company and the Subsidiaries has good and marketable title
to all property (real and personal) described in the Prospectuses as being owned
by it, free and clear of all liens, claims, security interests or other
encumbrances except (i) the Bank of America Pledge, (ii) such as are described
in the Registration Statement and the Prospectuses or in a document filed as an
exhibit to the Registration Statement and (iii) such as would not have a
material adverse effect in the condition (financial or other), business, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole, and all the property described in the Prospectuses as being held under
lease by each of the Company and the Subsidiaries is held by it under valid,
subsisting and enforceable leases.
(o) The Company has not distributed and, prior to the later to occur of (i)
the Closing Date or the Option Closing Date, if any, and (ii) completion of the
distribution of the Shares, will not distribute any offering material in
connection with the offering and sale of the Shares other than the Registration
Statement, the Prepricing Prospectuses, the Prospectuses or other materials, if
any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("permits") as are necessary to own its respective properties and to conduct its
business in the manner described in the Prospectuses, subject to such
qualifications as may be set forth in the Prospectuses; the Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectuses; and, except as described in the Prospectuses, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
-14-
<PAGE>
(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the
Prospectuses.
(s) The Company and each of the Subsidiaries have filed all tax returns
required to be filed, which returns are complete and correct, and neither the
Company nor any Subsidiary is in default in the payment of any taxes which were
payable pursuant to said returns or any assessments with respect thereto. All
tax liabilities have been adequately provided for in the financial statements of
the Company.
(t) Except as described in the Prospectuses or waived in writing, no holder
of any security of the Company has any right to require registration of shares
of Common Stock or any other security of the Company because of the filing of
the registration statement or consummation of the transactions contemplated by
this Agreement or the International Underwriting Agreement.
(u) Neither the Company nor any of the Subsidiaries is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
(v) The Company and each of its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as the Company believes are
adequate for the conduct of their respective businesses and the value of their
respective properties.
(w) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects, and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(x) To the best knowledge of the Company, no labor problem exists with its
employees or with employees of the Subsidiaries or that could adversely affect
the Company and its Subsidiaries taken as a whole, and the Company is not aware
of any existing or imminent labor disturbance by the employees of the Company or
its Subsidiaries's principal suppliers, contractors or customers of the Company
or its Subsidiaries that could be expected to materially adversely affect the
business of the Company and its Subsidiaries, taken as a whole.
-15-
<PAGE>
(y) Except as disclosed in the Registration Statement and except as would
not individually or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, have a material adverse effect on the business of the Company
and its Subsidiaries, taken as a whole, (A) the Company and each of its
Subsidiaries are each in compliance with all applicable Environmental Laws, (B)
the Company and each of its Subsidiaries have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each in
compliance with their requirements, (C) there are no pending or, to the
Company's knowledge, threatened Environmental Claims against the Company or its
Subsidiaries and (D) there are no circumstances known to the Company with
respect to any property or operations of the Company or its Subsidiaries that
could reasonably be anticipated to form the basis of an Environmental Claim
against the Company or its Subsidiaries.
(z) Each approval, consent, order, authorization, designation, declaration
or filing by or with any United States federal, state, local or municipal
regulatory, administrative or other governmental body necessary in connection
with the execution and delivery by the Company of this Agreement and the
International Underwriting Agreement and the consummation of the transactions
contemplated herein and therein (except such additional steps as may be required
by the Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares for
public offering by the U.S. Underwriters under State securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(aa) The Company and each of the Subsidiaries hold all material licenses,
certificates and permits from governmental authorities which are necessary to
the conduct of their businesses; and neither the Company nor any of the
Subsidiaries has received notice of, and has no knowledge of, any infringement
of any patents, patent rights, trade names, trademarks or copyrights of others,
which infringement would have a material adverse effect on the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries taken
as a whole. The Company knows of no material infringement by others of patents,
patent rights, trade names, trademarks or copyrights owned by or licensed to the
Company.
8. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder represents and warrants to each U.S. Underwriter that:
(a) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date will have, valid and marketable title to the Shares to be
sold by such Selling Stockholder, free and clear of any lien, claim, security
interest or other encumbrance, including, without limitation, any restriction on
transfer other than pursuant to this Agreement, the International Underwriting
Agreement, the Power of Attorney and the Custody Agreement.
(b) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date will have, full legal right, power and authorization, and
-16-
<PAGE>
any approval required by law, to sell, assign, transfer and deliver such Shares
in the manner provided in this Agreement and the International Underwriting
Agreement, and upon delivery of and payment for such Shares hereunder, the
several U.S. Underwriters will acquire valid and marketable title to such Shares
free and clear of any lien, claim, security interest, or other encumbrance.
(c) This Agreement, the International Underwriting Agreement and the
Custody Agreement have been duly authorized, executed and delivered by or on
behalf of such Selling Stockholder and are the valid and binding agreements of
such Selling Stockholder enforceable against such Selling Stockholder in
accordance with their terms.
(d) Neither the execution and delivery of this Agreement, the International
Underwriting Agreement or the Custody Agreement by or on behalf of such Selling
Stockholder nor the consummation of the transactions herein or therein
contemplated by or on behalf of such Selling Stockholder requires any consent,
approval, authorization or order of, or filing or registration with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required under the Act and the Exchange Act or
such as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Shares) or conflicts or will conflict with or
constitutes or will constitute a breach of, or default under, or violates or
will violate, any agreement, indenture, lease or other instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is or may be
bound or to which any of such Selling Stockholder's property or assets is
subject, or any statute, law, rule, regulation, ruling, judgment, injunction,
order or decree applicable to such Selling Stockholder or to any property or
assets of such Selling Stockholder.
(e) The Registration Statement and the Prospectuses, insofar as they relate
to such Selling Stockholder, do not and will not contain an untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(f) Such Selling Stockholder does not have any knowledge or any reason to
believe that the Registration Statement or the Prospectuses (or any amendment or
supplement thereto) contain any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(g) The representations and warranties of such Selling Stockholder in the
Custody Agreement are, and on the Closing Date and any Option Closing Date will
be, true and correct.
(h) Such Selling Stockholder has not taken, and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up arrangements
described in the Prospectuses.
-17-
<PAGE>
9. Indemnification and Contribution. (a) The Company agrees to
--------------------------------
indemnify and hold harmless each of you and each other U.S. Underwriter and each
person, if any, who controls any U.S. Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any U.S. Prepricing Prospectus
or in the Registration Statement or the U.S. Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such U.S. Underwriter or Manager furnished in
writing to the Company by or on behalf of any U.S. Underwriter through you or by
or on behalf of any Manager through a Lead Manager expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any U.S. Prepricing Prospectus shall not
inure to the benefit of any U.S. Underwriter (or to the benefit of any person
controlling such U.S. Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by such U.S.
Underwriter to any person if a copy of the U.S. Prospectus shall not have been
delivered or sent to such person within the time required by the Act and the
regulations thereunder, and the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in such U.S.
Prepricing Prospectus was corrected in the U.S. Prospectus, provided that the
Company has delivered the U.S. Prospectus to the several U.S. Underwriters in
requisite quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability which the
Company or any Selling Stockholder may otherwise have.
(b) If any action, suit or proceeding shall be brought against any U.S.
Underwriter or any person controlling any U.S. Underwriter in respect of which
indemnity may be sought against the Company or any Selling Stockholder, such
U.S. Underwriter or such controlling person shall promptly notify the parties
against whom indemnification is being sought (the "indemnifying parties"), and
such indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such U.S.
Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action, suit or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such U.S. Underwriter or such controlling person unless (i) the
indemnifying parties have agreed in writing to pay such fees and expenses, (ii)
the indemnifying parties have failed to assume the defense and employ counsel,
or (iii) the named parties to any such action, suit or proceeding (including any
impleaded parties) include both such U.S. Underwriter or such controlling person
and the indemnifying parties and such U.S. Underwriter or such controlling
person shall have been advised by its counsel that representation of such
indemnified party and any indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
-18-
<PAGE>
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying party
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such U.S. Underwriter or such controlling person). It
is understood, however, that the indemnifying parties shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such U.S. Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any U.S. Underwriter, to the extent provided in the preceding
paragraph, and any such controlling person from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
(c) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each of you and each other U.S. Underwriter and each
person, if any, who controls any U.S. Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, the Company, its directors,
its officers who sign the Registration Statement, and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
each U.S. Underwriter, but only with respect to the information furnished in
writing by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus,
or any amendment or supplement thereto. If any action, suit or proceeding shall
be brought against any U.S. Underwriter, any such controlling person of any U.S.
Underwriter, the Company, any of its directors, any such officer, or any such
controlling person of the Company, based on the Registration Statement, the U.S.
Prospectus or any U.S. Prepricing Prospectus or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any Selling
Stockholder pursuant to this paragraph (c), such Selling Stockholder shall have
the rights and duties given to the Company by paragraph (b) above (except that
if the Company shall have assumed the defense thereof such Selling Stockholder
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Selling Stockholder's expense), and each U.S. Underwriter, each
such controlling person of any U.S. Underwriter, the Company, its directors, any
such officer, and any such controlling person of the Company shall have the
rights and duties given to the Underwriters by paragraph (b) above. The
foregoing indemnity agreement shall be in addition to any liability which any
Selling Stockholder may otherwise have.
(d) Each U.S. Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each Selling Stockholder, and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company and
-19-
<PAGE>
the Selling Stockholders to each U.S. Underwriter, but only with respect to
information relating to such U.S. Underwriter furnished in writing by or on
behalf of such U.S. Underwriter through you expressly for use in the
Registration Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus,
or any amendment or supplement thereto. If any action, suit or proceeding shall
be brought against the Company, any of its directors, any such officer, any
Selling Stockholder, or any such controlling person based on the Registration
Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any U.S. Underwriter pursuant to this paragraph (d), such U.S.
Underwriter shall have the rights and duties given to the Company by paragraph
(b) above (except that if the Company shall have assumed the defense thereof
such U.S. Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such U.S. Underwriter's expense), and the
Company, its directors, any such officer, the Selling Stockholders, and any such
controlling person shall have the rights and duties given to the U.S.
Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be
in addition to any liability which any U.S. Underwriter may otherwise have.
(e) If the indemnification provided for in this Section 9 is unavailable to
an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company and
the Selling Stockholders on the one hand and the U.S. Underwriters on the other
hand from the offering of the Shares, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the U.S. Underwriters on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Stockholders on
the one hand and the U.S. Underwriters on the other hand shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the U.S.
Underwriters, in each case as set forth in the table on the cover page of the
U.S. Prospectus; provided that, in the event that the U.S. Underwriters shall
have purchased any Additional Shares hereunder, any determination of the
relative benefits received by the Company, the Selling Stockholders or the U.S.
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Company and the Selling
Stockholders, and the underwriting discounts and commissions received by the
U.S. Underwriters, from the sale of such Additional Shares, in each case
computed on the basis of the respective amounts set forth in the notes to the
table on the cover page of the U.S. Prospectus. The relative fault of the
Company and the Selling Stockholders on the one hand and the U.S. Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Stockholders on the one hand or by the
-20-
<PAGE>
U.S. Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(f) The Company, the Selling Stockholders and the U.S. Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
9 were determined by a pro rata allocation (even if the U.S. Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
paragraph (e) above. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to in
paragraph (e) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 9, no U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such U.S. Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The U.S. Underwriters' obligations to contribute pursuant to
this Section 9 are several in proportion to the respective numbers of Firm
Shares set forth opposite their names in Schedule II hereto (or such numbers of
Firm Shares increased as set forth in Section 12 hereof) and not joint.
(g) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any U.S. Underwriter
or any person controlling any U.S. Underwriter, the Company, its directors or
officers or the Selling Stockholders, any director, officer or partner of a
Selling Stockholder or any person controlling the Company or any Selling
Stockholder, (ii) acceptance of any Shares and payment therefor hereunder, and
(iii) any termination of this Agreement. A successor to any U.S. Underwriter or
any person controlling any U.S. Underwriter, or to the Company, its directors or
officers, or to a Selling Stockholder, any director, officer or partner of a
Selling Stockholder or any person controlling the Company or any Selling
Stockholder, shall be entitled to the benefits of the indemnity, contribution
and reimbursement agreements contained in this Section 9.
-21-
<PAGE>
10. Conditions of U.S. Underwriters' Obligations. The several obligations
--------------------------------------------
of the U.S. Underwriters to purchase the Firm Shares hereunder are subject to
the following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Registration Statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any U.S. Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectuses or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change, or any development involving a prospective change,
in or affecting the condition (financial or other), business, properties, net
worth, or results of operations of the Company or the Subsidiaries not
contemplated by the Prospectuses, which in your opinion, as Representatives of
the several U.S. Underwriters, would materially adversely affect the market for
the Shares, or (ii) any event or development relating to or involving the
Company or any officer or director of the Company or any Selling Stockholder
which makes any statement made in the Prospectuses untrue or which, in the
opinion of the Company and its counsel or the U.S. Underwriters and their
counsel, requires the making of any addition to or change in the Prospectuses in
order to state a material fact required by the Act or any other law to be stated
therein or necessary in order to make the statements therein not misleading, if
amending or supplementing the Prospectuses to reflect such event or development
would, in your opinion, as Representatives of the several U.S. Underwriters,
materially adversely affect the market for the Shares.
(c) You shall have received on the Closing Date, an opinion of Long,
Aldridge & Norman, LLP, counsel for the Company and the Selling Stockholders,
dated the Closing Date and addressed to you, as Representatives of the several
U.S. Underwriters, to the effect that:
(i) The Company is a corporation validly existing and in good
standing under the laws of the State of Georgia with corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectuses
(and any amendment or supplement thereto), and is duly qualified to
transact business in each of the States identified on Schedule IV hereto.
The foregoing statement is based solely upon certificates provided by
agencies of those states, copies of which the Company has delivered to you
at the Closing, and is limited to the meaning ascribed to such certificates
by each applicable state agency. Except as described in the Prospectuses,
there are no outstanding options, warrants or other rights calling for the
issuance of, and such counsel does not know of any commitment, plan or
-22-
<PAGE>
arrangement to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable or exercisable for capital stock
of the Company;
(ii) Each of the Subsidiaries is a corporation validly existing and
in good standing under the laws of the jurisdiction of its organization,
with corporate power and authority to own, lease, and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectuses (and any amendment or supplement thereto)
and is duly qualified to transact business in each of the States identified
on Schedule IV hereto. The foregoing statement is based solely upon
certificates provided by agencies of those states, copies of which the
Company has delivered to you at the Closing, and is limited to the meaning
ascribed to such certificates by each applicable state agency; and all the
outstanding shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued, are fully paid and nonassessable, and
are owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any perfected security interest other than
the Bank of America Pledge, or, to the best knowledge of such counsel after
reasonable inquiry, any other security interest, lien, adverse claim,
equity or other encumbrance, and no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding;
(iii) The Company and each of the Subsidiaries has all necessary
governmental authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental regulatory officials
and bodies (except where the failure so to have any such authorizations,
approvals, orders, licenses, certificates, franchises or permits,
individually or in the aggregate, would not have a material adverse effect
on the business, properties, operations or financial condition of the
Company and the Subsidiaries taken as a whole), to own their respective
properties and to conduct their respective businesses as now being
conducted, as described in the Prospectuses;
(iv) The authorized and outstanding capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectuses; and
the authorized capital stock of the Company conforms in all material
respects as to legal matters to the description thereof contained in the
Prospectuses under the caption "Description of Capital Stock";
(v) All the shares of capital stock of the Company outstanding prior
to the issuance of the Shares to be issued and sold by the Company pursuant
to the Underwriting Agreements, including the Shares to be sold by the
Selling Stockholders, have been duly authorized and validly issued, and are
fully paid and nonassessable, and, to such counsel's knowledge, no
preemptive rights of shareholders exist with respect to any of the Shares
or the issue and sale thereof other than such preemptive rights that have
been satisfied or waived by the holders thereof; and all corporate action
required to be taken for the authorization, issue and sale of such Shares
has been validly taken;
-23-
<PAGE>
(vi) Except as described in the Prospectuses, to the knowledge of
such counsel, there is no holder of any security of the Company or any
other person who has the right, contractual or otherwise, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite
the sale of, the Shares or the right to have any Common Stock or other
securities of the Company included in the Registration Statement or the
right, as a result of the filing of the Registration Statement, to require
registration under the Act of any shares of Common Stock or other
securities of the Company;
(vii) The Shares to be issued and sold to the U.S. Underwriters and
Managers by the Company under the U.S. Underwriting Agreement and the
International Underwriting Agreement have been duly authorized and, when
issued and delivered to the U.S. Underwriters and Managers against payment
therefor in accordance with the terms of the U.S. Underwriting Agreement
and the International Underwriting Agreement, will be validly issued, fully
paid and nonassessable and free of any preemptive, or to the best knowledge
of such counsel after reasonable inquiry, similar rights that entitle or
will entitle any person to acquire any Shares upon the issuance thereof by
the Company;
(viii) The form of certificates for the Shares conforms to the
requirements of the Georgia Business Corporation Code;
(ix) The Registration Statement and all post-effective amendments,
if any, have become effective under the Act and, to the best knowledge of
such counsel after reasonable inquiry, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectuses pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(x) The Company has the corporate power and authority to enter into
the U.S. Underwriting Agreement and the International Underwriting
Agreement and to issue, sell and deliver the Shares to be sold by it to the
U.S. Underwriters and Managers as provided therein, and each of the U.S.
Underwriting Agreement and the International Underwriting Agreement have
been duly authorized, executed and delivered by the Company and is a valid,
legal and binding agreement of the Company, enforceable against the Company
in accordance with its terms, except as enforcement of rights to indemnity
and contribution hereunder may be limited by Federal or state securities
laws or principles of public policy and subject to the qualification that
the enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium,
and other laws relating to or affecting creditors' rights generally and by
general equitable principles;
(xi) Neither the Company nor any of the Subsidiaries is in violation
of its respective certificate or articles of incorporation or bylaws, or
-24-
<PAGE>
other organizational documents, or to the best knowledge of such counsel
after reasonable inquiry, is in default in the performance of any material
obligation, agreement or condition contained in any bond, debenture, note
or other evidence of indebtedness, except as may be disclosed in the
Prospectuses;
(xii) Neither the issuance, offer, sale or delivery of the
Underwritten Shares, the execution, delivery or performance of the U.S.
Underwriting Agreement or the International Underwriting Agreement, or
compliance by the Company with all provisions of this Agreement and the
International Underwriting Agreement, nor consummation by the Company of
the transactions contemplated hereby or by the International Underwriting
Agreement conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company
or any of the Subsidiaries or any agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties is bound that is an
exhibit to the Registration Statement or to any Incorporated Document, or
is known to such counsel after reasonable inquiry, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of the Subsidiaries, nor will any such
action result in any violation of any existing law, regulation, ruling
(assuming compliance with all applicable state securities and Blue Sky
laws), judgment, injunction, order or decree known to such counsel after
reasonable inquiry, applicable to the Company, the Subsidiaries or any of
their respective properties;
(xiii) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company (except as have been obtained under the Act and the
Exchange Act or such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares) for the valid
issuance and sale of the Shares to the U.S. Underwriters as contemplated by
the U.S. Underwriting Agreement;
(xiv) The Registration Statement and the Prospectuses and any
supplements or amendments thereto (except for the financial statements,
schedules and the notes thereto and the schedules and other financial and
statistical data included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with the
requirements of the Act; and each of the Incorporated Documents (except for
the financial statements and the notes thereto and the schedules and other
financial and statistical data included therein, as to which counsel need
not express any opinion) complies as to form in all material respects with
the Exchange Act and the rules and regulations of the Commission
thereunder;
(xv) To the best knowledge of such counsel after reasonable inquiry,
(A) other than as described or contemplated in the Prospectuses (or any
supplement thereto), there are no legal or governmental proceedings pending
-25-
<PAGE>
or threatened against the Company or any of the Subsidiaries, or to which
the Company or any of the Subsidiaries, or any of their property, is
subject, which are required to be described in the Registration Statement
or Prospectuses (or any amendment or supplement thereto) and (B) there are
no agreements, contracts, indentures, leases or other instruments that are
required to be described in the Registration Statement or the Prospectuses
(or any amendment or supplement thereto) or to be filed as an exhibit to
the Registration Statement or any Incorporated Document that are not
described or filed as required, as the case may be;
(xvi) To the best knowledge of such counsel after reasonable
inquiry, neither the Company nor any of the Subsidiaries is in violation of
any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any decree of
any court or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries;
(xvii) The statements in the Registration Statement and
Prospectuses, insofar as they are descriptions of contracts, agreements or
other legal documents, or refer to statements of law or legal conclusions,
are accurate and present fairly the information required to be shown;
(xviii) The U.S. Underwriting Agreement, the International
Underwriting Agreement and the Custody Agreement have each been duly
executed and delivered by or on behalf of each of the Selling Stockholders
and are valid and binding agreements of each Selling Stockholder
enforceable against each Selling Stockholder in accordance with their
respective terms;
(xix) To the knowledge of such counsel, each Selling Stockholder
has full legal right, power and authorization, and any approval required by
law, to sell, assign, transfer and deliver good and marketable title to the
Shares which such Selling Stockholder has agreed to sell pursuant to the
U.S. Underwriting Agreement and the International Underwriting Agreement;
(xx) The execution and delivery of the U.S. Underwriting Agreement,
the International Underwriting Agreement and the Custody Agreement by the
Selling Stockholders and the consummation of the transactions contemplated
thereby will not conflict with, violate, result in a breach of or
constitute a default under the terms or provisions of any agreement,
indenture, mortgage or other instrument known to such counsel to which any
Selling Stockholder is a party or by which any of them or any of their
assets or property is bound, or any court order or decree or any law, rule,
or regulation applicable to any Selling Stockholder or to any of the
property or assets of any Selling Stockholder;
(xxi) Upon delivery of the Underwritten Shares pursuant to the U.S.
Underwriting Agreement and the International Underwriting Agreement and
payment therefor as contemplated therein, the U.S. Underwriters and the
-26-
<PAGE>
Managers will acquire good and marketable title to the Shares free and
clear of any lien, claim, security interest, or other encumbrance,
restriction on transfer or other defect in title;
(xxii) The Company and the Subsidiaries own all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectuses as being owned by them or any of
them or necessary for the conduct of their respective businesses, and such
counsel is not aware of any claim to the contrary or any challenge by any
other person to the rights of the Company and the Subsidiaries with respect
to the foregoing; and
(xxiii) Although counsel has not undertaken, except as otherwise
indicated in their opinion, to determine independently, and does not assume
any responsibility for, the accuracy or completeness of the statements in
the Registration Statement, such counsel has participated in the
preparation of the Registration Statement and the Prospectuses, including
general review and discussion of the contents thereof (including general
review and discussion of the contents of all Incorporated Documents), and
nothing has come to the attention of such counsel that has caused them to
believe that the Registration Statement (including the Incorporated
Documents) at the time the Registration Statement became effective, or the
Prospectuses, as of their respective dates and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated in the Prospectuses or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or
that any amendment or supplement to the Prospectuses, as of its respective
date, and as of the Closing Date or the Option Closing Date, as the case
may be, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated in the Prospectuses or
necessary in order to make the statements in the Prospectuses, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements, schedules, pro forma financial statements and the
notes thereto and the other financial and statistical data included in the
Registration Statement or the Prospectuses or any Incorporated Document).
In rendering their opinion as aforesaid, counsel may rely upon an opinion
or opinions, each dated the Closing Date, of other counsel retained by them or
the Company as to laws of any jurisdiction other than the United States or the
State of Georgia, provided that (1) each such local counsel is acceptable to the
Representatives, (2) such reliance is expressly authorized by each opinion so
relied upon and a copy of each such opinion is delivered to the Representatives
and is, in form and substance satisfactory to them and their counsel, and (3)
counsel shall state in their opinion that they believe that they and the U.S.
Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of King &
Spalding, counsel for the U.S. Underwriters, dated the Closing Date and
-27-
<PAGE>
addressed to you, as Representatives of the several U.S. Underwriters, with
respect to the matters referred to in clauses (vii), (ix), (x), (xiv) and
(xxiii) of the foregoing paragraph (c) and such other related matters as you may
request.
(e) You shall have received letters addressed to you, as Representatives of
the several U.S. Underwriters, and dated the date hereof and the Closing Date
from Ernst & Young, LLP, independent certified public accountants, substantially
in the forms heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock of the Company nor any material increase in the
short-term or long-term debt of the Company (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectuses (or any amendment or Supplement thereto); (iii) there shall
not have been, since the respective dates as of which information is given in
the Registration Statement and the Prospectuses (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectuses (or any amendment or supplement thereto), any material adverse
change in the condition (financial or other), business, prospects, properties,
net worth or results of operations of the Company and the Subsidiaries taken as
a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration Statement or the
Prospectuses (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement shall
be true and correct on and as of the date hereof and on and as of the Closing
Date as if made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company (or such other officers as are
acceptable to you), to the effect set forth in this Section 10(f) and in Section
10(g) hereof.
(g) The Company shall not have failed at or prior to the Closing Date to
have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(h) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by or on behalf of the Selling Stockholders to the effect set forth in
this Section 10(h) and in Section 10(i) hereof.
(i) The Selling Stockholders shall not have failed at or prior to the
Closing Date to have performed or complied with any of their agreements
contained in this Agreement or the International Underwriting Agreement and
required to be performed or complied with by them hereunder at or prior to the
Closing Date.
-28-
<PAGE>
(j) Prior to the Closing Date, the shares of Common Stock which the Company
agrees to sell pursuant to this Agreement and the International Underwriting
Agreement shall have been listed, subject to notice of issuance, on the New York
Stock Exchange.
(k) The Sellers shall have furnished or caused to be furnished to you such
further certificates and documents as you shall have requested.
(l) The closing under the International Underwriting Agreement shall have
occurred concurrently with the closing hereunder on the Closing Date.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company or any
Attorney-in-Fact or any Selling Stockholder and delivered to you, as
Representatives of the U.S. Underwriters, or to counsel for the U.S.
Underwriters, shall be deemed a representation and warranty by the Company, the
Selling Stockholders or the particular Selling Stockholder, as the case may be,
to each U.S. Underwriter as to the statements made therein.
The several obligations of the U.S. Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in this Section 10 shall be dated the Option Closing Date in
question and the opinions or letters called for by paragraphs (c), (d) and (e)
shall be revised to reflect the sale of Additional Shares.
11. Expenses. The Sellers (in proportion to the number of Shares being
--------
offered by each of them, including any Additional Shares which the Underwriters
shall have elected to purchase) agree to pay the following costs and expenses
and all other costs and expenses incident to the performance by them of their
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectuses,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, each Prospectus, the Incorporated Documents and all
amendments or supplements to any of them, as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (iv) the printing (or reproduction) and delivery of this Agreement,
the International Underwriting Agreement, the Supplemental Agreement among U.S.
Underwriters, the Agreement Among Managers, the Agreement Between U.S.
Underwriters and Managers, the International Selling Agreement, the Manager's
Questionnaire, the preliminary and supplemental Blue Sky Memoranda and all other
-29-
<PAGE>
agreements or documents printed (or reproduced) and delivered in connection with
the offering of the Underwritten Shares; (v) the listing of the Shares on the
New York Stock Exchange; (vi) the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of the several states
as provided in Section 5(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the U.S. Underwriters relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental Blue
Sky Memoranda and such registration and qualification); (vii) the filing fees
and the fees and expenses of counsel for the U.S. Underwriters in connection
with any filings required to be made with the National Association of Securities
Dealers, Inc.; (viii) the transportation and other expenses incurred by or on
behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and the Selling Stockholders.
12. Effective Date of Agreement. This Agreement shall become effective:
---------------------------
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as Representatives of the several U.S. Underwriters, by notifying the
Company and the Selling Stockholders.
If any one or more of the U.S. Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting U.S.
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the U.S.
Underwriters are obligated to purchase on the Closing Date, each non-defaulting
U.S. Underwriter shall be obligated, severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule II hereto bears to
the aggregate number of Firm Shares set forth opposite the names of all non-
defaulting U.S. Underwriters or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among Underwriters of Smith
Barney Inc., to purchase the Shares which such defaulting U.S. Underwriter or
Underwriters are obligated, but fail or refuse, to purchase. If any one or more
of the U.S. Underwriters shall fail or refuse to purchase Shares which it or
they are obligated to purchase on the Closing Date and the aggregate number of
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the U.S. Underwriters are obligated to purchase
on the Closing Date and arrangements satisfactory to you and the Company for the
purchase of such Shares by one or more non-defaulting U.S. Underwriters or other
party or parties approved by you and the Company are not made within 36 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting U.S. Underwriter or the Company. In any such case which
does not result in termination of this Agreement, either you or the Company
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectuses or any other documents or arrangements may be
-30-
<PAGE>
effected. Any action taken under this paragraph shall not relieve any
defaulting U.S. Underwriter from liability in respect of any such default of any
such Underwriter under this Agreement. The term "U.S. Underwriter" as used in
this Agreement includes, for all purposes of this Agreement, any party not
listed in Schedule II hereto who, with your approval and the approval of the
Company, purchases Shares which a defaulting U.S. Underwriter is obligated, but
fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
U.S. Underwriter to the Company or any Selling Stockholder, by notice to the
Company, if prior to the Closing Date or any Option Closing Date (if different
from the Closing Date and then only as to the Additional Shares), as the case
may be, (i) trading in securities generally on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market shall have been suspended
or materially limited, (ii) a general moratorium on commercial banking
activities in New York or Georgia shall have been declared by either federal or
state authorities, or (iii) there shall have occurred any outbreak or escalation
of hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the U.S.
Prospectus or to enforce contracts for the resale of the Shares by the U.S.
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
14. Information Furnished by the U.S. Underwriters. The statements set
----------------------------------------------
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first and third paragraphs under
the caption "Underwriting" in any U.S. Prepricing Prospectus and in the U.S.
Prospectus, constitute the only information furnished by or on behalf of the
U.S. Underwriters through you as such information is referred to in Sections
7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13
-------------
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at NOVA Corporation, Five Concourse Parkway, Suite 700, Atlanta, Georgia
30328, Attention: ________________ with a copy to Long, Aldridge & Norman, LLP,
303 Peachtree Street, Suite 5300, Atlanta, Georgia 30308, Attention:
_____________; or (ii) if to the Selling Stockholders, at _______, Attention:
_______________, or (iii) if to you, as Representatives of the several U.S.
Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
U.S. Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 9 hereof and the Selling Stockholders
-31-
<PAGE>
and their respective successors and assigns, to the extent provided herein, and
no other person shall acquire or have any right under or by virtue of this
Agreement. Neither the term "successor" nor the term "successors and assigns"
as used in this Agreement shall include a purchaser from any U.S. Underwriter of
any of the Shares in his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by and
----------------------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
-32-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Stockholders and the several U.S. Underwriters.
Very truly yours,
NOVA CORPORATION
By:
------------------------------------
Chairman of the Board
Each of the Selling Stockholders
named in Schedule I hereto
By:
------------------------------------
Attorney-in-Fact
By:
------------------------------------
Attorney-in-Fact
Confirmed as of the date first above mentioned on behalf of themselves and the
other several U.S. Underwriters named in Schedule II hereto.
SMITH BARNEY INC.
BT ALEX. BROWN INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, LLC
As Representatives of the Several U.S. Underwriters
By: SMITH BARNEY INC.
By:
------------------------------------
Managing Director
-33-
<PAGE>
SCHEDULE I
NOVA CORPORATION
Part A--C Firm Shares
- - - ---------------------
Number of
Selling Stockholders Firm Shares
-------------------- -----------
_________
_________
Total.....................
=========
Part B--C Additional Shares
- - - ---------------------------
Number of
Selling Stockholders Additional Shares
-------------------- -----------------
_________
_________
Total.....................
=========
-34-
<PAGE>
SCHEDULE II
NOVA CORPORATION
Number of Firm
Underwriter Shares
----------- --------------
Smith Barney Inc................................. _________
BT Alex. Brown Incorporated...................... _________
The Robinson-Humphrey Company, LLC............... _________
Total...........................
=========
-35-
<PAGE>
SCHEDULE III
SCHEDULE OF LOCKUP AGREEMENTS
(1) World Com, Inc.
(2) Warburg, Pincus Investors, L .P.
(3) First Union Corporation affiliates:
(a) First Union NOVA Holdings of Connecticut, Inc.
(b) First Union NOVA Holdings of Maryland, Inc.
(c) First Union NOVA Holdings of Tennessee, Inc.
(d) First Union NOVA Holdings of South Carolina, Inc.
(e) First Union NOVA Holdings of Georgia, Inc.
(f) First Union NOVA Holdings of Virginia, Inc.
(g) First Union NOVA Holdings of North Carolina, Inc.
(h) First Union NOVA Holdings of New Jersey, Inc.
(i) First Union NOVA Holdings of Florida, Inc.
(j) First Union NOVA Holdings of DC, Inc.
(4) Edward Grzedzinski
(5) James M. Bahin
(6) John M. Perry
(7) Dr. James E. Carnes
(8) U. Bertram Ellis
(9) Dr. Henry Kressel
(10) Joseph P. Landy
(11) Maurice F. Terbrueggen, Jr.
(12) Fred Martin Winkler
(13) Charles T. Cannada
-36-
<PAGE>
SCHEDULE IV
SCHEDULE OF STATES WHERE COMPANY
IS QUALIFIED TO DO BUSINESS
Alabama
Arizona (pending)
California
Connecticut
Delaware
Washington, D.C.
Florida
Georgia
Idaho
Illinois
Iowa
Kansas
Louisiana
Maryland
Massachusetts
Michigan
Minnesota
Montana
New Jersey
New York
North Carolina
North Dakota
Oregon
Pennsylvania
South Carolina
Tennessee
Utah
Virginia
Washington
West Virginia
Wisconsin (pending)
Wyoming
Vermont
-37-
<PAGE>
EXHIBIT 1.2
1,420,000 Shares
NOVA CORPORATION
Common Stock
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
______________, 1998
SMITH BARNEY INC.
BT ALEX. BROWN INTERNATIONAL,
a division of Bankers Trust PLC
THE ROBINSON-HUMPHREY COMPANY, LLC
As Lead Managers for the Several Managers
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
NOVA Corporation, a Georgia corporation (the "Company"), proposes to issue
and sell an aggregate of 1,060,000 shares of its common stock, $.01 par value
per share, and the persons named in Part A of Schedule I hereto (the "Selling
Stockholders") propose to sell an aggregate of 360,000 shares of common stock of
the Company (together with the 1,060,000 shares of common stock to be issued and
sold by the Company, the "Firm Shares") to the several Underwriters named in
Schedule II hereto (the "Managers") for whom Smith Barney Inc., BT Alex. Brown
International, a division of Bankers Trust International PLC, and The Robinson-
Humphrey Company, LLC are acting as representatives (the "Lead Managers"). The
Company and the Selling Stockholders are hereinafter sometimes referred to as
the "Sellers." The Firm Shares are hereinafter referred to as the "Shares." The
Company's common stock, par value $.01 per share, including the Shares and the
U.S. Shares (as defined herein), is hereinafter referred to as the "Common
Stock."
<PAGE>
It is understood that the Company and the Selling Stockholders are
concurrently entering into a U.S. Underwriting Agreement, dated the date hereof
(the "U.S. Underwriting Agreement"), providing for the sale of 5,680,000 shares
of the Common Stock (the "Firm U.S. Shares"), of which 4,240,000 shares will be
sold by the Company and 1,440,000 will be sold by the Selling Stockholders (plus
an option granted by certain of the Selling Stockholders to purchase up to an
additional 1,065,000 shares of Common Stock (the "Additional U.S. Shares")
solely for the purpose of covering over-allotments) through arrangements with
certain underwriters in the United States and Canada (the "U.S. Underwriters"),
for whom Smith Barney Inc., BT Alex. Brown Incorporated and The Robinson-
Humphrey Company, LLC are acting as representatives (the "Representatives"). All
shares of Common Stock proposed to be offered to U.S. Underwriters pursuant to
the U.S. Underwriting Agreement, including the Firm U.S. Shares and the
Additional U.S. Shares, are herein called the "U.S. Shares"; the U.S. Shares and
the Shares, collectively, are herein called the "Underwritten Shares."
The Company and the Selling Stockholders also understand that the Lead
Managers and the Representatives have entered into an agreement (the "Agreement
Between U.S. Underwriters and Managers") contemplating the coordination of
certain transactions between the Managers and the U.S. Underwriters and that,
pursuant thereto and subject to the conditions set forth therein, the Managers
may purchase from U.S. Underwriters a portion of the U.S. Shares or sell to the
Managers a portion of the Shares. The Company and the Selling Stockholders
understand that any such purchases and sales between the Managers and the U.S.
Underwriters shall be governed by the Agreement Between U.S. Underwriters and
Managers and shall not be governed by the terms of this Agreement or the U.S.
Underwriting Agreement.
The Company and the Selling Stockholders wish to confirm as follows their
respective agreements with you and the other several Managers on whose behalf
you are acting, in connection with the several purchases of the Shares by the
Underwriters.
1. Registration Statement and Prospectuses. The Company has prepared and
---------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including prospectuses subject to completion, relating to the
Underwritten Shares. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a post-
effective amendment to the registration statement will be filed and must be
declared effective before the offering of the Underwritten Shares may commence,
the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If an
abbreviated registration statement is prepared and filed with the Commission in
accordance with Rule 462(b) under the Act (an "Abbreviated Registration
-2-
<PAGE>
Statement"), the term "Registration Statement" as used in this Agreement
includes the Abbreviated Registration Statement. The term "Prospectuses" as
used in this Agreement means the prospectuses in the forms included in the
Registration Statement, or, if the prospectuses included in the Registration
Statement omit information in reliance on Rule 430A under the Act and such
information is included in prospectuses filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectuses" as used in this Agreement
means the prospectuses in the forms included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectuses filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectuses" as used in this Agreement means the prospectuses
subject to completion in the forms included in the Registration Statement at the
time of the initial filing of the Registration Statement with the Commission,
and as such prospectuses shall have been amended from time to time prior to the
date of the Prospectuses. Any reference in this Agreement to the registration
statement, the Registration Statement, any Prepricing Prospectuses or the
Prospectuses shall be deemed to refer to and include the documents incorporated
by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the
date of the registration statement, the Registration Statement, such Prepricing
Prospectuses or the Prospectuses, as the case may be, and any reference to any
amendment or supplement to the registration statement, the Registration
Statement, any Prepricing Prospectuses or the Prospectuses shall be deemed to
refer to and include any documents filed after such date under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") which, upon filing, are
incorporated by reference therein, as required by paragraph (b) of Item 12 of
Form S-3. As used herein, the term "Incorporated Documents" means the documents
which at the time are incorporated by reference in the registration statement,
the Registration Statement, any Prepricing Prospectuses, the Prospectuses, or
any amendment or supplement thereto.
It is understood that two forms of Prepricing Prospectus and two forms of
Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
U.S. Shares that are to be offered and sold in the United States (as defined
herein) or Canada (as defined herein) or to U.S. or Canadian Persons (the "U.S.
Prepricing Prospectus" and the "U.S. Prospectus," respectively), and a
Prepricing Prospectus and a Prospectus relating to the Shares which are to be
offered and sold outside the United States or Canada to persons other than U.S.
or Canadian Persons (the "International Prepricing Prospectus" and the
"International Prospectus," respectively). The U.S. Prospectus and the
International Prospectus are herein collectively called the "Prospectuses," and
the U.S. Prepricing Prospectus and the International Prepricing Prospectus are
herein called the "Prepricing Prospectuses." For purposes of this Agreement:
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as applicable; "U.S. or Canadian Person" means any
resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions and
-3-
<PAGE>
other areas subject to its jurisdiction; and "Canada" means Canada and its
territories, its possessions and other areas subject to its jurisdiction.
2. Agreements to Sell and Purchase. Subject to such adjustments as you
-------------------------------
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Manager and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, each Manager agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
$ per Share (the "purchase price per share"), the number of Firm Shares
that bears the same proportion to the aggregate number of Firm Shares to be
issued and sold by the Company as the number of Firm Shares set forth opposite
the name of such Manager in Schedule II hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company and the Selling Stockholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Stockholder agrees, subject to all the terms and
conditions set forth herein, to sell to each Manager and, upon the basis of the
representations, warranties and agreements of the Company and the Selling
Stockholders herein contained and subject to all the terms and conditions set
forth herein, each Manager, severally and not jointly, agrees to purchase from
each Selling Stockholder, at the purchase price per share, the number of Firm
Shares that bears the same proportion to the number of Firm Shares set forth
opposite the name of such Selling Stockholder in Schedule I hereto as the number
of Firm Shares set forth opposite the name of such Manager in Schedule II hereto
(or such number of Firm Shares increased as set forth in Section 12 hereof)
bears to the aggregate number of Firm Shares to be sold by the Company and the
Selling Stockholders.
-4-
<PAGE>
Certificates in transferable form for the Shares that each of the Selling
Stockholders agrees to sell pursuant to this Agreement have been placed in
custody with First Union National Bank of North Carolina (the "Custodian") for
delivery under this Agreement pursuant to a Custody Agreement and Power of
Attorney (the "Custody Agreement") executed by each of the Selling Stockholders
appointing Edward Grzedzinski and James M. Bahin, as agents and attorneys-in-
fact (the "Attorneys-in-Fact"). Each Selling Stockholder agrees that (i) the
Shares represented by the certificates held in custody pursuant to the Custody
Agreement are subject to the interests of the Managers, the Company and each
other Selling Stockholder, (ii) the arrangements made by the Selling
Stockholders for such custody are, except as specifically provided in the
Custody Agreement, irrevocable, and (iii) the obligations of the Selling
Stockholders hereunder and under the Custody Agreement shall not be terminated
by any act of such Selling Stockholder or by operation of law, whether by the
death or incapacity of any Selling Stockholder or the occurrence of any other
event or, if the Selling Stockholder is not a natural person, upon any
dissolution, winding up, distribution of assets or other event affecting the
legal existence of such Selling Stockholder. If any Selling Stockholder shall
die or be incapacitated or if any other event shall occur before the delivery of
the Shares hereunder or if the Selling Stockholder is not a natural person,
shall dissolve, wind up, distribute assets or if any other event affecting the
legal existence of such Selling Stockholder shall occur before the delivery of
the Shares hereunder, certificates for the Shares of such Selling Stockholder
shall be delivered to the Underwriters by the Attorneys-in-Fact in accordance
with the terms and conditions of this Agreement and the Custody Agreement as if
such death or incapacity, dissolution, winding up or distribution of assets or
other event had not occurred, regardless of whether or not the Attorneys-in-Fact
or any Manager shall have received notice of such death, incapacity,
dissolution, winding up or distribution of assets or other event. Each Attorney-
in-Fact is authorized, on behalf of each of the Selling Stockholders, to execute
this Agreement and any other documents necessary or desirable in connection with
the sale of the Shares to be sold hereunder by such Selling Stockholder, to make
delivery of the certificates for such Shares, to receive the proceeds of the
sale of such Shares, to give receipts for such proceeds, to pay therefrom any
expenses to be borne by such Selling Stockholder in connection with the sale and
public offering of such Shares, to distribute the balance thereof to such
Selling Stockholder, and to take such other action as may be necessary or
desirable in connection with the transactions contemplated by this Agreement.
Each Attorney-in-Fact agrees to perform his duties under the Custody Agreement.
-5-
<PAGE>
3. Terms of Public Offering. The Sellers have been advised by you that
------------------------
the Managers propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the International Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the Managers
-------------------------------------------
of and payment for the Firm Shares shall be made at the office of Smith Barney
Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York City
time, on , 1998 (the "Closing Date"). The place of closing for
the Firm Shares and the Closing Date may be varied by agreement among you, the
Company and the Attorneys-in-Fact.
Certificates for the Firm Shares to be purchased hereunder shall be
registered in such names and in such denominations as you shall request prior to
9:30 A.M., New York City time, on the second business day preceding the Closing
Date or any Option Closing Date, as the case may be. Such certificates shall be
made available to you in New York City for inspection and packaging not later
than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares to be purchased hereunder shall be delivered to you
on the Closing Date or the Option Closing Date, as the case may be, against
payment of the purchase price therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
-------------------------
Managers as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you, will
confirm such advice in writing: (i) of any request by the Commission for
-6-
<PAGE>
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectuses or the Prospectuses or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, including the filing of any information, documents or reports
pursuant to the Exchange Act, that makes any statement of a material fact made
in the Registration Statement or the Prospectuses (as then amended or
supplemented) untrue or which requires the making of any additions to or changes
in the Registration Statement or the Prospectuses (as then amended or
supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectuses (as then amended or supplemented) to comply with the Act or any
other law. If at any time the Commission shall issue any stop order suspending
the effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Company will furnish to you, without charge (i) four signed copies
of the Registration Statement as originally filed with the Commission and of
each amendment thereto, including financial statements and all exhibits to the
Registration Statement, (ii) such number of conformed copies of the Registration
Statement as originally filed and of each amendment thereto, but without
exhibits, as you may request, (iii) such number of copies of the Incorporated
Documents, without exhibits, as you may request and (iv) four copies of the
exhibits to the Incorporated Documents.
(d) The Company will not file any amendment to the Registration Statement
or make any amendment or supplement to the Prospectuses or, prior to the end of
the period of time referred to in the first sentence in subsection (f) below,
file any document which, upon filing, becomes an Incorporated Document, of which
you shall not previously have been advised or to which, after you shall have
received a copy of the document proposed to be filed, you shall reasonably
object.
(e) Prior to the execution and delivery of this Agreement, the Company has
delivered or will deliver to you, without charge, in such quantities as you have
requested or may hereafter request, copies of each form of the International
Prepricing Prospectus. The Company consents to the use, in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several Managers and by
dealers, prior to the date of the International Prospectus, of each
International Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as possible
and thereafter from time to time for such period as in the opinion of counsel
for the Managers an International Prospectus is required by the Act to be
delivered in connection with sales by any Manager or dealer, the Company will
expeditiously deliver to each Manager and each dealer, without charge, as many
-7-
<PAGE>
copies of the International Prospectus (and of any amendment or supplement
thereto) as you may request. The Company consents to the use of the
International Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several
Managers and by all dealers to whom Shares may be sold, both in connection with
the offering and sale of the Shares and for such period of time thereafter as
the International Prospectus is required by the Act to be delivered in
connection with sales by any Manager or dealer. If during such period of time
any event shall occur that in the judgment of the Company or in the opinion of
counsel for the Managers is required to be set forth in the International
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the International Prospectus (or to file under the Exchange Act any
document which, upon filing, becomes an Incorporated Document) in order to
comply with the Act or any other law, the Company will forthwith prepare and,
subject to the provisions of paragraph (d) above, file with the Commission an
appropriate supplement or amendment thereto (or to such document), and will
expeditiously furnish to the Managers and dealers a reasonable number of copies
thereof. In the event that the Company and you, as Lead Managers for the
several Managers, agree that the International Prospectus should be amended or
supplemented, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for the Managers
in connection with the registration or qualification of the Shares for offering
and sale by the several Managers and by dealers under the securities or Blue Sky
laws of such jurisdictions as you may reasonably designate and will file such
consents to service of process or other documents necessary or appropriate in
order to effect such registration or qualification; provided that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action that would subject it to
service of process in suits, other than those arising out of the offering or
sale of the Shares, in any jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security holders a
consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section ll(a) of the Act.
(i) During the period of five years hereafter, the Company will furnish to
you (i) as soon as available, a copy of each report of the Company mailed to
stockholders or filed with the Commission or the NYSE, and (ii) from time to
time such other information concerning the Company as you may request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
-8-
<PAGE>
second paragraph of Section 12 hereof or by notice given by you terminating this
Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement
shall be terminated by the Managers because of any failure or refusal on the
part of the Company or any of the Selling Stockholders to comply, in any
material respect, with the terms or fulfill, in any material respect, any of the
conditions of this Agreement, the Company agrees to reimburse the Lead Managers
for all reasonable out-of-pocket expenses (including reasonable fees and
expenses of counsel for the Managers) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the Shares to
be sold by it hereunder substantially in accordance with the description set
forth in the Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely file the
Prospectuses pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
(m) Except as provided in this Agreement and the U.S. Underwriting
Agreement, the Company will not offer, sell, contract to sell or otherwise
dispose of any Common Stock (or any securities convertible into or exercisable
or exchangeable for Common Stock) or grant any options or warrants to purchase
Common Stock, except for sales to the Managers pursuant to this Agreement and to
the U.S. Underwriters pursuant to the U.S. Underwriting Agreement for a period
of 60 days after the date of the Prospectuses, without the prior written consent
of Smith Barney Inc.
(n) The Company has furnished or will furnish to you "lock-up" letters, in
form and substance satisfactory to you, signed, by each of its current officers
and directors and each of its stockholders listed in Schedule III.
(o) Except as stated in this Agreement and in the U.S. Underwriting
Agreement and in the Prepricing Prospectuses and Prospectuses, the Company has
not taken, nor will it take, directly or indirectly, any action designed to or
that might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(p) The Company will use its best efforts to have the shares of Common
Stock which it agrees to sell under this Agreement listed, subject to notice of
issuance, on the New York Stock Exchange on or before the Closing Date.
6. Agreements of the Selling Stockholders. Each of the Selling
--------------------------------------
Stockholders agrees with the several Managers as follows:
(a) Such Selling Stockholder will cooperate to the extent necessary to
cause the registration statement or any post-effective amendment thereto to
become effective at the earliest possible time.
(b) Such Selling Stockholder will pay all Federal and other taxes, if any
on the transfer or sale of the Shares being sold by the Selling Stockholder to
the Managers.
-9-
<PAGE>
(c) Such Selling Stockholder will do or perform all things required to be
done or performed by the Selling Stockholder prior to the Closing Date or any
Option Closing Date, as the case may be, to satisfy all conditions precedent to
the delivery of the Shares pursuant to this Agreement.
(d) Such Selling Stockholder has executed or will execute a "lock-up"
letter as provided in Section 5(n) above and will not sell, contract to sell or
otherwise dispose of any Common Stock except for the sale of Shares to the
Managers pursuant to this Agreement or to the U.S. Underwriters pursuant to the
U.S. Underwriting Agreement, prior to the expiration of 60 days after the date
of the Prospectuses, without the prior written consent of Smith Barney Inc.
(e) Except as stated in this Agreement and the U.S. Underwriting Agreement
and in the Prepricing Prospectuses and the Prospectuses, such Selling
Stockholder has not taken, and will not take, directly or indirectly, any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(f) Such Selling Stockholder will advise you promptly, and if requested by
you, will confirm such advice in writing, within the period of time referred to
in Section 5(f) hereof, of any change in the Company's condition (financial or
other), business, prospects, properties, net worth or results of operations, or
of any change in information relating to such Selling Stockholder or the Company
or any new information relating to the Company or relating to any matter stated
in the Prospectus or any amendment or supplement thereto which comes to the
attention of such Selling Stockholder that suggests that any statement made in
the Registration Statement or the Prospectuses (as then amended or supplemented,
if amended or supplemented) is or may be untrue in any material respect or that
the Registration Statement or the Prospectuses (as then amended or supplemented,
if amended or supplemented) omits or may omit to state a material fact or a fact
necessary to be stated therein or necessary in order to make the statements
therein not misleading in any material respect, or of the necessity to amend or
supplement the Prospectuses (as then amended or supplemented, if amended or
supplemented) in order to comply with the Act or any other law.
7. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each Manager that:
(a) Each International Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The Company and the transactions contemplated by this Agreement meet
the requirements for using Form S-3 under the Act. The Registration Statement
in the form in which it became or becomes effective and also in such form as it
-10-
<PAGE>
may be when any post-effective amendment thereto shall become effective and the
Prospectuses and any supplement or amendment thereto when filed with the
Commission under Rule 424(b) under the Act, complied or will comply in all
material respects with the provisions of the Act and will not at any such times
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; except that this representation and warranty does not apply to
statements in or omissions from the Registration Statement or the Prospectuses
made in reliance upon and in conformity with information relating to any Manager
furnished to the Company in writing by or on behalf of a Manager through the
Lead Managers or by a U.S. Underwriter through the Representatives expressly for
use therein.
(c) The Incorporated Documents heretofore filed, when they were filed (or,
if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder, and any future
Incorporated Documents so filed will, when they are filed, conform in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was filed),
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; and no such further document, when it is filed, will
contain an untrue statement of a material fact or will omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading.
(d) All the outstanding shares of Common Stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and are
free of any preemptive or similar rights; the Shares to be issued and sold by
the Company have been duly authorized and, when issued and delivered to the
Managers against payment therefor in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and free of any preemptive or
similar rights; and the capital stock of the Company conforms to the description
thereof in the Registration Statement and the Prospectuses.
(e) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Georgia with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectuses, and is duly registered and qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) taken as a whole.
(f) All the Company's subsidiaries (collectively, the "Subsidiaries") are
listed in an exhibit to the Company's Annual Report on Form 10-K which is
incorporated by reference into the Registration Statement. Each Subsidiary is
-11-
<PAGE>
duly organized, is validly existing as a corporation and in good standing in the
jurisdiction of its incorporation, with full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectuses, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of such Subsidiary; all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and are owned by the Company directly, or indirectly through one
of the other Subsidiaries, free and clear of any lien, adverse claim, security
interest, equity or other encumbrance, except for the pledge of outstanding
shares of capital stock of each of the Subsidiaries to the Bank of America (the
"Bank of America Pledge"); and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the
Subsidiaries are outstanding.
(g) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectuses but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectuses or to be filed as an exhibit to the Registration Statement or
any Incorporated Document that are not described or filed as required by the Act
or the Exchange Act.
(h) Neither the Company nor any of the Subsidiaries is in violation of its
certificate or articles of incorporation or by-laws, or other organizational
documents, or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which any of them or any of their respective
properties may be bound, and no condition or state of facts exists, which with
the passage of time or the giving of notice or both, would constitute such a
default.
(i) Neither the issuance and sale of the Shares, the execution, delivery or
performance of this Agreement or the U.S. Underwriting Agreement by the Company
nor the consummation by the Company of the transactions contemplated hereby and
thereby (i) requires any consent, approval, authorization or other order of or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as may be required
for the registration of the Shares under the Act and the Exchange Act and
compliance with the securities or Blue Sky laws of various jurisdictions, all of
which have been or will be effected in accordance with this Agreement) or
-12-
<PAGE>
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, the certificate or articles of incorporation or bylaws, or
other organizational documents, of the Company or any of the Subsidiaries or
(ii) conflicts or will conflict with or constitutes or will constitute a breach
of, or a default under, any agreement, indenture, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by which any of them
or any of their respective properties may be bound, or violates or will violate
any statute, law, regulation or filing or judgment, injunction, order or decree
applicable to the Company or any of the Subsidiaries or any of their respective
properties, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to which any
of them is a party or by which any of them may be bound or to which any of the
property or assets of any of them is subject.
(j) The accountants, Ernst & Young LLP, who have certified or shall certify
the financial statements included or incorporated by reference in the
Registration Statement and the Prospectuses (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(k) The financial statements, together with related schedules and notes
included or incorporated by reference in the Registration Statement and the
Prospectuses (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations, cash flows and changes
in financial position of the Company and the Subsidiaries on the basis stated in
the Registration Statement at the respective dates or for the respective periods
to which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
or incorporated by reference in the Registration Statement and the Prospectuses
(and any amendment or supplement thereto) are accurately presented and prepared
on a basis consistent with such financial statements and the books and records
of the Company and the Subsidiaries.
(l) The execution and delivery of, and the performance by the Company of
its obligations under, each of this Agreement and the U.S. Underwriting
Agreement have been duly and validly authorized by the Company, and each of this
Agreement and the U.S. Underwriting Agreement have been duly executed and
delivered by the Company and constitutes the valid and legally binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as rights to indemnity and contribution hereunder may be limited by
federal or state securities laws.
(m) Except as disclosed in the Registration Statement and the Prospectuses
(or any amendment or supplement thereto), subsequent to the respective dates as
of which such information is given in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto), neither the Company nor
any of the Subsidiaries has incurred any liability or obligation, direct or
contingent, or entered into any transaction, not in the ordinary course of
business, that is material to the Company and the Subsidiaries taken as a whole,
and there has not been any change in the capital stock, or material increase in
the short-term debt or long-term debt, of the Company or any of the
Subsidiaries, or any material adverse change, or any development involving or
-13-
<PAGE>
which may reasonably be expected to involve, a prospective material adverse
change, in the condition (financial or other), business, net worth or results of
operations of the Company and the Subsidiaries taken as a whole.
(n) Each of the Company and the Subsidiaries has good and marketable title
to all property (real and personal) described in the Prospectuses as being owned
by it, free and clear of all liens, claims, security interests or other
encumbrances except (i) the Bank of America Pledge, (ii) such as are described
in the Registration Statement and the Prospectuses or in a document filed as an
exhibit to the Registration Statement and (iii) such as would not have a
material adverse effect in the condition (financial or other), business, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole, and all the property described in the Prospectuses as being held under
lease by each of the Company and the Subsidiaries is held by it under valid,
subsisting and enforceable leases.
(o) The Company has not distributed and, prior to the later to occur of (i)
the Closing Date or the Option Closing Date, if any, and (ii) completion of the
distribution of the Shares, will not distribute any offering material in
connection with the offering and sale of the Shares other than the Registration
Statement, the Prepricing Prospectuses, the Prospectuses or other materials, if
any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("permits") as are necessary to own its respective properties and to conduct its
business in the manner described in the Prospectuses, subject to such
qualifications as may be set forth in the Prospectuses; the Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred that allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectuses; and, except as described in the Prospectuses, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
-14-
<PAGE>
any funds in violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the
Prospectuses.
(s) The Company and each of the Subsidiaries have filed all tax returns
required to be filed, which returns are complete and correct, and neither the
Company nor any Subsidiary is in default in the payment of any taxes which were
payable pursuant to said returns or any assessments with respect thereto. All
tax liabilities have been adequately provided for in the financial statements of
the Company.
(t) Except as described in the Prospectuses or waived in writing, no holder
of any security of the Company has any right to require registration of shares
of Common Stock or any other security of the Company because of the filing of
the registration statement or consummation of the transactions contemplated by
this Agreement or the U.S. Underwriting Agreement.
(u) Neither the Company nor any of the Subsidiaries is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
(v) The Company and each of its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as the Company believes are
adequate for the conduct of their respective businesses and the value of their
respective properties.
(w) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects, and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(x) To the best knowledge of the Company, no labor problem exists with its
employees or with employees of the Subsidiaries or that could adversely affect
the Company and its Subsidiaries taken as a whole, and the Company is not aware
of any existing or imminent labor disturbance by the employees of the Company or
its Subsidiaries's principal suppliers, contractors or customers of the Company
or its Subsidiaries that could be expected to materially adversely affect the
business of the Company and its Subsidiaries, taken as a whole.
(y) Except as disclosed in the Registration Statement and except as would
not individually or in the aggregate, if the subject of an unfavorable decision,
-15-
<PAGE>
ruling or finding, have a material adverse effect on the business of the Company
and its Subsidiaries, taken as a whole, (A) the Company and each of its
Subsidiaries are each in compliance with all applicable Environmental Laws, (B)
the Company and each of its Subsidiaries have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each in
compliance with their requirements, (C) there are no pending or, to the
Company's knowledge, threatened Environmental Claims against the Company or its
Subsidiaries and (D) there are no circumstances known to the Company with
respect to any property or operations of the Company or its Subsidiaries that
could reasonably be anticipated to form the basis of an Environmental Claim
against the Company or its Subsidiaries.
(z) Each approval, consent, order, authorization, designation, declaration
or filing by or with any United States federal, state, local or municipal
regulatory, administrative or other governmental body necessary in connection
with the execution and delivery by the Company of this Agreement and the U.S.
Underwriting Agreement and the consummation of the transactions contemplated
herein and therein (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the "NASD") or
such additional steps as may be necessary to qualify the Shares for public
offering by the Managers under State securities or Blue Sky laws) has been
obtained or made and is in full force and effect.
(aa) The Company and each of the Subsidiaries hold all material licenses,
certificates and permits from governmental authorities which are necessary to
the conduct of their businesses; and neither the Company nor any of the
Subsidiaries has received notice of, and has no knowledge of, any infringement
of any patents, patent rights, trade names, trademarks or copyrights of others,
which infringement would have a material adverse effect on the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries taken
as a whole. The Company knows of no material infringement by others of patents,
patent rights, trade names, trademarks or copyrights owned by or licensed to the
Company.
8. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder represents and warrants to each Manager that:
(a) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date will have, valid and marketable title to the Shares to be
sold by such Selling Stockholder, free and clear of any lien, claim, security
interest or other encumbrance, including, without limitation, any restriction on
transfer other than pursuant to this Agreement, the U.S. Underwriting Agreement,
the Power of Attorney and the Custody Agreement.
(b) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date will have, full legal right, power and authorization, and
any approval required by law, to sell, assign, transfer and deliver such Shares
in the manner provided in this Agreement and the U.S. Underwriting Agreement,
-16-
<PAGE>
and upon delivery of and payment for such Shares hereunder, the several Managers
will acquire valid and marketable title to such Shares free and clear of any
lien, claim, security interest, or other encumbrance.
(c) This Agreement, the U.S. Underwriting Agreement and the Custody
Agreement have been duly authorized, executed and delivered by or on behalf of
such Selling Stockholder and are the valid and binding agreements of such
Selling Stockholder enforceable against such Selling Stockholder in accordance
with their terms.
(d) Neither the execution and delivery of this Agreement, the U.S.
Underwriting Agreement or the Custody Agreement by or on behalf of such Selling
Stockholder nor the consummation of the transactions herein or therein
contemplated by or on behalf of such Selling Stockholder requires any consent,
approval, authorization or order of, or filing or registration with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required under the Act and the Exchange Act or
such as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Shares) or conflicts or will conflict with or
constitutes or will constitute a breach of, or default under, or violates or
will violate, any agreement, indenture, lease or other instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is or may be
bound or to which any of such Selling Stockholder's property or assets is
subject, or any statute, law, rule, regulation, ruling, judgment, injunction,
order or decree applicable to such Selling Stockholder or to any property or
assets of such Selling Stockholder.
(e) The Registration Statement and the Prospectuses, insofar as they relate
to such Selling Stockholder, do not and will not contain an untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(f) Such Selling Stockholder does not have any knowledge or any reason to
believe that the Registration Statement or the Prospectuses (or any amendment or
supplement thereto) contain any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(g) The representations and warranties of such Selling Stockholder in the
Custody Agreement are, and on the Closing Date and any Option Closing Date will
be, true and correct.
(h) Such Selling Stockholder has not taken, and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up arrangements
described in the Prospectuses.
9. Indemnification and Contribution. (a) The Company agrees to indemnify
--------------------------------
and hold harmless each of you and each other Manager and each person, if any,
who controls any Manager within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act from and against any and all losses, claims, damages,
-17-
<PAGE>
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any International Prepricing Prospectus or in the
Registration Statement or the International Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Manager furnished in writing to the
Company by or on behalf of any Manager through you expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any International Prepricing Prospectus shall
not inure to the benefit of any Manager (or to the benefit of any person
controlling such Manager) on account of any such loss, claim, damage, liability
or expense arising from the sale of the Shares by such Manager to any person if
a copy of the International Prospectus shall not have been delivered or sent to
such person within the time required by the Act and the regulations thereunder,
and the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such International Prepricing
Prospectus was corrected in the International Prospectus, provided that the
Company has delivered the International Prospectus to the several Managers in
requisite quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability which the
Company or any Selling Stockholder may otherwise have.
(b) If any action, suit or proceeding shall be brought against any Manager
or any person controlling any Manager in respect of which indemnity may be
sought against the Company or any Selling Stockholder, such Manager or such
controlling person shall promptly notify the parties against whom
indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Manager or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Manager or
such controlling person unless (i) the indemnifying parties have agreed in
writing to pay such fees and expenses, (ii) the indemnifying parties have failed
to assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both such
Manager or such controlling person and the indemnifying parties and such Manager
or such controlling person shall have been advised by its counsel that
representation of such indemnified party and any indemnifying party by the same
counsel would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has been
proposed) due to actual or potential differing interests between them (in which
case the indemnifying party shall not have the right to assume the defense of
such action, suit or proceeding on behalf of such Manager or such controlling
person). It is understood, however, that the indemnifying parties shall, in
connection with any one such action, suit or proceeding or separate but
substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such Managers
-18-
<PAGE>
and controlling persons not having actual or potential differing interests with
you or among themselves, which firm shall be designated in writing by Smith
Barney Inc., and that all such fees and expenses shall be reimbursed as they are
incurred. The indemnifying parties shall not be liable for any settlement of
any such action, suit or proceeding effected without their written consent, but
if settled with such written consent, or if there be a final judgment for the
plaintiff in any such action, suit or proceeding, the indemnifying parties agree
to indemnify and hold harmless any Manager, to the extent provided in the
preceding paragraph, and any such controlling person from and against any loss,
claim, damage, liability or expense by reason of such settlement or judgment.
(c) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each of you and each other Manager and each person,
if any, who controls any Manager within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, the Company, its directors, its officers who
sign the Registration Statement, and any person who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act to the
same extent as the foregoing indemnity from the Company to each Manager, but
only with respect to the information furnished in writing by or on behalf of
such Selling Stockholder expressly for use in the Registration Statement, the
International Prospectus or any International Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against any Underwriter, any such controlling person of any Manager, the
Company, any of its directors, any such officer, or any such controlling person
of the Company, based on the Registration Statement, the International
Prospectus or any International Prepricing Prospectus or any amendment or
supplement thereto, and in respect of which indemnity may be sought against any
Selling Stockholder pursuant to this paragraph (c), such Selling Stockholder
shall have the rights and duties given to the Company by paragraph (b) above
(except that if the Company shall have assumed the defense thereof such Selling
Stockholder shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof, but the fees and expenses of
such counsel shall be at such Selling Stockholder's expense), and each Manager,
each such controlling person of any Manager, the Company, its directors, any
such officer, and any such controlling person of the Company shall have the
rights and duties given to the Managers by paragraph (b) above. The foregoing
indemnity agreement shall be in addition to any liability which any Selling
Stockholder may otherwise have.
(d) Each Manager agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, its officers who sign the Registration
Statement, each Selling Stockholder, and any person who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from the Company and the
Selling Stockholders to each Manager, but only with respect to information
relating to such Manager furnished in writing by or on behalf of such Manager
through you expressly for use in the Registration Statement, the International
Prospectus or any International Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, any of its directors, any such officer, any Selling Stockholder, or
any such controlling person based on the Registration Statement, the
International Prospectus or any International Prepricing Prospectus, or any
-19-
<PAGE>
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Manager pursuant to this paragraph (d), such Manager shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company or the Selling Stockholders shall have assumed the defense thereof
such Manager shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof, but the fees and expenses of
such counsel shall be at such Manager's expense), and the Company, its
directors, any such officer, the Selling Stockholders, and any such controlling
person shall have the rights and duties given to the Managers by paragraph (b)
above. The foregoing indemnity agreement shall be in addition to any liability
which any Manager may otherwise have.
(e) If the indemnification provided for in this Section 9 is unavailable to
an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company and
the Selling Stockholders on the one hand and the Managers on the other hand from
the offering of the Shares, or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Stockholders on the one
hand and the Managers on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Managers on the other hand shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Managers, in each case as set forth in
the table on the cover page of the International Prospectus. The relative fault
of the Company and the Selling Stockholders on the one hand and the Managers on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Stockholders on the one hand or by the Managers on the
other hand and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
(f) The Company, the Selling Stockholders and the Managers agree that it
would not be just and equitable if contribution pursuant to this Section 9 were
determined by a pro rata allocation (even if the Managers were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (e) above. The
-20-
<PAGE>
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (e) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 9, no Managers shall
be required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds the
amount of any damages which such Managers has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Managers'
obligations to contribute pursuant to this Section 9 are several in proportion
to the respective numbers of Firm Shares set forth opposite their names in
Schedule II hereto (or such numbers of Firm Shares increased as set forth in
Section 12 hereof) and not joint.
(g) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Managers or any
person controlling any Manager, the Company, its directors or officers or the
Selling Stockholders, any director, officer or partner of a Selling Stockholder
or any person controlling the Company or any Selling Stockholder, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Manager or any person
controlling any Manager, or to the Company, its directors or officers, or to a
Selling Stockholder, any director, officer or partner of a Selling Stockholder
or any person controlling the Company or any Selling Stockholder, shall be
entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 9.
10. Conditions of Managers' Obligations. The several obligations of the
-----------------------------------
Managers to purchase the Firm Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
-21-
<PAGE>
Registration Statement or such post-effective amendment shall have become
effective not later than 5:30 P.M. New York City time, on the date hereof, or at
such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Manager, threatened
by the Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectuses or otherwise)
shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change, or any development involving a prospective change,
in or affecting the condition (financial or other), business, properties, net
worth or results of operations of the Company or the Subsidiaries not
contemplated by the Prospectuses, which in your opinion, as Lead Managers of the
several Managers, would materially, adversely affect the market for the Shares,
or (ii) any event or development relating to or involving the Company or any
officer or director of the Company or any Selling Stockholder which makes any
statement made in the Prospectuses untrue or which, in the opinion of the
Company and its counsel or the Managers and their counsel, requires the making
of any addition to or change in the Prospectuses in order to state a material
fact required by the Act or any other law to be stated therein or necessary in
order to make the statements therein not misleading, if amending or
supplementing the Prospectuses to reflect such event or development would, in
your opinion, as Lead Managers for the several Managers, materially adversely
affect the market for the Shares.
(c) You shall have received on the Closing Date an opinion of Long,
Aldridge & Norman, LLP, counsel for the Company and the Selling Stockholders,
dated the Closing Date and addressed to you, as Lead Managers for the several
Managers, to the effect that:
(i) The Company is a corporation validly existing and in good
standing under the laws of the State of Georgia with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectuses
(and any amendment or supplement thereto); and is duly registered and
qualified to transact business in each of the States identified on Schedule
IV hereto. The foregoing statement is based solely upon certificates
provided by agencies of those states, copies of which the Company has
delivered to you at the Closing, and is limited to the meaning ascribed to
such certificates by each applicable state agency. Except as described in
the Prospectuses, there are no outstanding options, warrants or other
rights calling for the issuance of, and such counsel does not know of any
commitment, plan or arrangement to issue, any shares of capital stock of
the Company or any security convertible into or exchangeable or exercisable
for capital stock of the Company;
(ii) Each of the Subsidiaries is a corporation validly existing and
in good standing under the laws of the jurisdiction of its organization,
with corporate power and authority to own, lease, and operate its
-22-
<PAGE>
properties and to conduct its business as described in the Registration
Statement and the Prospectuses (and any amendment or supplement thereto)
and is duly qualified to transact business in each of the States identified
on Schedule IV hereto. The foregoing statement is based solely upon
certificates provided by agencies of those states, copies of which the
Company has delivered to you at the Closing, and is limited to the meaning
ascribed to such certificates by each applicable state agency; and all the
outstanding shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued, are fully paid and nonassessable, and
are owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any perfected security interest other than
the Bank of America Pledge, or, to the best knowledge of such counsel after
reasonable inquiry, any other security interest, lien, adverse claim,
equity or other encumbrance, and no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding;
(iii) The Company and each of the Subsidiaries has all necessary
governmental authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental regulatory officials
and bodies (except where the failure so to have any such authorizations,
approvals, orders, licenses, certificates, franchises or permits,
individually or in the aggregate, would not have a material adverse effect
on the business, properties, operations or financial condition of the
Company and the Subsidiaries taken as a whole), to own their respective
properties and to conduct their respective businesses as now being
conducted, as described in the Prospectuses;
(iv) The authorized and outstanding capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectuses; and
the authorized capital stock of the Company conforms in all material
respects as to legal matters to the description thereof contained in the
Prospectuses under the caption "Description of Capital Stock";
(v) All the shares of capital stock of the Company outstanding prior
to the issuance of the Shares to be issued and sold by the Company pursuant
to the Underwriting Agreements, including the Shares to be sold by the
Selling Stockholders, have been duly authorized and validly issued, and are
fully paid and nonassessable, and, to such counsel's knowledge, no
preemptive rights of shareholders exist with respect to any of the Shares
or the issue and sale thereof other than such preemptive rights that have
been satisfied or waived by the holders thereof; and all corporate action
required to be taken for the authorization, issue and sale of such Shares
has been validly taken;
(vi) Except as described in the Prospectuses, to the knowledge of
such counsel, there is no holder of any security of the Company or any
other person who has the right, contractual or otherwise, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite
the sale of, the Shares or the right to have any Common Stock or other
securities of the Company included in the Registration Statement or the
-23-
<PAGE>
right, as a result of the filing of the Registration Statement, to require
registration under the Act of any shares of Common Stock or other
securities of the Company;
(vii) The Shares to be issued and sold to the Managers and the U.S.
Underwriters by the Company under the International Underwriting Agreement
and the U.S. Underwriting Agreement have been duly authorized and, when
issued and delivered to the Managers and the U.S. Underwriters against
payment therefor in accordance with the terms of the International
Underwriting Agreement and the U.S. Underwriting Agreement, will be validly
issued, fully paid and nonassessable and free of any preemptive or, to the
best knowledge of such counsel after reasonable inquiry, similar rights
that entitle or will entitle any person to acquire any Shares upon the
issuance thereof by the Company;
(viii) The form of certificates for the Shares conforms to the
requirements of the Georgia Business Corporation Code;
(ix) The Registration Statement and all post-effective amendments,
if any, have become effective under the Act and, to the best knowledge of
such counsel after reasonable inquiry, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectuses pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(x) The Company has the corporate power and authority to enter into
this Agreement and the U.S. Underwriting Agreement and to issue, sell and
deliver the Shares to be sold by it to the Managers and the U.S.
Underwriters as provided herein and therein, and each of this Agreement and
the U.S. Underwriting Agreement have been duly authorized, executed and
delivered by the Company and is a valid, legal and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as enforcement of rights to indemnity and contribution hereunder may
be limited by Federal or state securities laws or principles of public
policy and subject to the qualification that the enforceability of the
Company's obligations hereunder may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium, and other laws relating
to or affecting creditors' rights generally and by general equitable
principles;
(xi) Neither the Company nor any of the Subsidiaries is in violation
of its respective certificate or articles of incorporation or bylaws, or
other organizational documents, or to the best knowledge of such counsel
after reasonable inquiry, is in default in the performance of any material
obligation, agreement or condition contained in any bond, debenture, note
or other evidence of indebtedness, except as may be disclosed in the
Prospectuses;
(xii) Neither the issuance, offer, sale or delivery of the
Underwritten Shares, the execution, delivery or performance of this
-24-
<PAGE>
Agreement or the U.S. Underwriting Agreement, or compliance by the Company
with all provisions of this Agreement and the U.S. Underwriting Agreement,
nor consummation by the Company of the transactions contemplated hereby or
by the U.S. Underwriting Agreement conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
certificate or articles of incorporation or bylaws, or other organizational
documents, of the Company or any of the Subsidiaries or any agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties is bound that is an exhibit to the Registration Statement or to
any Incorporated Document, or is known to such counsel after reasonable
inquiry, or will result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of the
Subsidiaries, nor will any such action result in any violation of any
existing law, regulation, ruling (assuming compliance with all applicable
state securities and Blue Sky laws), judgment, injunction, order or decree
known to such counsel after reasonable inquiry, applicable to the Company,
the Subsidiaries or any of their respective properties;
(xiii) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company (except as have been obtained under the Act and the
Exchange Act or such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares) for the valid
issuance and sale of the Shares to the Managers as contemplated by this
Agreement;
(xiv) The Registration Statement and the Prospectuses and any
supplements or amendments thereto (except for the financial statements,
schedules and the notes thereto and the schedules and other financial and
statistical data included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with the
requirements of the Act; and each of the Incorporated Documents (except for
the financial statements and the notes thereto and the schedules and other
financial and statistical data included therein, as to which counsel need
not express any opinion) complies as to form in all material respects with
the Exchange Act and the rules and regulations of the Commission
thereunder;
(xv) To the best knowledge of such counsel after reasonable inquiry,
(A) other than as described or contemplated in the Prospectuses (or any
supplement thereto), there are no legal or governmental proceedings pending
or threatened against the Company or any of the Subsidiaries, or to which
the Company or any of the Subsidiaries, or any of their property, is
subject, which are required to be described in the Registration Statement
or Prospectuses (or any amendment or supplement thereto) and (B) there are
no agreements, contracts, indentures, leases or other instruments, that are
required to be described in the Registration Statement or the Prospectuses
(or any amendment or supplement thereto) or to be filed as an exhibit to
the Registration Statement or any Incorporated Document that are not
described or filed as required, as the case may be;
-25-
<PAGE>
(xvi) To the best knowledge of such counsel after reasonable
inquiry, neither the Company nor any of the Subsidiaries is in violation of
any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any decree of
any court or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries;
(xvii) The statements in the Registration Statement and
Prospectuses, insofar as they are descriptions of contracts, agreements or
other legal documents or refer to statements of law or legal conclusions,
are accurate and present fairly the information required to be shown;
(xviii) This Agreement, the U.S. Underwriting Agreement and the
Custody Agreement have each been duly executed and delivered by or on
behalf of each of the Selling Stockholders and are valid and binding
agreements of each Selling Stockholder enforceable against each Selling
Stockholder in accordance with their respective terms;
(xix) To the knowledge of such counsel, each Selling Stockholder
has full legal right, power and authorization, and any approval required by
law, to sell, assign, transfer and deliver good and marketable title to the
Shares which such Selling Stockholder has agreed to sell pursuant to this
Agreement and the U.S. Underwriting Agreement;
(xx) The execution and delivery of this Agreement, the U.S.
Underwriting Agreement and the Custody Agreement by the Selling
Stockholders and the consummation of the transactions contemplated hereby
and thereby will not conflict with, violate, result in a breach of or
constitute a default under the terms or provisions of any agreement,
indenture, mortgage or other instrument known to such counsel to which any
Selling Stockholder is a party or by which any of them or any of their
assets or property is bound, or any court order or decree or any law, rule,
or regulation applicable to any Selling Stockholder or to any of the
property or assets of any Selling Stockholder;
(xxi) Upon delivery of the Underwritten Shares pursuant to this
Agreement and the U.S. Underwriting Agreement and payment therefor as
contemplated herein and by the U.S. Underwriting Agreement, the Managers
and the U.S. Underwriters will acquire good and marketable title to the
Shares free and clear of any lien, claim, security interest, or other
encumbrance, restriction on transfer or other defect in title;
(xxii) The Company and the Subsidiaries own all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectuses as being owned by them or any of
them or necessary for the conduct of their respective businesses, and such
counsel is not aware of any claim to the contrary or any challenge by any
other person to the rights of the Company and the Subsidiaries with respect
to the foregoing; and
-26-
<PAGE>
(xxiii) Although counsel has not undertaken, except as otherwise
indicated in their opinion, to determine independently, and does not assume
any responsibility for, the accuracy or completeness of the statements in
the Registration Statement, such counsel has participated in the
preparation of the Registration Statement and the Prospectuses, including
general review and discussion of the contents thereof (including general
review and discussion of the contents of all Incorporated Documents), and
nothing has come to the attention of such counsel that has caused them to
believe that the Registration Statement (including the Incorporated
Documents) at the time the Registration Statement became effective, or the
Prospectuses, as of their respective dates and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated in the Prospectuses or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or
that any amendment or supplement to the Prospectuses, as of its respective
date, and as of the Closing Date or the Option Closing Date, as the case
may be, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated in the Prospectuses or
necessary in order to make the statements in the Prospectuses, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements, schedules, pro forma financial statements and the
notes thereto and the other financial and statistical data included in the
Registration Statement or the Prospectuses or any Incorporated Document).
In rendering their opinion as aforesaid, counsel may rely upon an opinion
or opinions, each dated the Closing Date, of other counsel retained by them or
the Company as to laws of any jurisdiction other than the United States or the
State of Georgia, provided that (1) each such local counsel is acceptable to the
Lead Managers, (2) such reliance is expressly authorized by each opinion so
relied upon and a copy of each such opinion is delivered to the Lead Managers
and is, in form and substance satisfactory to them and their counsel, and (3)
counsel shall state in their opinion that they believe that they and the
Managers are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of King &
Spalding, counsel for the Managers, dated the Closing Date and addressed to you
as Lead Managers for the several Managers, with respect to the matters referred
to in clauses (vii), (ix), (x), (xiv) and (xxiii) of the foregoing paragraph (c)
and such other related matters as you may request.
(e) You shall have received letters addressed to you, as Lead Managers for
the several Managers, and dated the date hereof and the Closing Date from Ernst
& Young LLP, independent certified public accountants, substantially in the
forms heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
-27-
<PAGE>
Commission at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock of the Company nor any material increase in the
short-term or long-term debt of the Company (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectuses (or any amendment or Supplement thereto); (iii) there shall
not have been, since the respective dates as of which information is given in
the Registration Statement and the Prospectuses (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectuses (or any amendment or supplement thereto), any material adverse
change in the condition (financial or other), business, prospects, properties,
net worth or results of operations of the Company and the Subsidiaries taken as
a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration Statement or the
Prospectuses (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement shall
be true and correct on and as of the date hereof and on and as of the Closing
Date as if made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company (or such other officers as are
acceptable to you), to the effect set forth in this Section 10(f) and in Section
10(g) hereof.
(g) The Company shall not have failed at or prior to the Closing Date to
have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(h) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by or on behalf of the Selling Stockholders to the effect set forth in
this Section 10(h) and in Section 10(i) hereof.
(i) The Selling Stockholders shall not have failed at or prior to the
Closing Date to have performed or complied with any of their agreements
contained in this Agreement or the U.S. Underwriting Agreement and required to
be performed or complied with by them hereunder at or prior to the Closing Date.
(j) Prior to the Closing Date, the shares of Common Stock which the Company
agrees to sell pursuant to this Agreement and the U.S. Underwriting Agreement
shall have been listed, subject to notice of issuance, on the New York Stock
Exchange.
(k) The Sellers shall have furnished or caused to be furnished to you such
further certificates and documents as you shall have requested.
(l) The closing under the U.S. Underwriting Agreement shall have occurred
on the Closing Date concurrently with the closing hereunder on the Closing Date.
-28-
<PAGE>
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company or any
Attorney-in-Fact or any Selling Stockholder and delivered to you, as Lead
Managers for the several Managers, or to counsel for the Managers, shall be
deemed a representation and warranty by the Company, the Selling Stockholders or
the particular Selling Stockholder, as the case may be, to each Manager as to
the statements made therein.
The several obligations of the Managers to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in this Section 10 shall be dated the Option Closing Date in
question and the opinions or letters called for by paragraphs (c), (d) and (e)
shall be revised to reflect the sale of Additional Shares.
11. Expenses. The Sellers (in proportion to the number of Shares being
--------
offered by each of them) agree to pay the following costs and expenses and all
other costs and expenses incident to the performance by them of their
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectuses,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
International Prepricing Prospectus, each International Prospectus, the
Incorporated Documents and all amendments or supplements to any of them, as may
be reasonably requested for use in connection with the offering and sale of the
Shares; (iii) the preparation, printing, authentication, issuance and delivery
of certificates for the Shares, including any stamp taxes in connection with the
original issuance and sale of the Shares; (iv) the printing (or reproduction)
and delivery of this Agreement, the U.S. Underwriting Agreement, the
Supplemental Agreement Among U.S. Underwriters, the Agreement Among Managers,
the Agreement Between U.S. Underwriters and Managers, the International Selling
Agreement, the Managers' Questionnaire, the preliminary and supplemental Blue
Sky Memoranda and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Underwritten Shares; (v) the
listing of the Shares on the New York Stock Exchange; (vi) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Managers relating
to the preparation, printing or reproduction, and delivery of the preliminary
and supplemental Blue Sky Memoranda and such registration and qualification);
(vii) the filing fees and the fees and expenses of counsel for the Managers in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with presentations to
-29-
<PAGE>
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and the Selling Stockholders.
12. Effective Date of Agreement. This Agreement shall become effective:
---------------------------
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as Lead Managers for the several Managers, by notifying the Company and
the Selling Stockholders.
If any one or more of the Managers shall fail or refuse to purchase Shares
which it or they are obligated to purchase hereunder on the Closing Date, and
the aggregate number of Shares which such defaulting Manager or Managers are
obligated but fail or refuse to purchase is not more than one-tenth of the
aggregate number of Shares which the Managers are obligated to purchase on the
Closing Date, each non-defaulting Manager shall be obligated, severally, in the
proportion which the number of Firm Shares set forth opposite its name in
Schedule II hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting Managers or in such other proportion as
you may specify in accordance with Section 20 of the Master Agreement Among
Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting
Manager or Managers are obligated, but fail or refuse, to purchase. If any one
or more of the Managers shall fail or refuse to purchase Shares which it or they
are obligated to purchase on the Closing Date and the aggregate number of Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the Managers are obligated to purchase on the
Closing Date and arrangements satisfactory to you and the Company for the
purchase of such Shares by one or more non-defaulting Managers or other party or
parties approved by you and the Company are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any non-
defaulting Manager or the Company. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. Any action
taken under this paragraph shall not relieve any defaulting Manager from
liability in respect of any such default of any such Manager under this
Agreement. The term "Manager" as used in this Agreement includes, for all
purposes of this Agreement, any party not listed in Schedule II hereto who, with
your approval and the approval of the Company, purchases Shares which a
defaulting Manager is obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
-30-
<PAGE>
Manager to the Company or any Selling Stockholder, by notice to the Company, if
prior to the Closing Date, as the case may be, (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended or materially limited, (ii) a
general moratorium on commercial banking activities in New York or Georgia shall
have been declared by either federal or state authorities, or (iii) there shall
have occurred any outbreak or escalation of hostilities or other international
or domestic calamity, crisis or change in political, financial or economic
conditions, the effect of which on the financial markets of the United States is
such as to make it, in your judgment, impracticable or inadvisable to commence
or continue the offering of the Shares at the offering price to the public set
forth on the cover page of the International Prospectus or to enforce contracts
for the resale of the Shares by the Managers. Notice of such termination may be
given to the Company by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
14. Information Furnished by the Managers. The statements set forth in
-------------------------------------
the last paragraph on the cover page, the stabilization legend on the inside
front cover page, and the statements in the first and third paragraphs under the
caption "Underwriting" in the International Prepricing Prospectus and in the
International Prospectus, constitute the only information furnished by or on
behalf of the Managers through you as such information is referred to in
Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13
-------------
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at NOVA Corporation, Five Concourse Parkway, Suite 700, Atlanta, Georgia
30328, Attention: , with a copy to Long, Aldridge & Norman, LLP,
303 Peachtree Street, Suite 5300, Atlanta, Georgia 30308, Attention: ;
or (ii) if to the Selling Stockholders, at Attention:
; or (iii) if to you, as Lead Managers for the several Managers,
care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Managers, the Company, its directors and officers, and the other controlling
persons referred to in Section 9 hereof and the Selling Stockholders and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Manager of any of the Shares
in his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by and
----------------------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
-31-
<PAGE>
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
-32-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Stockholders and the several Managers.
Very truly yours,
NOVA CORPORATION
By:____________________________
Chairman of the Board
Each of the Selling Stockholders
named in Schedule I hereto
By:_____________________________
Attorney-in-Fact
By:
Attorney-in-Fact
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Managers named in Schedule II hereto.
SMITH BARNEY INC.
BT ALEX. BROWN INTERNATIONAL,
a division of Bankers Trust PLC
THE ROBINSON-HUMPHREY COMPANY, LLC
As Lead Managers for of the
Several Managers
By: SMITH BARNEY INC.
By:____________________________
Managing Director
-33-
<PAGE>
SCHEDULE I
NOVA CORPORATION
<TABLE>
<CAPTION>
Part A -- Firm Shares
- - - ---------------------
<S> <C> <C>
Number of
Selling Stockholders Firm Shares
-------------------- -----------
___________
___________
Total.....................
===========
</TABLE>
-34-
<PAGE>
SCHEDULE II
NOVA CORPORATION
<TABLE>
<CAPTION>
Number of
Manager Firm Shares
------- ------------
<S> <C>
Smith Barney Inc................................. _________
BT Alex. Brown International, a division of
Bankers Trust PLC.............................. _________
The Robinson-Humphrey Company, LLC............... _________
Total...........................
=========
</TABLE>
-35-
<PAGE>
SCHEDULE III
SCHEDULE OF LOCKUP AGREEMENTS
(1) World Com, Inc.
(2) Warburg, Pincus Investors, L .P.
(3) First Union Corporation affiliates:
(a) First Union NOVA Holdings of Connecticut, Inc.
(b) First Union NOVA Holdings of Maryland, Inc.
(c) First Union NOVA Holdings of Tennessee, Inc.
(d) First Union NOVA Holdings of South Carolina, Inc.
(e) First Union NOVA Holdings of Georgia, Inc.
(f) First Union NOVA Holdings of Virginia, Inc.
(g) First Union NOVA Holdings of North Carolina, Inc.
(h) First Union NOVA Holdings of New Jersey, Inc.
(i) First Union NOVA Holdings of Florida, Inc.
(j) First Union NOVA Holdings of DC, Inc.
(4) Edward Grzedzinski
(5) James M. Bahin
(6) Steve A. Hughes
(7) Elmer F. Arnold
(8) Tammy Cooper Zimmerman
(9) James M. Rinkel
(10) Rodney N. Beegle
(11) Pamela A. Joseph
(12) E. John Macht
(13) Robert K. Walker
(14) Michael J. Koopp
(15) Cathy A. Harper
(16) Joseph P. Cohane
(17) Stephanie R. Sharp
(18) Donna S. Hall
(19) Paul W. Bowers
(20) Rebecca L. Powell
-36-
<PAGE>
SCHEDULE IV
SCHEDULE OF STATES WHERE COMPANY
IS QUALIFIED TO DO BUSINESS
Alabama
Arizona (pending)
California
Connecticut
Delaware
Washington, D.C.
Florida
Georgia
Idaho
Illinois
Iowa
Kansas
Louisiana
Maryland
Massachusetts
Michigan
Minnesota
Montana
New Jersey
New York
North Carolina
North Dakota
Oregon
Pennsylvania
South Carolina
Tennessee
Utah
Virginia
Washington
West Virginia
Wisconsin (pending)
Wyoming
Vermont
-37-
<PAGE>
FIRST AMENDMENT TO SHAREHOLDERS AGREEMENT
THIS FIRST AMENDMENT TO SHAREHOLDERS AGREEMENT (this "First Amendment") is
made and entered into as of August 15, 1997, by and among First Union
Corporation, a North Carolina corporation, First Union National Bank, a national
banking association headquartered in Charlotte, North Carolina (formerly known
as First Union National Bank of North Carolina and successor by merger to First
National Bank of Florida, First Union National Bank of Georgia, First Union
National Bank of Maryland, First Union National Bank of South Carolina, First
Union National Bank of Virginia, First Union National Bank of Tennessee, First
Union National Bank of Washington, D.C., and First Union Bank of Connecticut),
First Union National Bank, a national banking association headquartered in
Avondale, Pennsylvania (formerly known as First Fidelity Bank, N.A.), NOVA
Information Systems, Inc., a Georgia corporation, and NOVA Corporation
(formerly, NOVA Holdings, Inc.), a Georgia corporation, as a supplement and an
amendment to the Shareholders Agreement (the "Shareholders Agreement") dated as
of January 31, 1996, by and among the aforesaid parties. Any capitalized,
undefined terms used herein will have the meanings ascribed to them in the
Shareholders Agreement.
W I T N E S S E T H :
WHEREAS, pursuant to the Shareholders Agreement, the Former NOVA
Shareholders agreed not to sell, assign, dispose of, transfer, pledge or
hypothecate any Holdings Securities, except as permitted by the Shareholders
Agreement; and
WHEREAS, Section 2.5 of the Shareholders Agreement requires that the
certificates representing such Holdings Securities must have a legend imprinted
on them which states that the Holdings Securities are subject to the terms and
conditions of the Shareholders Agreement, which provides for, among other
things, (i) the election of directors, (ii) a right of first refusal on the sale
of such Holdings Securities, and (iii) a limitation on resale of such Holdings
Securities; and
WHEREAS, pursuant to Section 3.1 of the Shareholders Agreement, the
provisions relating to the election of directors expired six months after the
initial Public Offering; and
WHEREAS, pursuant to Section 2.3(d) of the Shareholders Agreement, the
provisions relating to the right of first refusal on the sale of Holdings
Securities owned by Former NOVA Shareholder no longer apply following the
initial Public Offering; and
WHEREAS, the initial Public Offering referred to in the Shareholders
Agreement occurred on May 8, 1996; and
WHEREAS, pursuant to Section 2.4 of the Shareholders Agreement, the
provisions relating to the resale restrictions of such Holdings Securities will
apply for a period of at least 90 days but not to exceed 180 days after the date
of any future Public Offering; and
WHEREAS, to permit James M. Rinkel, a Former NOVA Shareholder, to remove
the above-described legend from the certificates representing his Holdings
Securities, the parties to this First Amendment desire to make certain
modifications to the Shareholders Agreement as described below; and
<PAGE>
WHEREAS, Section 4.1 of the Shareholders Agreement permits the amendment or
modification of the Shareholders Agreement by an instrument executed by the
Holdings Shareholders owning of record at least 90% of the then issued and
outstanding Holdings Voting Stock then held by Holdings Shareholders; provided
that such amendment or modification may not operate to the disproportionate
detriment of any Shareholder; and
WHEREAS, the parties to this First Amendment own at least 90% of the
currently issued and outstanding Holdings Voting Stock currently held by
Holdings Shareholders.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein set forth, the parties to this First Amendment agree as
follows:
1. Legend. The Shareholders Agreement is hereby amended and modified by
------
inserting at the end of Section 2.5 the following:
Notwithstanding anything in this Agreement to the contrary, this Section
2.5 shall not apply to certificates representing Holdings Securities which
are registered in the name of James M. Rinkel.
2. Transfer Documentation; Transfer Books. The Shareholders Agreement is
--------------------------------------
hereby amended and modified by inserting at the end of Section 2.7 the
following:
(c) Notwithstanding anything in this Agreement to the contrary, any
transferee, donee or subsequent purchaser of Holdings Securities previously
registered in the name of James M. Rinkel shall not be bound by the terms
and conditions of this Agreement.
3. Full Force and Effect. Other than as specifically amended and
---------------------
modified herein, the Shareholders Agreement is unaltered and remains in full
force and effect in accordance with its terms.
[Signatures Begin on Following Page]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly
executed as of the day and year first above written.
First Union Corporation
By /s/ Robert L. Andersen
------------------------------------------
Name: Robert L. Andersen
------------------------------------
Title: Senior Vice President
------------------------------------
First Union National Bank, headquartered in
Charlotte, North Carolina
By /s/ Robert L. Andersen
------------------------------------------
Name: Robert L. Andersen
------------------------------------
Title: Senior Vice President
------------------------------------
First Union National Bank, headquartered in
Avondale, Pennsylvania
By /s/ Robert L. Andersen
------------------------------------------
Name: Robert L. Andersen
------------------------------------
Title: Senior Vice President
------------------------------------
NOVA Information Systems, Inc.
By /s/ James M. Bahin
-------------------------------------------
James M. Bahin
Chief Financial Officer
NOVA Corporation
(formerly NOVA Holdings, Inc.)
By /s/ James M. Bahin
-------------------------------------------
James M. Bahin
Chief Financial Officer
(Signatures continue on following page)
3
<PAGE>
Warburg, Pincus Investors, L.P.
By: Warburg, Pincus & Co., its General Partner
By /s/ Dr. Henry Kressel
-------------------------------------------
Dr. Henry Kressel
Partner
Worldcom, Inc.
By /s/ Charles T. Cannada
-------------------------------------------
Charles T. Cannada
Senior Vice President
4
<PAGE>
SECOND AMENDMENT TO SHAREHOLDERS AGREEMENT
THIS SECOND AMENDMENT TO SHAREHOLDERS AGREEMENT (this "Second Amendment")
is made and entered into as of August 22, 1997, by and among First Union
Corporation, a North Carolina corporation, First Union National Bank, a national
banking association headquartered in Charlotte, North Carolina (formerly known
as First Union National Bank of North Carolina and successor by merger to First
National Bank of Florida, First Union National Bank of Georgia, First Union
National Bank of Maryland, First Union National Bank of South Carolina, First
Union National Bank of Virginia, First Union National Bank of Tennessee, First
Union National Bank of Washington, D.C., and First Union Bank of Connecticut),
First Union National Bank, a national banking association headquartered in
Avondale, Pennsylvania (formerly known as First Fidelity Bank, N.A.), NOVA
Information Systems, Inc., a Georgia corporation, and NOVA Corporation
(formerly, NOVA Holdings, Inc.), a Georgia corporation, as a supplement and an
amendment to the Shareholders Agreement (the "Shareholders Agreement") dated as
of January 31, 1996, by and among the aforesaid parties, which was previously
supplemented and amended by the First Amendment to Shareholders Agreement dated
as of August 15, 1997, by and among the aforesaid parties. Any capitalized,
undefined terms used herein will have the meanings ascribed to them in the
Shareholders Agreement.
W I T N E S S E T H :
WHEREAS, pursuant to the Shareholders Agreement, the Former NOVA
Shareholders agreed not to sell, assign, dispose of, transfer, pledge or
hypothecate any Holdings Securities, except as permitted by the Shareholders
Agreement; and
WHEREAS, Section 2.5 of the Shareholders Agreement requires that the
certificates representing such Holdings Securities must have a legend imprinted
on them which states that the Holdings Securities are subject to the terms and
conditions of the Shareholders Agreement, which provides for, among other
things, (i) the election of directors, (ii) a right of first refusal on the sale
of such Holdings Securities, and (iii) a limitation on resale of such Holdings
Securities; and
WHEREAS, pursuant to Section 3.1 of the Shareholders Agreement, the
provisions relating to the election of directors expired six months after the
initial Public Offering; and
WHEREAS, pursuant to Section 2.3(d) of the Shareholders Agreement, the
provisions relating to the right of first refusal on the sale of Holdings
Securities owned by Former NOVA Shareholder no longer apply following the
initial Public Offering; and
WHEREAS, the initial Public Offering referred to in the Shareholders
Agreement occurred on May 8, 1996; and
WHEREAS, pursuant to Section 2.4 of the Shareholders Agreement, the
provisions relating to the resale restrictions of such Holdings Securities will
apply for a period of at least 90 days but not to exceed 180 days after the date
of any future Public Offering; and
WHEREAS, to permit Elmer F. Arnold, III, Rodney N. Beegle, Donna S. Hall,
Steve A. Hughes, Rebecca L. Powell and Tammy Cooper Zimmerman, each a Former
NOVA Shareholder, to remove the above-described legend from the certificates
representing their Holdings Securities, the parties
<PAGE>
to this Second Amendment desire to make certain modifications to the
Shareholders Agreement as described below; and
WHEREAS, Section 4.1 of the Shareholders Agreement permits the amendment or
modification of the Shareholders Agreement by an instrument executed by the
Holdings Shareholders owning of record at least 90% of the then issued and
outstanding Holdings Voting Stock then held by Holdings Shareholders; provided
that such amendment or modification may not operate to the disproportionate
detriment of any Shareholder; and
WHEREAS, the parties to this Second Amendment own at least 90% of the
currently issued and outstanding Holdings Voting Stock currently held by
Holdings Shareholders.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein set forth, the parties to this Second Amendment agree as
follows:
1. Legend. The Shareholders Agreement is hereby amended and modified by
------
inserting at the end of Section 2.5 the following:
Notwithstanding anything in this Agreement to the contrary, this Section
2.5 shall not apply to certificates representing Holdings Securities which
are registered in the name of Elmer F. Arnold, III, Rodney N. Beegle, Donna
S. Hall, Steve A. Hughes, Rebecca L. Powell, James M. Rinkel or Tammy
Cooper Zimmerman.
2. Transfer Documentation; Transfer Books. The Shareholders Agreement is
--------------------------------------
hereby amended and modified by inserting at the end of Section 2.7 the
following:
(c) Notwithstanding anything in this Agreement to the contrary, any
transferee, donee or subsequent purchaser of Holdings Securities previously
registered in the name of Elmer F. Arnold, III, Rodney N. Beegle, Donna S.
Hall, Steve A. Hughes, Rebecca L. Powell, James M. Rinkel or Tammy Cooper
Zimmerman (each an "Excluded Former NOVA Shareholder") shall not be bound
by the terms and conditions of this Agreement; provided that this Section
2.7(c) shall not apply to any transferee, donee or subsequent purchaser who
is (1) a member of the immediate family of any Excluded Former NOVA
Shareholder or (2) controlled by (i) any Excluded Former NOVA Shareholder
or (ii) an entity controlled by any Excluded Former NOVA Shareholder.
3. Full Force and Effect. Other than as specifically amended and
---------------------
modified herein, the Shareholders Agreement is unaltered and remains in full
force and effect in accordance with its terms.
[Signatures Begin on Following Page]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Second Amendment to be
duly executed as of the day and year first above written.
First Union Corporation
By /s/ Robert L. Andersen
----------------------------------------
Name: Robert L. Andersen
----------------------------------
Title: Senior Vice President
---------------------------------
First UNION NATIONAL BANK, headquartered in
Charlotte, North Carolina
By /s/ Robert L. Andersen
----------------------------------------
Name: Robert L. Andersen
----------------------------------
Title: Senior Vice President
---------------------------------
First UNION NATIONAL BANK, headquartered in
Avondale, Pennsylvania
By /s/ Robert L. Andersen
----------------------------------------
Name: Robert L. Andersen
----------------------------------
Title: Senior Vice President
--------------------------------
NOVA Information Systems, Inc.
By /s/ James M. Bahin
---------------------------------------
James M. Bahin
Chief Financial Officer
NOVA Corporation
(formerly NOVA Holdings, Inc.)
By /s/ James M. Bahin
---------------------------------------
James M. Bahin
Chief Financial Officer
(Signatures continue on following page)
3
<PAGE>
Warburg, Pincus Investors, L.P. By: Warburg,
Pincus & Co., its General Partner
By /s/ Dr. Henry Kressel
---------------------------------------
Dr. Henry Kressel
Partner
Worldcom, Inc.
By /s/ Charles T. Cannada
---------------------------------------
Charles T. Cannada
Senior Vice President
4
<PAGE>
THIRD AMENDMENT TO SHAREHOLDERS AGREEMENT
THIS THIRD AMENDMENT TO SHAREHOLDERS AGREEMENT (this "Third Amendment") is
made and entered into as of September 8, 1997, by and among First Union
Corporation, a North Carolina corporation, First Union National Bank, a national
banking association headquartered in Charlotte, North Carolina (formerly known
as First Union National Bank of North Carolina and successor by merger to First
National Bank of Florida, First Union National Bank of Georgia, First Union
National Bank of Maryland, First Union National Bank of South Carolina, First
Union National Bank of Virginia, First Union National Bank of Tennessee, First
Union National Bank of Washington, D.C., and First Union Bank of Connecticut),
First Union National Bank, a national banking association headquartered in
Avondale, Pennsylvania (formerly known as First Fidelity Bank, N.A.), NOVA
Information Systems, Inc., a Georgia corporation, and NOVA Corporation
(formerly, NOVA Holdings, Inc.), a Georgia corporation, as a supplement and an
amendment to the Shareholders Agreement (the "Shareholders Agreement") dated as
of January 31, 1996, by and among the aforesaid parties, which was previously
supplemented and amended by the First Amendment to Shareholders Agreement dated
as of August 15, 1997 the Second Amendment to Shareholders Agreement dated as of
August 22, 1997, by and among the aforesaid parties. Any capitalized, undefined
terms used herein will have the meanings ascribed to them in the Shareholders
Agreement.
W I T N E S S E T H :
WHEREAS, pursuant to the Shareholders Agreement, the Former NOVA
Shareholders agreed not to sell, assign, dispose of, transfer, pledge or
hypothecate any Holdings Securities, except as permitted by the Shareholders
Agreement; and
WHEREAS, Section 2.5 of the Shareholders Agreement requires that the
certificates representing such Holdings Securities must have a legend imprinted
on them which states that the Holdings Securities are subject to the terms and
conditions of the Shareholders Agreement, which provides for, among other
things, (i) the election of directors, (ii) a right of first refusal on the sale
of such Holdings Securities, and (iii) a limitation on resale of such Holdings
Securities; and
WHEREAS, pursuant to Section 3.1 of the Shareholders Agreement, the
provisions relating to the election of directors expired six months after the
initial Public Offering; and
WHEREAS, pursuant to Section 2.3(d) of the Shareholders Agreement, the
provisions relating to the right of first refusal on the sale of Holdings
Securities owned by Former NOVA Shareholder no longer apply following the
initial Public Offering; and
WHEREAS, the initial Public Offering referred to in the Shareholders
Agreement occurred on May 8, 1996; and
WHEREAS, pursuant to Section 2.4 of the Shareholders Agreement, the
provisions relating to the resale restrictions of such Holdings Securities will
apply for a period of at least 90 days but not to exceed 180 days after the date
of any future Public Offering; and
WHEREAS, to permit James M. Bahin, Paul W. Bowers and Edward Grzendzinski,
each a Former NOVA Shareholder, to remove the above-described legend from the
certificates representing their Holdings
<PAGE>
Securities, the parties to this Third Amendment desire to make certain
modifications to the Shareholders Agreement as described below; and
WHEREAS, Section 4.1 of the Shareholders Agreement permits the amendment or
modification of the Shareholders Agreement by an instrument executed by the
Holdings Shareholders owning of record at least 90% of the then issued and
outstanding Holdings Voting Stock then held by Holdings Shareholders; provided
that such amendment or modification may not operate to the disproportionate
detriment of any Shareholder; and
WHEREAS, the parties to this Third Amendment own at least 90% of the
currently issued and outstanding Holdings Voting Stock currently held by
Holdings Shareholders.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein set forth, the parties to this Third Amendment agree as
follows:
1. Legend. The Shareholders Agreement is hereby amended and modified by
------
inserting at the end of Section 2.5 the following:
Notwithstanding anything in this Agreement to the contrary, this Section
2.5 shall not apply to certificates representing Holdings Securities which
are registered in the name of Elmer F. Arnold, III, James M. Bahin, Rodney
N. Beegle, Paul W. Bowers, Edward Grzendzinski, Donna S. Hall, Steve A.
Hughes, Rebecca L. Powell, James M. Rinkel or Tammy Cooper Zimmerman.
2. Transfer Documentation; Transfer Books. The Shareholders Agreement is
--------------------------------------
hereby amended and modified by inserting at the end of Section 2.7 the
following:
(c) Notwithstanding anything in this Agreement to the contrary, any
transferee, donee or subsequent purchaser of Holdings Securities previously
registered in the name of Elmer F. Arnold, III, James M. Bahin, Rodney N.
Beegle, Paul W. Bowers, Edward Grzendzinski, Donna S. Hall, Steve A.
Hughes, Rebecca L. Powell, James M. Rinkel or Tammy Cooper Zimmerman (each
an "Excluded Former NOVA Shareholder") shall not be bound by the terms and
conditions of this Agreement; provided that this Section 2.7(c) shall not
apply to any transferee, donee or subsequent purchaser who is (1) a member
of the immediate family of any Excluded Former NOVA Shareholder or (2)
controlled by (i) any Excluded Former NOVA Shareholder or (ii) an entity
controlled by any Excluded Former NOVA Shareholder.
3. Full Force and Effect. Other than as specifically amended and modified
---------------------
herein, the Shareholders Agreement is unaltered and remains in full force and
effect in accordance with its terms.
[Signatures Begin on Following Page]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Third Amendment to be duly
executed as of the day and year first above written.
First Union Corporation
By /s/ Robert L. Andersen
------------------------------------------
Name: Robert L. Andersen
------------------------------------
Title: Senior Vice President
-----------------------------------
First Union National Bank, headquartered in
Charlotte, North Carolina
By /s/ Robert L. Andersen
------------------------------------------
Name: Robert L. Andersen
------------------------------------
Title: Senior Vice President
-----------------------------------
First Union National Bank, headquartered in
Avondale, Pennsylvania
By /s/ Robert L. Andersen
------------------------------------------
Name: Robert L. Andersen
------------------------------------
Title: Senior Vice President
-----------------------------------
NOVA Information Systems, Inc.
By /s/ James M. Bahin
------------------------------------------
James M. Bahin
Chief Financial Officer
NOVA Corporation
(formerly NOVA Holdings, Inc.)
By /s/ James M. Bahin
------------------------------------------
James M. Bahin
Chief Financial Officer
(Signatures continue on following page)
3
<PAGE>
Warburg, Pincus Investors, L.P.
By: Warburg, Pincus & Co., its General Partner
By /s/ Dr. Henry Kressel
------------------------------------------
Dr. Henry Kressel
Partner
Worldcom, Inc.
By /s/ Charles T. Cannada
------------------------------------------
Charles T. Cannada
Senior Vice President
(Signatures continue on following page)
4
<PAGE>
EXHIBIT 5
March 24, 1998
NOVA Corporation
One Concourse Parkway
Suite 300
Atlanta, Georgia 30328
Re: NOVA Corporation
Registration Statement on Form S-1 (File No. 333-45997)
Ladies and Gentlemen:
We have acted as counsel to NOVA Corporation, a Georgia corporation (the
"Company"), in connection with the filing by the Company of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission registering under the Securities Act of 1933, as amended, up
to 8,165,000 shares of the Company's Common Stock, par value $.01 per share (the
"Shares"), inclusive of 5,300,000 shares to be issued and sold by the Company
(the "Company Shares"), 1,800,000 shares (the "Firm Selling Shareholder Shares")
to be sold by certain selling shareholders (the "Selling Shareholders"), and up
to 1,065,000 shares (together with the Firm Selling Shareholder Shares, the
"Selling Shareholder Shares") subject to a 30-day over-allotment option granted
by the Selling Shareholders to Smith Barney Inc., BT Alex. Brown Incorporated
and The Robinson-Humphrey Company LLC, as underwriters (the "Underwriters").
The opinions hereinafter set forth are given to the Company pursuant to
Item 16 of Form S-1 and Item 601(b)(5) of Regulation S-K. The only opinions
rendered by this firm consist of the matters set forth in numbered paragraphs
(1) and (2) below (our "Opinions"), and no other opinion is implied or to be
inferred beyond such matters. Additionally, our Opinions are based upon and
subject to the qualifications, limitations and exceptions set forth in this
letter.
Our Opinions are furnished for the benefit of the Company solely with
regard to the Registration Statement, may be relied upon by the Company only in
connection with the Registration Statement and may not otherwise be relied upon,
used, quoted or referred to by or filed with any other person or entity without
our prior written permission.
In rendering our Opinions, we have examined such agreements, documents,
instruments and records as we deemed necessary or appropriate under the
circumstances for us to express our Opinions, including without limitation, the
Articles of Incorporation of the Company; the Bylaws of the Company; the U.S.
underwriting agreement and the international underwriting agreement between the
Company and the U.S. Underwriters and Managers named therein (collectively, the
"Underwriting Agreements"); and resolutions duly adopted by the Board of
Directors of the Company, authorizing and approving the preparation and filing
of the Registration Statement and the sale of the Company Shares. In making all
of our examinations, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as copies, and the due
execution and delivery of all documents by any persons or entities where due
execution and delivery by such persons or entities is a prerequisite to the
effectiveness of such documents.
As to various factual matters that are material to our Opinions, we have
relied upon the factual statements set forth in a certificate of officers of the
Company and certificates of public officials. We have not independently
verified or investigated, nor do we assume any responsibility for, the factual
accuracy or completeness of such factual statements.
Members of this firm are admitted to the Bar of the State of Georgia and
are duly qualified to practice law in that state. We do not herein express any
opinion concerning any matter respecting or affected by any laws other than the
laws of the State of Georgia that are now in effect and that, in the exercise of
reasonable professional judgment, are normally considered in transactions such
as those contemplated by the offering of the Shares. The Opinions hereinafter
set forth are based upon pertinent laws and facts in existence as of the date
hereof, and we expressly disclaim any obligation to advise you of changes to
such pertinent laws or facts that hereafter may come to our attention.
Based upon and subject to the foregoing, we are of the Opinion that:
(1) the Company Shares, when issued and sold in accordance with the
Underwriting Agreements, against payment in full of the purchase price
therefor, will be validly issued, fully paid and nonassessable.
(2) the Selling Shareholder Shares are validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
LONG ALDRIDGE & NORMAN LLP
By: /s/ David M. Calhoun
----------------------
David M. Calhoun
<PAGE>
EXHIBIT 11.1
NOVA CORPORATION
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
10-MONTH
PERIOD ENDED
DECEMBER 31,
1995
-----------
<S> <C>
Weighted average Common Stock outstanding during the period.......... $26,932,029
Dilutive effect of common stock equivalents.......................... 1,671,743
-----------
Total........................................................... 28,603,772
Net income........................................................... $ 7,267,000
Less: Preferred Stock dividends...................................... 229,677
-----------
Net income available for Common Stock and common stock equivalents... $ 7,037,323
===========
Per share amount..................................................... $ 0.25
===========
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial and Other Data" in the Pre-Effective Amendment
No. 1 to the Registration Statement (Form S-1 No. 333-45997) and related
Prospectus of NOVA Corporation for the registration of 7,100,000 shares of its
common stock.
We also consent to the incorporation by reference therein of our report dated
February 17, 1998 with respect to the consolidated financial statements and
schedule of NOVA Corporation for the years ended December 31, 1997 and 1996, and
the 10-month period ended December 31, 1995 included in the Annual Report (Form
10-K) for 1997 filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
-----------------------------
Ernst & Young LLP
Atlanta, Georgia
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 739,000
<SECURITIES> 0
<RECEIVABLES> 35,377,000
<ALLOWANCES> (2,822,000)
<INVENTORY> 1,156,000
<CURRENT-ASSETS> 42,645,000
<PP&E> 31,520,000
<DEPRECIATION> (10,503,000)
<TOTAL-ASSETS> 170,528,000
<CURRENT-LIABILITIES> 30,407,000
<BONDS> 0
0
0
<COMMON> 290,000
<OTHER-SE> 102,647,000
<TOTAL-LIABILITY-AND-EQUITY> 170,528,000
<SALES> 335,625,000
<TOTAL-REVENUES> 335,625,000
<CGS> 260,058,000
<TOTAL-COSTS> 260,058,000
<OTHER-EXPENSES> 47,205,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (721,000)
<INCOME-PRETAX> 28,307,000
<INCOME-TAX> 10,922,000
<INCOME-CONTINUING> 17,385,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,385,000
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.58
</TABLE>
