<PAGE>
PROSPECTUS
8,400,000 SHARES
LOGO
FILED PURSUANT TO
RULE 424 (b) (1)
FILE NOs: 333-45997
COMMON STOCK 333-50687
------------
Of the 8,400,000 shares of Common Stock being offered hereby, 5,000,000
shares are being sold by NOVA Corporation (the "Company") and 3,400,000 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 8,400,000 shares of Common Stock offered hereby, 6,720,000 shares are
being offered in the United States and Canada and 1,680,000 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 April 21, 1998, was $31.8125 per share.
------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES 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.
- -------------------------------------------------------------------------------
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<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 $30.00 $1.35 $28.65 $28.65
- --------------------------------------------------------------------
Total(3) $252,000,000 $11,340,000 $143,250,000 $97,410,000
</TABLE>
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- -------------------------------------------------------------------------------
(1) For information regarding indemnification, see "Underwriting".
(2) Before deducting expenses estimated at $565,000 payable by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters a 30-day
option to purchase up to 1,260,000 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
$289,800,000, $13,041,000, and $133,509,000, 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 April 27, 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
April 21, 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 accrued 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............................ 5,000,000 shares
By the Selling Shareholders............... 3,400,000 shares
Common Stock to be outstanding after the
offering.................................. 34,183,307 shares(2)
Use of proceeds by the Company............. The net proceeds to the Company, estimated
at $142.7 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>
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(1) Of the 8,400,000 shares of Common Stock offered hereby, 6,720,000 shares
are being offered in the United States and Canada by the U.S. Underwriters
and 1,680,000 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>
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 $280,413
Long-term debt and capital lease obligations, less cur-
rent portion.......................................... 33,296 496
Total shareholders' equity............................. 102,937 245,622
</TABLE>
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(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 5,000,000 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>
RECENT FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues............................................. $ 66,525 $ 133,318
Cost of service...................................... 52,071 105,330
Conversion costs..................................... 491 4,587(1)
Selling, general and administrative.................. 7,359 11,176
Depreciation and amortization........................ 1,876 5,534
---------- ----------
Operating income..................................... 4,728 6,691
Interest expense (income)............................ (342) 1,165
Minority interest in income of subsidiary............ -- 937
---------- ----------
Pretax income........................................ 5,070 4,589
Provision for income tax............................. 1,926 1,698
---------- ----------
Net income........................................... $ 3,144 $ 2,891
========== ==========
Net income per share--assuming dilution.............. $ 0.11 $ 0.10
Weighted average common shares outstanding assuming
dilution............................................ 29,873 30,290
Merchant sales volume processed...................... $3,007,594 $5,916,520
</TABLE>
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(1) Includes a non-recurring charge for early termination of a third-party
processor contract.
Revenues increased 100.4% to $133.3 million for the quarter ended March 31,
1998, compared to $66.5 million for the quarter ended March 31, 1997. The
increase resulted primarily from a 96.7% increase in merchant sales volume
processed to $5.9 billion during the quarter, compared to $3.0 billion for the
quarter ended March 31, 1997. Of these increases, $50.1 million in revenues and
$2.2 billion in sales volume processed are attributable to the Crestar and MBNA
portfolio purchases and the Firstar Joint Venture and KeyBank Joint Venture.
Cost of service increased 102.3% to $105.3 million for the quarter ended
March 31, 1998, compared to $52.0 million for the quarter ended March 31, 1997.
The increase in cost of service is due to the increase in merchant sales volume
processed. The percentage increase is higher than the percentage increase in
merchant sales volume processed primarily because a substantial portion of the
volume from recent transactions has not been converted to the Company's
operating platform and is therefore being processed by third party vendors.
Conversion costs increased 834.2% to $4.6 million, compared to $491,000 in
1997. Of this increase, $2.0 million ($1.3 million, net of tax, or $0.04 per
share assuming dilution) relates to a non-recurring charge for early
termination of a merchant processing contract with a third-party processor. The
remaining increase relates to the significance of conversion efforts currently
underway as compared to 1997.
Selling, general and administrative expenses increased 51.9% to $11.2 million
for the quarter ended March 31, 1998, compared to $7.4 million for the quarter
ended March 31, 1997. This increase is attributable to the costs paid to
sellers for operating and managing merchant portfolios during transition and an
expanded sales force associated with marketing arrangements entered into in
conjunction with recent portfolio purchases and joint venture transactions.
Depreciation and amortization increased 195.0% to $5.5 million for the
quarter ended March 31, 1998, compared to $1.9 million for the quarter ended
March 31, 1997 due to amortization expense associated with the recent portfolio
purchases and joint venture transactions.
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the
Common Stock offered by this Prospectus.
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
8
<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
9
<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 accrued 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
10
<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
11
<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 345,534
shares to be sold by WorldCom (477,684 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 5.9% of the Company's outstanding
Common Stock (5.5% 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.
12
<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. First Union currently beneficially owns
approximately 27.5% of the Company's outstanding Common Stock and currently
has one designee on the Company's Board of Directors. In connection with First
Union's pending acquisition of CoreStates Financial Corp ("CoreStates"), on
April 21, 1998, First Union contributed 1,125,083 shares of Common Stock to
the CoreStates Foundation. The shares of Common Stock offered hereby include
1,125,083 of such shares to be sold by the CoreStates Foundation, which shares
were originally intended to be sold by First Union in the Offering prior to
such contribution. Upon completion of this Offering, the CoreStates Foundation
will not own any shares of Common Stock. Upon completion of the Offering,
First Union will own approximately 22.9% of the Company's outstanding Common
Stock (21.4% assuming the Underwriters' over-allotment option is exercised in
full). 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
13
<PAGE>
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").
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, directors and director nominees of the Company and
their affiliates, and WorldCom, Inc. will own beneficially 27.7%, 22.9%,
59.4%, and 5.9%, respectively, of the Company's outstanding Common Stock
(25.9%, 21.4%, 55.7%, and 5.5% 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 8,400,000
shares offered hereby (9,660,000 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 19,955,182 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
14
<PAGE>
of a total of approximately 19,659,642 shares of Common Stock, including
19,419,531 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 after deducting estimated underwriting discounts
and commissions and expenses payable by the Company, are estimated to be
approximately $142.7 million. The Company anticipates that an aggregate of
$48.5 million of the net proceeds of this offering (approximately 34.0% 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 $94.2 million (66.0% 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................................ $33.500 $22.750
Quarter Ended June 30, 1998 (through April 21, 1998)........ 37.438 30.188
</TABLE>
The last reported sale price of the Common Stock on the NYSE on April 21,
1998, was $31.8125 per share. As of March 24, 1998, the Company had
approximately 50 shareholders of record.
15
<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
5,000,000 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)........................... 290 340
Additional paid-in capital........................... 99,967 242,602
Retained earnings.................................... 2,680 2,680
----------- -----------
Total shareholders' equity.......................... 102,937 245,622
----------- -----------
Total capitalization................................ $ 136,233 $ 246,118
=========== ===========
</TABLE>
- --------
(1) Does not include $15.7 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.
16
<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.
17
<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 accrued 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
18
<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 92.2%, 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.
19
<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.
20
<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.
21
<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, EXCEPT PER SHARE DATA)
<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
Net income...... $ 1,115 $ 1,439 $ 2,369 $ 2,344 $ 3,145 $ 4,416 $ 4,757 $ 5,067
Net income per
share.......... 0.01 0.04 0.08 0.08 0.11 0.15 0.16 0.17
Net income per
share assuming
dilution....... 0.04 0.05 0.08 0.08 0.11 0.15 0.16 0.17
</TABLE>
22
<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
23
<PAGE>
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.
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.
24
<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
25
<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 accrued 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
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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.
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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:
LOGO
[GRAPHIC OF U.S. CHARGE VOLUME FOR VISA AND MASTERCARD 1986-1996 APPEARS HERE]
Source: The Credit Card Management Card Industry Directory, 1997 edition; The
Nilson Report.
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
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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 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 1997,
although the ten largest bankcard processors accounted for approximately 85%
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:
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<PAGE>
Focus on Small- to Medium-Sized Merchants. Since inception, the Company has
focused its strategy on delivering to small- to medium-sized merchants the
variety and sophistication of products and services previously available only
to large merchants. The Company believes that its use of technology and focused
marketing strategy enable it to effectively compete for merchant customers in
this market segment. See "Business--Customer Base."
Leverage Available Technologies. One of the Company's principal strategies is
to maximize the benefits of available technologies to deliver transaction
processing services and related software application products and services on a
cost-effective basis. The ability to achieve this strategy is facilitated by
the Company's flexible systems architecture and the capabilities of the NOVA
Network. While the NOVA Network is a fast, efficient, reliable and
technologically advanced telecommunications network, the Company continues to
develop and pursue enhancements to its telecommunications network in order to
allow the Company to maintain the advantages derived from its network
technology. The Company continues to enhance its ability to provide customized
and sophisticated software application products and services through the
ongoing development of software for POS terminals and PC applications. See
"Business--Technology" and "Business--Software Application Products and Value-
Added Services."
Provide High-Quality, Reliable Service. The Company is dedicated to providing
reliable transaction processing services and effective customer service and
support. The Company maintains a 24-hours-a-day, seven-days-a-week helpline
staffed by full-time customer service representatives. The ability of these
customer service representatives to serve effectively and efficiently the needs
of the Company's merchants is enhanced greatly by the use of networked systems
that provide access to real-time customer transaction information, a capability
historically available only to large merchants. In addition, the switching
capabilities of the NOVA Network result in rapid electronic transaction
authorizations. See "Business--Merchant Services Provided by the Company,"
"Business--Customer Service and Support" and "Business--Technology."
Utilize Multiple Marketing Channels. To reach its target market segment in a
cost-effective manner and to further its market penetration, the Company
markets its services through three principal channels: (i) bank alliances,
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
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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."
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:
LOGO
[GRAPHIC OF FLOW OF INFORMATION SERVICES WITH RESPECT TO A TYPICAL CREDIT CARD
TRANSACTION APPEARS HERE]
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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 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
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<PAGE>
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."
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
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<PAGE>
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.
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.
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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.
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
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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.
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.
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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.
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
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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, 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
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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 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,
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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.
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
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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, 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. 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
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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.
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
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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.
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,
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any such action, if it were to occur, may result in protracted and costly
litigation or royalty arrangements or otherwise have a material adverse effect
on the Company's financial condition and results of operations.
The Company currently licenses certain software from third parties to
supplement its internal software and technology development and to shorten
time-to-market software application product deliveries. For instance, the
Company licenses the software for NOVA Time. Management believes that it will
be necessary to continue this practice in the future, although there can be no
assurance that the Company will be able to do so on favorable terms or at all.
The Company's trademarks include "NOVA," "NOVA Information Systems," "NOVA
ACS," "NOVA Remote ACS," "NOVA Time," "NOVA Clock," "NOVA Perks," "PC
Transact It" and "NOVA Shadow Pay". To date, however, the Company only has
sought to have "NOVA" and "NOVA Perks" registered on the federal level. The
Company's application to register "NOVA" 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
44
<PAGE>
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 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
45
<PAGE>
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.
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.
46
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors,
director nominees 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........................
Stephen E. Wall............ 56 Director nominee
</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.
47
<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.
Mr. Wall has served with KeyCorp, a bank holding company, since 1970, most
recently as Executive Vice President. Mr. Wall serves as a director of
MasterCard International, a global payment system comprised of financial
institution members, and Electronic Payment Systems, Inc., a privately-held
electronic transaction processor. Mr. Wall has over 30 years experience in the
financial services 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.
48
<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 $635 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 $ 63,750 $ -- 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 $767 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 $811 50,000 $ --
Executive Vice Presi-
dent, 1996 95,000 25,000 337 15,500 --
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 were 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.
(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.
49
<PAGE>
EMPLOYMENT AGREEMENTS
Messrs. Grzedzinski, Bahin and Perry each has entered into a written
employment agreement with NOVA Information Systems dated October 27, 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.
50
<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.
51
<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"), including WorldCom and
Warburg, 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. In connection with that transaction, Worldcom received
an aggregate of 413,324 shares of Common Stock and convertible preferred stock
which it subsequently exercised and converted into an additional 1,957,739
shares of Common Stock. Warburg received an aggregate of 1,168,291 shares of
Common Stock and convertible preferred stock which it subsequently converted
into an additional 9,918,479 shares of Common Stock. Warburg also received
shares of the Company's Series D Preferred Stock. Following the Company's
initial public offering in May 1996, the Company redeemed all of the shares of
Series D Preferred Stock held by Warburg for $5.0 million plus $700,000 for
accrued but unpaid dividends.
52
<PAGE>
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.
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."
53
<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 other Selling Shareholder, (iii) each director and
director nominee of the Company who beneficially owns shares of Common Stock,
(iv) each Named Executive Officer who beneficially owns shares of Common
Stock, and (v) 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 AND CERTAIN
SELLING SHAREHOLDERS
Warburg, Pincus Invest-
ors, L.P.(3).......... 11,086,770 38.0% 1,615,668 9,471,102 27.7%
First Union Corpora-
tion(4)............... 8,024,126 27.5 208,226 7,815,900 22.9
CoreStates Founda-
tion(5)............... 1,125,083 3.9 1,125,083 -0- --
WorldCom, Inc.(6)...... 2,371,063 8.1 345,534 2,025,529 5.9
NAMED EXECUTIVE OFFICERS
AND DIRECTORS
Edward Grzedzinski(7).. 748,971 2.2 -0- 748,971 1.9
James M. Bahin(8)...... 723,872 2.1 105,489 618,383 1.8
Pamela A. Joseph(9).... 132,999 * -0- 132,999 *
John M. Perry(10)...... 154,500 * -0- 154,500 *
Rebecca L. Powell(11).. 102,925 * -0- 102,925 *
Charles T. Cannada(6).. 2,371,063 8.1 345,534 2,025,529 5.9
Dr. James E.
Carnes(12)............ 3,200 * -0- 3,200 *
U. Bertram Ellis(13)... 5,000 * -0- 5,000 *
Dr. Henry Kressel(3)... 11,086,770 38.0 1,615,668 9,471,102 27.7
Joseph P. Landy(3)..... 11,086,770 38.0 1,615,668 9,471,102 27.7
Maurice F. Terbrueggen,
Jr.(4)................ 8,024,126 27.5 208,226 7,815,900 22.9
Stephen E. Wall........ -- -- -- -- --
All executive officers,
directors and director
nominees as a group
(12 persons)(14)...... 23,353,426 77.0 2,274,917 21,078,509 59.4
---------
Total.................. 3,400,000
---------
</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
54
<PAGE>
(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 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 617,920 shares and, as a result, would beneficially own
8,853,182 shares, or 25.9%, 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
509,930 shares and, as a result, would beneficially own 7,305,970 shares,
or 21.4%, after the Offering.
(5) In connection with First Union's pending acquisition of CoreStates, on
April 21, 1998, First Union contributed 1,125,083 shares of Common Stock
to the CoreStates Foundation, which shares were originally intended to be
sold by First Union in the Offering prior to such contribution. The
CoreStates Foundation will sell all of such shares in this Offering. As a
result, upon completion of this Offering the CoreStates Foundation will
not own any shares of Common Stock. The CoreStates Foundation's address
is c/o PNB Public Responsibility, 1500 Market Street, Philadelphia,
Pennsylvania 19101.
(6) 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 132,150 shares and, as a result,
would beneficially own 1,893,379 shares, or 5.5%, after the Offering.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
55
<PAGE>
(14) 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 8,024,126 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.
56
<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, 34,183,307 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.
57
<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
58
<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.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 34,183,307 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 19,955,182 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.
60
<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...................................................... 1,950,000
BT Alex. Brown Incorporated........................................... 1,950,000
The Robinson-Humphrey Company, LLC.................................... 975,000
Bear, Stearns & Co. Inc............................................... 125,000
William Blair & Company, L.L.C........................................ 125,000
Goldman, Sachs & Co................................................... 125,000
Lehman Brothers Inc................................................... 125,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................... 125,000
J.P. Morgan Securities Inc............................................ 125,000
Morgan Stanley & Co. Incorporated..................................... 125,000
NationsBanc Montgomery Securities LLC................................. 125,000
Prudential Securities Incorporated.................................... 125,000
J.C. Bradford & Co.................................................... 90,000
First Albany Corporation.............................................. 90,000
McDonald & Company Securities, Inc.................................... 90,000
Pennsylvania Merchant Group........................................... 90,000
Piper Jaffray Inc..................................................... 90,000
Raymond James & Associates, Inc....................................... 90,000
Sutro & Co. Incorporated.............................................. 90,000
Tucker Anthony Incorporated........................................... 90,000
---------
Total............................................................... 6,720,000
=========
</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..................................................... 476,000
BT Alex. Brown International, a division of Bankers Trust Interna-
tional PLC.......................................................... 476,000
The Robinson-Humphrey Company, LLC................................... 476,000
Banque Nationale de Paris............................................ 84,000
Credit Lyonnais Securities........................................... 84,000
ING Bank N.V......................................................... 84,000
---------
Total.............................................................. 1,680,000
=========
</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
61
<PAGE>
this Prospectus and part to certain dealers at a price that represents a
concession not in excess of $0.81 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 $0.10 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 1,260,000 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 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 19,955,182 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 6,720,000 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 1,680,000 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.
62
<PAGE>
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 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.
63
<PAGE>
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 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included 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 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.
64
<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.
Ernst & Young LLP
Atlanta, Georgia
February 17, 1998
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C> <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 shareholders' 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> <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>
YEAR ENDED 10-MONTH
DECEMBER 31, PERIOD 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, EXCEPT PER SHARE DATA)
<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>
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- -------------------------------------------------------------------------------
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.............................................................. 8
Use of Proceeds........................................................... 15
Price Range of Common Stock............................................... 15
Dividend Policy........................................................... 16
Capitalization............................................................ 16
Selected Consolidated Financial and Other Data............................ 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 25
Management................................................................ 47
Certain Relationships and Related Transactions............................ 52
Principal and Selling Shareholders........................................ 54
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 60
Underwriting.............................................................. 61
Legal Matters............................................................. 63
Experts................................................................... 64
Available Information..................................................... 64
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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- -------------------------------------------------------------------------------
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8,400,000 SHARES
LOGO
COMMON STOCK
--------
PROSPECTUS
APRIL 21, 1998
--------
SALOMON SMITH BARNEY
BT ALEX. BROWN
THE ROBINSON-HUMPHREY
COMPANY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
8,400,000 SHARES
LOGO
COMMON STOCK
------------
Of the 8,400,000 shares of Common Stock being offered hereby, 5,000,000
shares are being sold by NOVA Corporation (the "Company") and 3,400,000 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 8,400,000 shares of Common Stock offered hereby, 6,720,000 shares are
being offered in the United States and Canada and 1,680,000 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 April 21, 1998, was $31.8125 per share.
------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 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 $30.00 $1.35 $28.65 $28.65
- -------------------------------------------------------------------
Total(3) $252,000,000 $11,340,000 $143,250,000 $97,410,000
</TABLE>
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- -------------------------------------------------------------------------------
(1) For information regarding indemnification, see "Underwriting."
(2) Before deducting expenses estimated at $565,000 payable by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters a 30-day
option to purchase up to 1,260,000 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 $289,800,000, $13,041,000, and $133,509,000, 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 April 27,
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
April 21, 1998
<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.............................................................. 8
Use of Proceeds........................................................... 15
Price Range of Common Stock............................................... 15
Dividend Policy........................................................... 16
Capitalization............................................................ 16
Selected Consolidated Financial and Other Data............................ 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 25
Management................................................................ 47
Certain Relationships and Related Transactions............................ 52
Principal and Selling Shareholders........................................ 54
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 60
Underwriting.............................................................. 61
Legal Matters............................................................. 63
Experts................................................................... 64
Available Information..................................................... 64
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,400,000 SHARES
LOGO
COMMON STOCK
--------
PROSPECTUS
APRIL 21, 1998
--------
SALOMON SMITH BARNEY
INTERNATIONAL
BT ALEX. BROWN
INTERNATIONAL
THE ROBINSON-HUMPHREY
COMPANY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
