<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NOVA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-2209575
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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ONE CONCOURSE PARKWAY
SUITE 300
ATLANTA, GEORGIA 30328
(770) 396-1456
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES M. BAHIN
CHIEF FINANCIAL OFFICER
NOVA CORPORATION
ONE CONCOURSE PARKWAY
SUITE 300
ATLANTA, GEORGIA 30328
(770) 396-1456
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
THE COMMISSION IS REQUESTED TO MAIL COPIES OF ALL ORDERS, NOTICES AND
COMMUNICATIONS TO:
THOMAS WARDELL, ESQ. JEFFREY M. STEIN, ESQ.
DAVID M. CALHOUN, ESQ. KING & SPALDING
LONG ALDRIDGE & NORMAN LLP 191 PEACHTREE STREET, N.E.
5300 ONE PEACHTREE CENTER ATLANTA, GEORGIA 30303
303 PEACHTREE STREET (404) 572-4600
ATLANTA, GEORGIA 30308-3201
(404) 527-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest investment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share.......... 8,165,000 $28.625 $233,723,125 $70,826
</TABLE>
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(1) Includes 1,065,000 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(c) on the basis of the average of the high
and low sale prices of the Registrant's Common Stock as reported in the
New York Stock Exchange consolidated reporting system on February 6, 1998.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectuses: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in a concurrent international offering outside
the United States and Canada (the "International Prospectus"). The U.S.
Prospectus and the International Prospectus are identical except for the front
and back cover pages. Each of the pages for the International Prospectus
included herein is labeled "Alternate Page."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
7,100,000 SHARES
[LOGO OF NOVA CORPORATION APPEARS HERE]
COMMON STOCK
--------
Of the 7,100,000 shares of Common Stock being offered hereby, 5,300,000
shares are being sold by NOVA Corporation (the "Company") and 1,800,000 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders.
Of the 7,100,000 shares of Common Stock offered hereby, 5,680,000 shares are
being offered in the United States and Canada and 1,420,000 shares are being
offered in a concurrent international offering outside the United States and
Canada. The public offering price and the aggregate underwriting discount per
share will be identical for both offerings. See "Underwriting."
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "NIS." The last reported sale price of the Common
Stock on the NYSE on February 6, 1998, was $28.875 per share.
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
- ---------------------------------------------------------------
Total(3) $ $ $ $
</TABLE>
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(1) For information regarding indemnification, see "Underwriting".
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters a 30-day option
to purchase up to 1,065,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Selling Shareholders will be $ ,
$ , and $ , respectively.
--------
The shares of Common Stock are being offered by the several U.S. Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
--------
SALOMON SMITH BARNEY BT ALEX. BROWN
THE ROBINSON-HUMPHREY COMPANY
, 1998
<PAGE>
[DESCRIPTION OF GRAPHIC TO BE PROVIDED BY AMENDMENT.]
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 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
NOVA Corporation (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, 1996, 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 approximately $24.5 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 4.0% of the total industry
charge volume in 1996 (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 Alliance,
the Firstar Joint Venture and the Crestar Alliance (each as defined below),
which in the aggregate add approximately $10.9 billion of annualized
transaction processing volume and 106,000 merchant locations to the Company's
network. The transactions collectively represent increases of 91.4% over fiscal
1996 transaction processing volume of $11.9 billion and 127.9% over year-end
1996 merchant locations of 82,900. 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, and which, in the aggregate, represented approximately $774.0 million
of transaction volume and approximately 7,000 merchant locations.
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 and 45,000 merchant locations to the
Company's network. Further, KeyBank will market and promote, on an exclusive
basis, transaction processing services on behalf of Key Merchant Services
through KeyBank's approximately 1,000 bank branch locations. The Company owns a
51% interest in Key Merchant Services.
On December 30, 1997, the Company consummated a transaction (the "MBNA
Alliance") with MBNA America Bank, N.A. ("MBNA") pursuant to which the Company
acquired substantially all of MBNA's merchant transaction processing assets.
MBNA also agreed to cooperate with the Company in marketing the Company's
merchant transaction processing services and 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 Alliance will add approximately $1.0 billion in annualized credit
and debit card volume and 18,000 merchant locations.
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 and 32,000 merchant locations) 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.
On May 29, 1997, the Company consummated a transaction with Crestar Bank to
form an exclusive marketing alliance and acquire substantially all of Crestar
Bank's merchant portfolio (the "Crestar Alliance"). The Company estimates that
the Crestar Alliance will add approximately $1.8 billion in annualized credit
and
4
<PAGE>
debit card volume and 11,000 merchant locations to the Company's network. In
addition, Crestar Bank will market and promote, on an exclusive basis, the
Company's transaction processing services through Crestar Bank's approximately
500 branch bank locations.
The Company expects each of these transactions to provide significant
strategic and financial benefits, including: (i) enhanced distribution channels
to facilitate growth of the Company's processed transaction volume and number
of merchant locations served; (ii) further geographic diversification of the
Company's merchant portfolio into additional regions of the United States; and
(iii) economies of scale from substantial increases in transaction processing
volume once the merchant accounts and other services are fully integrated into
the Company's operating platform. See "Business--Recent Transactions."
The Company's predecessor was incorporated in February 1991. Unless the
context otherwise requires, references in this Prospectus to the "Company"
refer to NOVA Corporation and its subsidiaries. The address of the Company's
principal executive offices is One Concourse Parkway, Suite 300, Atlanta,
Georgia 30328. Its telephone number at such address is (770) 396-1456.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered(1):
By the Company............................ 5,300,000 shares
By the Selling Shareholders............... 1,800,000 shares
Common Stock to be outstanding after the
offering.................................. 34,341,332 shares(2)
Use of proceeds by the Company............. The net proceeds to the Company, estimated
at $ , will be used to retire acquisition
related indebtedness, to finance potential
future acquisitions, to fund capital
expenditures and for general corporate
purposes. See "Use of Proceeds."
NYSE symbol................................ NIS
</TABLE>
- --------
(1) Of the 7,100,000 shares of Common Stock offered hereby, 5,680,000 shares
are being offered in the United States and Canada by the U.S. Underwriters
and 1,420,000 shares are being offered in a concurrent offering outside the
United States and Canada by the Managers.
(2) Excludes 1,906,419 shares of Common Stock issuable upon the exercise of
stock options and warrants outstanding as of February 6, 1998, at a
weighted average exercise price of $9.54 per share, of which options and
warrants for 861,724 shares were exercisable.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
TEN-MONTH NINE MONTHS ENDED
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SEPTEMBER 30,
---------------------------------- DECEMBER 31, DECEMBER 31, ----------------------
1993 1994 1995 1995(1) 1996 1996 1997
---------- ---------- ---------- ------------ ------------ ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND MERCHANT LOCATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 37,230 $ 68,213 $ 93,592 $ 129,035 $ 265,829 $ 198,229 $ 232,058
Operating income (loss). (5,421) (3,931) (245) 2,789 11,905 8,316 19,367
Net income (loss)....... (6,417) (4,142) (1,213) 4,887(2) 7,267 4,923 12,319
Net income (loss) per
common and common
equivalent share(3).... $ (0.13) $ 0.24 $ 0.25 $ 0.17 $ 0.41
========== ========== =========== ========== ===========
Weighted average common
and common equivalent
shares outstanding(3).. 13,603 18,024 28,604 28,146 30,058
OTHER DATA:
Merchant sales volume
processed.............. $1,409,861 $2,871,793 $4,131,071 $5,975,013 $11,925,126 $8,918,811 $10,353,995
Merchant locations at
period end............. 19,179 24,838 43,980 77,884 82,906 80,742 100,331
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets........................................... $128,959 $
Long-term debt and capital lease obligations, less cur-
rent portion.......................................... 711
Total shareholders' equity............................. 97,639
</TABLE>
- --------
(1) The Company changed its fiscal year end from the last day of February to
December 31, effective December 31, 1995. For financial reporting purposes,
the ten month period ended December 31, 1995 is considered an annual
period. Revenues and net income for the 12 months ended December 31, 1995
were $147.8 million and $3.6 million, respectively.
(2) Reflects the reduction of valuation allowance against deferred taxes of
$5.0 million, the benefits of which have been recognized in the provision
for income taxes. See Note 4 to the Company's Consolidated Financial
Statements.
(3) Pro forma prior to May 7, 1996. See Note 12 to the Company's Consolidated
Financial Statements.
(4) Adjusted to reflect the sale of 5,300,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom as
described in "Use of Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the
Common Stock offered by this Prospectus.
This Prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
which represent the Company's expectations or beliefs, including, but not
limited to, statements concerning transaction volume and the impact of
acquisitions, joint ventures and alliances. When used in this Prospectus, the
words "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control. The Company cautions that various factors, including the factors
described under the caption "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and those discussed
in the Company's filings with the Securities and Exchange Commission (the
"Commission"), as well as general economic conditions and industry trends
could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements of the Company. Any forward-
looking statement speaks only as of the date of this Prospectus and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of an unanticipated event. New
factors emerge from time to time, and it is not possible for the Company to
predict all of such factors. Further, the Company cannot assess the impact of
each such factor on its business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
VISA AND MASTERCARD REGISTRATION TERMINATION
The Company, along with all other nonbank transaction processors, must be
sponsored by a financial institution that is a principal member of the VISA
and MasterCard credit card associations in order to process bankcard
transactions. Through each of Regions Bank, Bank of the West, Mellon Bank,
N.A. ("Mellon Bank"), Firstar, KeyBank and First Union National Bank of North
Carolina ("FUNB-NC"), 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 82%
of the total charge volume processed in 1996. The largest bankcard processor
accounted for approximately 38% of total charge volume processed in 1996. The
Company would have processed 4.0% of the total charge volume processed in
1996, after giving pro forma effect to the transactions discussed in
"Business--Recent Transactions" below.
7
<PAGE>
Several of the Company's competitors and potential competitors have greater
financial, technological, marketing and personnel resources than the Company,
and there can be no assurance that the Company will continue to be able to
compete successfully with such entities. In addition, the competitive pricing
pressures that would result from any increase in competition would adversely
affect the Company's margins and may have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Competition." The Company markets its services through several different
marketing channels, including through banks. In the event that there is
continued significant consolidation in the banking industry, banks that market
the Company's services may be acquired by banks that compete with the Company
or by banks that have a relationship or alliance with one or more competitors
of the Company, thus potentially depriving the Company of a distribution
channel.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
Increased Consolidation in the Marketplace. A material element of the
Company's growth strategy is the purchase of additional merchant portfolios
and acquisition of operating businesses and transaction processing assets in
order to facilitate growth, expand the Company's distribution channels and
create greater economies of scale. The Company faces significant competition
from other transaction processors for available acquisition, joint venture and
alliance opportunities. This competition has an impact on the price and
availability of acquisitions, joint ventures and alliances. In addition,
community and regional banks, whose transaction processing businesses have
been the Company's primary source of acquisition opportunities, in recent
years have been undergoing extensive consolidation reflective of underlying
trends in the financial institutions industry and unrelated to their
transaction processing businesses. As a result, smaller banks that may have
sought to divest themselves of their transaction processing businesses may be
acquired by banks that compete with the Company or banks that have a
relationship or alliance with one or more competitors of the Company, thus
potentially depriving the Company of acquisition opportunities. There can be
no assurance that the historical or current level of acquisition opportunities
will continue to exist, that the Company will be able to acquire merchant
portfolios, operating businesses and transaction processing assets that
satisfy the Company's criteria, or that any such acquisition will be on terms
favorable to the Company.
Complexity of Risk Analysis of Acquisition Targets. In evaluating any
potential purchase of a merchant portfolio or joint venture, the Company
conducts a due diligence review of the related merchant portfolio. The review
process includes analyzing the composition of the merchant portfolio, applying
uniform standards and underwriting guidelines developed by the Company to the
merchant portfolio and attempting to identify high-risk merchants contained in
the merchant portfolio. Notwithstanding these due diligence efforts, however,
there can be no assurance that the Company will properly assess the risk
attributes associated with an acquired portfolio or otherwise identify high-
risk merchants. Incorrect risk assessments may result in excessive losses from
chargebacks or merchant fraud in connection with any acquired portfolio.
Conversion of Purchased Portfolios. At the time of consummation of merchant
portfolio purchases or joint ventures, merchants in a purchased portfolio
typically are not operating on the Company's proprietary telecommunications
network (the "NOVA Network") and may not use the merchant accounting
processors used by the Company. Until the Company converts each newly-
purchased merchant to the NOVA Network and the Company's merchant accounting
processors, the Company has little, if any, control over the performance of
such other networks and processors and typically is unable to apply fully its
risk management and fraud avoidance practices to such merchants. The Company
also must continue to pay third parties for processing services until the
purchased portfolio is fully converted to the NOVA Network, reducing the
economic benefits to the Company during such time. Moreover, the merchant
customers that comprise a purchased portfolio may have been sold transaction
processing services by ISOs and financial institutions sponsored by a
principal member of the VISA and MasterCard credit card associations. ISOs are
independent agents that typically market and sell the full range of
transaction processing services to merchants, with such services primarily
being outsourced on a non-exclusive basis. Certain of these ISOs and financial
institutions may be unwilling to assist the Company in converting the
merchants to the NOVA Network and the Company's merchant accounting processors
and, in some cases, may solicit these merchants on behalf of a competing
processor. Further, the conversion of merchants may require
8
<PAGE>
that merchants learn new operating procedures and could result in problems,
causing merchants to seek verbal authorization of credit and debit card
transactions. As a condition to conversion, merchants also may seek to
negotiate lower fees.
As a result of the recent purchases of merchant portfolios undertaken by the
Company, the magnitude, scope, timing, duration and expense of the conversion
of the KeyBank Joint Venture, the Firstar Joint Venture and the MBNA Alliance
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.
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," "Certain Relationships and Related Transactions--Transactions
Related to the First Union Alliance" and "Business--Acquisition Strategy."
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 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,
9
<PAGE>
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, 1998, and the agreement with Mellon Bank expires February 28, 1998.
The Company currently is negotiating a new agreement with Vital Processing
Services and expects to renew the agreement with Mellon Bank for an additional
one year term. Termination of either agreement would require the Company
either to seek alternative outsourcing arrangements or to make significant
capital expenditures to develop internal systems to provide these merchant
accounting services. Although management believes that in the event of
termination of either or both of these agreements the Company could locate
alternative outsourcing arrangements or develop internal systems, there can be
no assurance that such arrangements will be available on terms as favorable to
the Company as the existing contracts or that the Company could develop
internal systems on a timely or cost effective basis. Accordingly, termination
of either agreement could have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Merchant
Accounting and Clearing Bank Relationships."
ANNOUNCED INTERCHANGE RATE INCREASES
Each of VISA and MasterCard has announced increases in interchange rates
effective in April 1998. The increase in rates of approximately 5% is the
largest single increase for either association since 1991. The announced
change affects all transaction processing industry competitors. While the
Company intends to reflect the entire amount of the increase in its pricing to
merchants, there can be no assurance that merchants will
10
<PAGE>
assume the entire impact of the announced change or that transaction
processing volumes and merchant attrition will not be adversely affected by
the change.
CHARGEBACK RISK
When a billing dispute between a cardholder and a merchant is not resolved
in favor of the merchant, the transaction is "charged back" to the merchant
and that amount is credited to the cardholder. These billing disputes include,
among others: (i) nonreceipt of merchandise or services; (ii) unauthorized use
of a credit card; and (iii) general disputes between a customer and a merchant
as to the quality of the goods purchased or the services rendered by that
merchant. Some of the Company's merchant customers, including certain
merchants that generate high transaction processing volume, require full or
partial payment from debit and credit cardholders for products or services to
be delivered or rendered in the future. If the Company or its clearing banks
are unable to collect chargeback amounts from a merchant's account, and if the
merchant refuses or is unable due to bankruptcy or other reasons to reimburse
the Company for the chargeback, the Company bears the loss for the amount of
the refund paid to the cardholder. The Company attempts to reduce its exposure
to such losses by performing periodic credit reviews on its merchant customers
and adjusting the Company's rates based, in part, on the merchant's credit
risk, business or industry. There can be no assurance that the Company will
not experience significant losses from chargebacks in the future. Increases in
chargebacks not paid by merchants may have a material adverse effect on the
Company's financial condition and results of operations. See "Business--Risk
Management."
MERCHANT FRAUD
The Company bears the risk of losses caused by fraudulent credit card
transactions initiated by its merchant customers. Examples of merchant fraud
include inputting false sales transactions or false credits. The Company
monitors merchant transactions against a series of standards it has developed
to detect merchant fraud. Notwithstanding these measures, however, there can
be no assurance that the Company will not experience significant amounts of
merchant fraud in the future, which may have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Customer Base" and "Business--Risk Management."
TELECOMMUNICATIONS NETWORK
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 8.2% of
the Company's outstanding Common Stock and has a designee on the Company's
Board of Directors. The shares of Common Stock offered hereby include 179,872
shares to be sold by WorldCom (291,571 shares if the U.S. Underwriters' over-
allotment option is exercised in full). As a result, upon completion of this
offering, WorldCom will own approximately 6.4% of the Company's outstanding
Common Stock (6.1% if the U.S. Underwriters' over-allotment option is
exercised in full). There can be no assurance that conflicts of interests
between WorldCom and the Company will not arise or that any such conflicts
will be resolved in a manner favorable to the Company. See "Business--
Technology" and "Certain Relationships and Related Transactions--Transactions
with WorldCom."
CERTAIN STATE TAX ISSUES
Transaction processing companies like the Company may be subject to state
taxation of certain portions of their fees charged to merchants for their
services. Application of this tax is an emerging issue in the industry and the
states have not yet adopted uniform guidelines implementing these regulations.
If the Company is required to pay such taxes and is unable to pass this tax
expense through to its merchant customers, the financial condition and results
of operations of the Company could be adversely affected.
11
<PAGE>
DEVELOPMENT AND MARKET ACCEPTANCE OF NEW PRODUCTS
Because the transaction processing industry and the software application
products and value-added services of the type offered by the Company have been
characterized by rapidly changing technology and the development of new
products and services, management believes that the future success of the
Company will depend, in part, on the Company's ability to continue to improve
its products and services and to offer its merchant customers new products and
services. There can be no assurance that the Company will continue to develop
successful new products and services or that the Company's newly-developed
products and services will perform satisfactorily or be widely accepted in the
marketplace. See "Business--Software Application Products and Value-Added
Services."
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues in the third calendar quarter and lower revenues in the first
calendar quarter, reflecting increased transaction volumes during the summer
months and a significant decrease in transaction volume during the period
immediately following the holiday season. Quarterly results also are affected
by the timing of purchases of merchant portfolios and joint ventures and the
timing and magnitude of expenses for merchant portfolio conversions.
Fluctuations in operating results may result in volatility in the price of the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Results."
DEPENDENCE ON KEY MANAGEMENT
The development of the Company's business and its operations has been
materially dependent upon the active participation of its executive officers
and other key employees. The loss of one or more of the Company's executive
officers or other key employees may have a material adverse effect on the
Company's financial condition and results of operations. See "Management."
SIGNIFICANT INTANGIBLE ASSETS
A substantial portion of the Company's assets are intangible assets related
to acquired merchant portfolios or business operations. In the event of a
material decline in revenues generated from any of such merchant portfolios or
business operations which would not be recovered from future cash flows, the
fair value and, as a result, the carrying value of the related intangible
asset will be reduced. Additionally, changes in accounting policies or rules
that affect the way in which such intangible assets are reflected in the
Company's financial statements, or the way in which they are treated for tax
purposes, could have a material adverse effect on the Company's financial
condition.
BANKING AND TERRITORIAL RESTRICTIONS
To facilitate First Union's compliance with applicable banking laws,
regulations and orders (collectively, the "Banking Laws"), and to allow First
Union to obtain any required consents or approvals, the Company has agreed to
notify, and obtain approval from, First Union before the Company enters into
any business activities substantially different from the business activities
the Company currently conducts. Pursuant to the KeyBank Joint Venture and the
Firstar Joint Venture and to the extent required by the Banking Laws, the
Company may be required to take certain measures in the event either the
Company or the limited liability companies formed pursuant to the transactions
enters into or acquires any other entity which is engaged in a business that
is substantially different from the business activities the Company, or the
limited liability companies, currently conduct. Such measures may include
applying for any required regulatory consents, or assisting either KeyBank,
Firstar, or the limited liability companies, as the case may be, to prepare
such applications. If the required consents and approvals are not received,
the Company may not engage in the new business activity (such restrictions,
including the restrictions relating to First Union, being collectively
referred to herein as the "Banking Restrictions").
12
<PAGE>
In connection with a December 1995 transaction between the Company and First
Union (the "First Union Alliance"), the Crestar Alliance, the Firstar Joint
Venture, and the KeyBank Joint Venture, the Company agreed that it would not,
without the prior consent of the affected entity, enter into certain marketing
or, in certain instances, acquisition agreements with third parties located in
specified areas where any of First Union, Crestar Bank, Firstar or KeyBank
maintain a significant banking presence (such restrictions being collectively
referred to herein as the "Territorial Restrictions"). The effect of the
Banking Restrictions and the Territorial Restrictions is to limit in certain
respects the Company's ability to directly seek or take advantage of certain
business or marketing opportunities other than through a venture with the
Company's regional bank partners. The agreements generally do not prohibit the
Company from pursuing transactions indirectly through the respective alliance
or joint venture. See "Certain Relationships and Related Transactions--
Transactions Related to the First Union Alliance" and "Business--Banking
Regulation."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation authorize the Company to issue up to
5,000,000 shares of Preferred Stock with such designations, powers,
preferences and rights as may be fixed by the Board of Directors, without any
further vote or action by the shareholders. The issuance of Preferred Stock
could have the effect of delaying, deferring or preventing a change in control
of the Company.
CONTROLLING SHAREHOLDERS
After giving effect to the sale of the shares of Common Stock offered
hereby, Warburg, Pincus Investors, L.P. and its affiliates ("Warburg"), First
Union, executive officers and directors of the Company and their affiliates,
and WorldCom, Inc. will own beneficially 29.8%, 24.6%, 63.4%, and 6.4%,
respectively, of the Company's outstanding Common Stock (28.3%, 23.4%, 60.4%,
and 6.1% 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 34,341,332 shares of Common Stock. Of these shares, the 7,100,000
shares offered hereby (8,165,000 shares if the U.S. Underwriters' over-
allotment option is exercised in full) and the 4,025,000 shares sold in the
Company's initial public offering will be freely tradeable without restriction
or further registration under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Rule 144"). Approximately 21,555,182 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
13
<PAGE>
of a total of approximately 21,307,753 shares of Common Stock, including
21,067,642 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 1,906,419 shares were outstanding as of February 6, 1998, of which options
and warrants for 861,724 shares were exercisable.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, at an assumed public offering price of $
per share, the last reported sale price of the Common Stock on the NYSE on
, 1998, and after deducting estimated underwriting discounts and
commissions and expenses payable by the Company, are estimated to be
approximately $ . The Company anticipates that an aggregate of $ of the
net proceeds of this offering will be used for the repayment of indebtedness
with a weighted average interest rate of %, incurred in connection with
acquisitions.
The Company expects to use the balance of the net proceeds of the offering
to acquire merchant portfolios and enter into joint ventures and alliances in
the ordinary course of its business, to fund capital expenditures and for
general corporate purposes. The Company continues to evaluate potential
acquisitions of merchant portfolios and to negotiate with several third
parties that may be seeking purchasers of their merchant portfolios, although
except as discussed in this Prospectus, the Company currently is not a party
to any agreements or understandings with respect to any material acquisitions.
See "Business--Acquisition Strategy."
Pending such uses, the net proceeds of the offering will be invested in U.S.
Treasury securities, certificates of deposit, commercial paper and/or
investment grade, interest-bearing securities. The Company will not receive
any proceeds from the sales of shares of Common Stock by the Selling
Shareholders.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the NYSE on May 8, 1996, under
the symbol "NIS." Prior to that date, there was no public market for the
Company's Common Stock. The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share for the Common Stock as
reported on the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996:
From May 8 to June 30, 1996.................................. $39.875 $26.000
Quarter Ended September 30, 1996............................. 36.000 27.500
Quarter Ended December 31, 1996.............................. 33.500 18.000
1997:
Quarter Ended March 31, 1997................................. $23.500 $12.875
Quarter Ended June 30, 1997.................................. 26.563 15.625
Quarter Ended September 30, 1997............................. 29.125 23.500
Quarter Ended December 31, 1997.............................. 30.813 23.250
1998:
Quarter Ended March 31, 1998 (through February 6, 1998)...... $33.500 $22.750
</TABLE>
The last reported sale price of the Common Stock on the NYSE on February 6,
1998, was $28.875 per share. As of February 6, 1998, the Company had 70
shareholders of record.
14
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The current policy of the Company's Board of Directors is to retain any
available earnings for use in the operation and expansion of the Company's
business. Therefore, no payment of cash dividends on the Common Stock is
likely in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will depend
upon the Company's earnings, capital requirements, financial condition, the
ability of the Company's subsidiaries to pay cash dividends to the Company and
any other factors deemed relevant by the Board of Directors. The Company's
loan agreements also restrict the payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and Note 6 to the Company's Consolidated
Financial Statements.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to reflect the sale by the Company of
5,300,000 shares of Common Stock in this offering and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion:
Bank notes payable(1).............................. $ 361 $
Other notes payable................................
Capital lease obligations.......................... 350
------------ ---------
711
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, 28,885,000 issued and outstanding;
34,185,000 as adjusted(2)......................... 289
Additional paid-in capital......................... 99,735
Accumulated deficit................................ (2,385)
------------ ---------
Total shareholders' equity........................ 97,639
------------ ---------
Total capitalization.............................. $ 98,350 $
============ =========
</TABLE>
- --------
(1) Does not include $49.1 million of indebtedness incurred subsequent to
September 30, 1997, which will be repaid with a portion of the proceeds to
the Company from this offering.
(2) Excludes 2,057,652 shares of Common Stock issuable upon the exercise of
stock options at a weighted average exercise price of $8.72 per share, of
which options for 494,105 shares were exercisable as of September 30,
1997.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial and other
data for the Company as of and for the three years ended February 28, 1995,
the ten-month year ended December 31, 1995 and the year ended December 31,
1996. 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 financial information
for the nine months ended September 30, 1996 and 1997 has been derived from
the Company's Consolidated Financial Statements and notes thereto and is
unaudited, but in the opinion of management reflects all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the results for such period. Operating results for the nine months ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997. 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>
NINE MONTHS
TEN-MONTH ENDED
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SEPTEMBER 30,
---------------------------------- DECEMBER 31, DECEMBER 31, ----------------------
1993 1994 1995 1995(1) 1996 1996 1997
---------- ---------- ---------- ------------ ------------ ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND MERCHANT LOCATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 37,230 $ 68,213 $ 93,592 $ 129,035 $ 265,829 $ 198,229 $ 232,058
Cost of service......... 30,206 54,984 74,032 100,375 207,595 154,484 179,165
Conversion costs........ 1,472 2,080 1,827 3,441 6,395 5,346 1,803
Selling, general and
administrative......... 9,327 12,419 14,091 17,795 32,952 24,917 24,704
Depreciation and
amortization........... 1,646 2,661 3,887 4,635 6,982 5,166 7,019
---------- ---------- ---------- ---------- ----------- ---------- -----------
Operating income (loss). (5,421) (3,931) (245) 2,789 11,905 8,316 19,367
Interest expense
(income), net.......... 996 211 968 1,959 (126) 188 (807)
---------- ---------- ---------- ---------- ----------- ---------- -----------
Income (loss) before
provision for income
taxes.................. (6,417) (4,142) (1,213) 830 12,031 8,128 20,174
Provision (benefit) for
income taxes........... -- -- -- (4,057) 4,764 3,205 7,855
---------- ---------- ---------- ---------- ----------- ---------- -----------
Net income (loss)....... $ (6,417) $ (4,142) $ (1,213) $ 4,887 (2) $ 7,267 $ 4,923 $ 12,319
========== ========== ========== ========== =========== ========== ===========
Net income (loss) per
common and common
equivalent share(3).... $ (0.13) $ 0.24 $ 0.25 $ 0.17 $ 0.41
========== ========== =========== ========== ===========
Weighted average common
and common equivalent
shares outstanding(3).. 13,603 18,024 28,604 28,146 30,058
========== ========== =========== ========== ===========
OTHER DATA:
Merchant sales volume
processed.............. $1,409,861 $2,871,793 $4,131,071 $5,975,013 $11,925,126 $8,918,811 $10,353,995
Merchant locations at
period end............. 19,179 24,838 43,980 77,884 82,906 80,742 100,331
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............ $ 27,879 $ 26,437 $ 47,823 $ 61,001 $ 107,705 $ 93,393 $ 128,959
Long-term debt and
capital lease
obligations, less
current portion........ 2,339 1,950 16,694 17,738 859 1,154 711
Total shareholders'
equity................. 19,079 18,783 18,719 26,017 84,882 81,306 97,639
</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 7, 1996. See Note 12 to the Company's Consolidated
Financial Statements.
16
<PAGE>
The following table sets forth selected consolidated statement of operations
data for the ten month year ended December 31, 1995 and the ten months ended
December 31, 1994. The selected consolidated statement of operations data for
the ten month year ended December 31, 1995 are derived from the Company's
Consolidated Financial Statements and notes thereto, which have been audited
by Ernst & Young LLP, independent auditors. The information for the ten months
ended December 31, 1994 is unaudited, but in the opinion of management
reflects all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results for such period.
<TABLE>
<CAPTION>
TEN MONTH
PERIOD/YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- ---------
(IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 74.8 $ 129.0
Cost of service............................................. 59.0 100.4
Conversion costs............................................ 0.9 3.4
Selling, general and administrative......................... 11.2 17.8
Depreciation and amortization............................... 2.9 4.6
-------- ---------
Operating income............................................ 0.8 2.8
Interest expense, net....................................... 0.6 2.0
-------- ---------
Income before provision for income taxes.................... 0.2 0.8
Provision (benefit) for income taxes........................ -- (4.1)
-------- ---------
Net income.................................................. $ 0.2 $ 4.9
======== =========
</TABLE>
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 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 10-month year 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, LLC. 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 and 35,000 merchant
locations to the Company's network. Further, KeyBank will market and promote,
on an exclusive basis, transaction processing services on behalf of Key
Merchant Services through KeyBank's approximately 1,000 bank branch locations.
The Company owns a 51% interest in Key Merchant Services.
On December 30, 1997, the Company consummated the MBNA Alliance 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 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 Alliance
will add approximately $1.0 billion in annualized credit and debit card
transaction processing volume and 18,000 merchant locations.
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 and 32,000 merchant locations) 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.
On May 29, 1997, the Company consummated the Crestar Alliance 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
Alliance will add approximately $1.8 billion in annualized credit and debit
card transaction
18
<PAGE>
processing volume and 11,000 merchant locations 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 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
transactions. 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 Alliance
will, in the aggregate, be greater than any conversion previously undertaken
by the Company. Failure to complete these conversions in accordance with
management plans would 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 12 month year
ended December 31, 1996 with the 10 month period ended December 31, 1995, and
the 10-month period ended December 31, 1995 with the 10 month period ended
December 31, 1994.
COMPONENTS OF REVENUES AND EXPENSES
Revenues. The Company derives revenues principally from processing credit,
charge and debit card transactions that are authorized and captured through
the NOVA Network. The Company typically charges merchants for these card
processing services at a bundled rate that is a percentage of the dollar
amount of each transaction and, in some instances, an additional fee per
transaction. These charges, referred to as "discount fees," are individually
negotiated with each merchant and, in the aggregate, represented approximately
94.6% and 93.7% of the Company's revenues for the years ended December 31,
1996 and 1995, respectively, and 92.7% and 94.9% for the nine months ended
September 30, 1997 and 1996, 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.
Also included in this category are systems and product development expenses,
which represent the internal costs of developing and implementing the NOVA
Network and its processing and POS systems.
Depreciation and amortization is related to the Company's capital
expenditures and merchant portfolio and business acquisitions. Depreciation of
property and equipment is recognized on a straight-line basis over periods of
three to seven years for equipment and 30 years for buildings. The acquisition
of merchant portfolios results in the capitalization of merchant and customer
contract values, which are amortized over 10 years based upon the Company's
merchant attrition experience and projected revenue streams. Excess cost of
businesses acquired is amortized over 30 years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items on the Company's consolidated statements
of operations:
<TABLE>
<CAPTION>
10-MONTH NINE MONTHS
PERIOD ENDED ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
-------------- DECEMBER 31, --------------
1994 1995 1996 1996 1997
------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of service................... 78.9 77.8 78.1 77.9 77.2
Conversion costs.................. 1.2 2.7 2.4 2.7 0.8
Selling, general and
administrative................... 15.0 13.8 12.4 12.6 10.6
Depreciation and amortization..... 3.9 3.6 2.6 2.6 3.0
Operating income ................. 1.0 2.1 4.5 4.2 8.3
Interest expense (income), net.... 0.8 1.5 -- 0.1 (0.4)
Income before provision for income
taxes............................ 0.2 0.6 4.5 4.1 8.7
Provision (benefit) for income
taxes............................ -- (3.1) 1.8 1.6 3.4
Net income ....................... 0.2% 3.7% 2.7% 2.5% 5.3%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Revenues for the nine months ended September 30, 1997 increased
17.1% to $232.1 million compared with $198.2 million for the nine months ended
September 30, 1996. The increase resulted primarily from the completion of the
Crestar Alliance in May 1997 and the addition of new merchant locations
generated through internal sales efforts.
Cost of Service. Cost of service increased approximately 16.0% to $179.2
million for the nine months ended September 30, 1997, from $154.5 million for
the nine months ended September 30, 1996. As a percentage of revenues, cost of
service decreased to 77.2% for the nine months ended September 30, 1997 from
77.9% for the nine months ended September 30, 1996.
Conversion Costs. Conversion costs decreased approximately 66.3% to $1.8
million for the nine months ended September 30, 1997, as compared with $5.3
million for the nine months ended September 30, 1996. This decrease in
conversion costs is attributable to the fact that a majority of the conversion
costs from the First Union Alliance were incurred during the nine months ended
September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $24.7 million for the nine months ended
September 30, 1997, from $24.9 million for the nine months ended September 30,
1996.
20
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased
approximately 35.9% to $7.0 million for the nine months ended September 30,
1997, from $5.2 million for the nine months ended September 30, 1996. This
increase resulted from purchases of merchant portfolios during the nine months
ended September 30, 1997 and additional depreciation expenses arising from
investments and capital additions.
Operating Income. For the reasons set forth above, operating income
increased approximately 132.9% to $19.4 million for the nine months ended
September 30, 1997 as compared to $8.3 million for the nine months ended
September 30, 1996.
Interest Expense (Income)--Net. The Company had net interest income of
$807,000 for the nine months ended September 30, 1997, as compared to net
interest expense of $188,000 for the nine months ended September 30, 1996.
Income Taxes. Income tax expense was recorded at an effective rate of 39.0%
for the nine months ended September 30, 1997. For the nine months ended
September 30, 1997, the Company recorded a provision for income taxes of $7.9
million as compared to a provision for income taxes of $3.2 million for the
nine months ended September 30, 1996.
Net Income. For the nine months ended September 30, 1997, net income
increased $7.4 million, or 150.2%, to $12.3 million compared to $4.9 million
for the nine months ended September 30, 1996 due to the factors discussed
above.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE TEN MONTH YEAR 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 year 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. This increase was attributable to the increased bankcard
volume from the purchase of First Union's merchant processing portfolio, as
well as record new customer volume added from internal marketing efforts. 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
signed 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 year 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 year
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
year ended December 31, 1995. The increase resulted primarily from the ongoing
conversion of the First Union portfolio, acquired in December 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 85.2% to $33.0 million in the year ended
December 31, 1996 from $17.8 million for the ten month year 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. The Company's consolidation plan is to provide even higher-
quality information systems processing to all market sectors within the credit
card industry, provide for
21
<PAGE>
operational efficiencies, as well as create new revenue opportunities in the
future. Selling, general and administrative expenses decreased as a percent of
revenues to 12.4% in 1996 from 13.8% in the prior year, reflecting operating
efficiencies.
Depreciation and Amortization. Depreciation and amortization increased 50.6%
to $7.0 million for the year ended December 31, 1996, from $4.6 million for
the ten month year 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 the acquisition of merchant portfolios.
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 year 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
year 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 in May
1996. 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 year ended December 31, 1995, a one-
time tax benefit of $5.0 million was included in the provision for income tax
reflecting the reversal of a deferred tax valuation allowance as a result of
the Company's improved profitability in 1995.
Net Income. For the year ended December 31, 1996, net income increased $2.4
million, or 48.7%, to $7.3 million compared to $4.9 million for the 10 month
year ended December 31, 1995, due to the factors discussed above. Net income
for 1995 included a one-time tax benefit of $5.0 million.
TEN MONTH YEAR ENDED DECEMBER 31, 1995, COMPARED WITH TEN MONTHS ENDED
DECEMBER 31, 1994
Revenues. Revenue increased 72.5% to $129.0 million for the ten month year
ended December 31, 1995, compared with $74.8 million for the same period in
1994. This increase resulted from an 81.8% increase in merchant sales volume
processed to $6.0 billion for 1995, compared to $3.3 billion in 1994. This
increased sales volume was primarily attributable to $1.7 billion from the
Company's acquisition of the merchant portfolios of the Bank of Boulder (the
"Boulder Acquisition"), $426 million from the First Union Alliance and new
merchants added as a result of Company sales efforts.
Cost of Service. Cost of service increased 70.2% to $100.4 million for the
ten month year ended December 31, 1995, compared with $59.0 million for the
same period in 1994. The increase resulted from additional interchange and
assessment fees and other operating costs associated with the higher volume of
merchant sales. Cost of service as a percent of revenues declined from 78.9%
to 77.8%, reflecting continuing cost efficiencies realized from the
consolidation of the operations relating to the Boulder Acquisition.
Conversion Costs. Conversion costs increased 270.8% to $3.4 million for the
ten month year ended December 31, 1995, compared with $900,000 for the same
period in 1994. The increase resulted primarily from the acquisition and
conversion of the Boulder portfolio.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 58.9% to $17.8 million for the ten month
year ended December 31, 1995, compared with $11.2 million for the same period
in 1994. Higher expenses in 1995 resulted from the addition of personnel in
the Company's operations center to support the increased merchant sales volume
and the addition of approximately 34,000
22
<PAGE>
merchant locations served. Additionally, sales and marketing expenses
increased to support the Company's growing number of merchants and bank
alliance relationships. Selling, general and administrative expenses declined
to 13.8% of revenues for the ten month year ended December 31, 1995, compared
with 15.0% for the same period in 1994, reflecting operational efficiencies.
Depreciation and Amortization. Depreciation and amortization increased 60.2%
to $4.6 million for the ten month year ended December 31, 1995, compared with
$2.9 million for the same period in 1994. The increase was principally due to
additional amortization of certain intangible assets related to the
acquisition of merchant portfolios and the Boulder Acquisition. To a lesser
extent, this expense increased because of greater depreciation for POS and
systems equipment purchased in the ten month year ended December 31, 1995,
compared with the same period in 1994.
Operating Income. For the foregoing reasons, operating income for the ten
month year ended December 31, 1995, increased 298.4% to $2.8 million compared
with $800,000 for the same period in 1994.
Interest Expense. Interest expense increased to $2.0 million for the ten
month year ended December 31, 1995, compared with $600,000 for the same period
in 1994, due to interest related to the bank debt and purchase note
obligations incurred principally in connection with the Boulder Acquisition.
Income Taxes. For the ten month year ended December 31, 1995, the income tax
provision reflects the recognition of $5.0 million in tax benefits related to
prior year tax losses.
Net Income. Net income increased $4.7 million to $4.9 million for the ten
month year ended December 31, 1995, compared with net income of $200,000 for
the same period in 1994, due to the factors discussed above.
QUARTERLY RESULTS
The following tables set forth certain unaudited financial data for each of
the Company's last 11 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
------- ------- -------- ---------- ------- ------- -------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <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
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
Conversion costs...... 1,281 998 969 1,092 1,573 2,034 1,737 1,051 491 499 813
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
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
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............... $(1,009) $ 152 $ 1,010 $ 1,733 $ 2,283 $ 2,459 $ 3,575 $ 3,588 $ 4,729 $ 6,985 $ 7,652
</TABLE>
23
<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
------- ------- -------- ---------- ------- ------- -------- ------- ------- ------- --------
<S> <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%
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
Conversion costs....... 4.3 2.9 2.6 2.4 2.6 3.0 2.5 1.6 0.7 0.6 0.9
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
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
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
</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 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 million. As of
February 9, 1998, $49.5 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 $20.7 million for the year
ended December 31, 1996, as compared to $4.9 million for the ten month year
ended December 31, 1995. Net cash provided by operating activities was $17.2
million for the first nine months of 1997 as compared to $10.5 million for the
same period in 1996.
Net cash used in investing activities was $10.0 million for the year ended
December 31, 1996, as compared to $5.1 million for the ten month year ended
December 31, 1995. Net cash used in investing activities was $37.2 million for
the nine month period ended September 30, 1997, compared to $5.5 million for
the same period in 1996. The Company's capital expenditure requirements
include POS terminals that are leased to merchants and computer hardware and
software necessary to support the NOVA Network and the systems at the
Company's operations center, as well as the expansion and consolidation to the
new Atlanta headquarters facility in October 1996. For the nine months ended
September 30, 1997, the year ended December 31, 1996, the ten month year ended
December 31, 1995, and the fiscal year ended February 28, 1995, the Company's
capital expenditures totaled approximately $10.6 million, $6.1 million, $1.6
million and $0.8 million, respectively. In addition to capital expenditures,
the Company purchased various merchant processing portfolios for an aggregate
price of $26.6 million, $4.0 million, $3.3 million and $16.6 million in the
nine months ended September 30, 1997, the year ended December 31, 1996, the
ten month year ended December 31, 1995, and the fiscal year ended February 28,
1995, respectively.
24
<PAGE>
Net cash provided by financing activities was $28.9 million for the year
ended December 31, 1996, due primarily to the Company's initial public
offering. The proceeds received were used to reduce most of the Company's bank
debt, to redeem outstanding Series D Preferred Stock for $5.0 million and to
pay all cumulative dividends of $11.7 million to holders of Preferred Stock
concurrent with the liquidation of all series of the Company's Preferred
Stock. Net cash provided by financing activities was minimal for the nine
months ended September 30, 1997, compared to cash provided by financing
activities of $29.3 million for the same period in 1996. This change was due
primarily to the proceeds received from the initial public offering and the
resulting reduction in long-term debt and payment of the cumulative dividends.
The Company typically has relatively low working capital requirements
because discount fees charged to merchants are collected in an average of 15
days, while normal payables are paid in 30 days or longer in the case of POS
terminal purchases. In addition, increasing acquisition activity may cause
variations in working capital due to conversion-period operating costs.
Because of the seasonality of the Company's business, capital requirements may
be greater in certain months.
The Company 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. The Company anticipates that
it will incur significantly 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 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.
25
<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,
1996, 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
approximately $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 and 106,000 merchants 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 and 127.9% over year-end
1996 merchant locations of 82,900. 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 and approximately 7,000 merchant locations.
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
26
<PAGE>
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. Further, KeyBank will market and promote, on an
exclusive basis, transaction processing services on behalf of Key Merchant
Services through KeyBank's approximately 1,000 bank branch locations. Key
Merchant Services, among other things, is required to pay to KeyBank a fee for
each merchant that enters into a merchant transaction processing contract with
Key Merchant Services as a result of any such referral, including a fixed
percentage of sales volume the referred merchant processes through the
Company. 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.
MBNA Alliance. On December 30, 1997, the Company consummated a transaction
with MBNA to form the MBNA Alliance. In connection with the MBNA Alliance, the
Company purchased substantially all of MBNA's merchant portfolio. MBNA has
agreed to cooperate with the Company in marketing the Company's merchant
transaction processing services and 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,
including a fixed percentage of sales volume the referred merchant processes
through the Company. 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 Alliance will add approximately $1.0 billion in annualized credit and
debit card transaction processing volume and 18,000 additional merchant
locations.
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 Corporation 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
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
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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 Alliance. On May 29, 1997, the Company consummated a transaction
with Crestar Bank to form the Crestar Alliance. In connection with the Crestar
Alliance, the Company acquired 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 Alliance will add approximately $1.8
billion in annualized credit and debit card transaction processing volume and
11,000 additional merchant locations. Crestar Bank's 500 branch locations will
offer the Company's transaction processing services thereby expanding the
Company's distribution network.
The Company expects each of these transactions to provide significant
strategic and financial benefits, including: (i) enhanced distribution
channels to facilitate growth of the Company's processed transaction volume
and number of merchant locations served; (ii) further geographic
diversification of the Company's merchant portfolio into additional regions of
the United States; and (iii) economies of scale from substantial increases in
transaction processing volume once the merchant accounts and other services
are fully integrated into the Company's operating platform.
INDUSTRY OVERVIEW
The transaction processing industry provides merchants with credit, charge
and debit card and other payment processing services, as well as related
information services. This industry has grown rapidly in recent years as a
result of wider merchant acceptance and increased consumer use of such cards,
and advances in transaction processing and telecommunications technology.
These factors, together with the efficiencies derived from economies of scale,
are causing the consolidation of transaction processing providers and the
availability of more sophisticated products and services to all market
segments.
Increased Growth in Card Use. The proliferation in the uses and types of
credit, charge and debit cards, rapid technological advances in transaction
processing and financial incentives offered by credit card associations and
issuers have contributed greatly to wider merchant acceptance and increased
consumer use of such cards. For example, industry sources indicate that for
the five years ended December 31, 1996, charge volume of VISA and MasterCard
credit cards grew at a compounded annual growth rate of approximately 18.7%.
The following chart sets forth consumer usage of VISA and MasterCard credit
cards for purchases and cash advances in the United States from 1986 to 1996:
[GRAPHIC OF U.S. CHARGE VOLUME FOR VISA AND MASTERCARD 1986-1996 APPEARS HERE]
Source: The Creditcard Management Industry Directory, 1997; editor: The Nilson
Report ($ in billions)
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$141.4 $165.7 $189.7 $210.1 $242.9 $260.2 $291.3 $351.7 $440.7 $538.2 $613.9
</TABLE>
28
<PAGE>
The growth in charge volume and the increase in the acceptance of credit
cards are expected to continue as consumers expand their use of such cards as
an alternative to cash and checks. VISA and MasterCard charge volume is
projected to exceed $1.0 trillion by the year 2000 (The Nilson Report--
September 1996).
Technology. Rapid technological advances in transaction processing,
particularly the transition from paper-based to electronic processing, have
contributed greatly to wider merchant acceptance and increased consumer use of
such cards. Electronic processing provides greater convenience to merchants
and consumers, reduces fees charged to merchants, and facilitates faster and
more accurate settlement of payments. According to industry sources,
approximately 87% of the dollar volume of credit card transactions was
processed electronically or by voice automation in 1995, up from approximately
77% in 1990. Increased card acceptance and usage, coupled with technological
advances in electronic processing, have created an opportunity for service
providers to offer a variety of sophisticated processing and information
services to merchants.
At present, many large transaction processors continue to provide customer
service and applications via legacy systems that are difficult and costly to
alter or otherwise customize. Accordingly, transaction processors that
continue to utilize these systems for customer service and applications find
it difficult to meet the increasing demands of small- to medium-sized
merchants for more sophisticated products and services tailored to their
diverse and changing needs. In contrast to more expensive and less flexible
legacy systems, advances in less costly, scalable and networked computer
systems, including distributed client/server architecture and relational
database management systems, afford transaction processors greatly improved
flexibility and responsiveness in providing customer service and applications.
In addition, the use of fiber optic cables and advanced switching technology
in telecommunications networks and competition among long-distance carriers
further enhance the ability of processors to provide faster and more reliable
service at lower per-transaction costs than previously possible.
Advances in personal computer ("PC") and POS terminal technology have
increasingly allowed access to a greater array and level of sophisticated
services at the POS and contributed to the demand for such services. In
addition, more sophisticated uses of integrated cash registers and networked
systems at the merchant site create 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
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<PAGE>
customer service, and the demands for additional customer applications have
made it difficult for community and regional banks and ISOs to remain
competitive. Many of these providers are unwilling or unable to invest the
capital required to meet these evolving demands, and are increasingly exiting
the transaction processing business or otherwise seeking alliance partners to
provide transaction processing for their customers. Despite this ongoing
consolidation, the industry remains fragmented with respect to the number of
entities providing merchant services. Industry sources indicate that in 1996,
although the ten largest bankcard processors accounted for approximately 82%
of the total charge volume processed and the largest accounted for
approximately 38% of the total volume, there were several hundred additional
registered service providers marketing and selling transaction processing
services to merchants. Management believes that these factors will result in
continuing industry consolidation opportunities over the next several years.
COMPANY STRATEGY
The Company's objective is to maintain its leadership in the transaction
processing industry by delivering transaction processing services and related
software application products and services to its merchant customers on a
cost-effective basis and by increasing the size of its customer base through
its marketing and acquisition programs. The Company seeks to accomplish this
objective through the following strategies:
Focus on Small- to Medium-Sized Merchants. Since inception, the Company has
focused its strategy on delivering to small- to medium-sized merchants the
variety and sophistication of products and services previously available only
to large merchants. The Company believes that its use of technology and
focused marketing strategy enable it to effectively compete for merchant
customers in this market segment. See "Business--Customer Base."
Leverage Available Technologies. One of the Company's principal strategies
is to maximize the benefits of available technologies to deliver transaction
processing services and related software application products and services on
a cost-effective basis. The ability to achieve this strategy is facilitated by
the Company's flexible systems architecture and the capabilities of the NOVA
Network. While the NOVA Network is a fast, efficient, reliable and
technologically advanced telecommunications network, the Company continues to
develop and 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
30
<PAGE>
through value-added resellers ("VARs") that integrate the Company's
transaction processing services with specialized business management software.
See "Business--Marketing."
Develop and Provide Value-Added Products and Services. In comparison to
large merchants, small- to medium-sized merchants historically have not been
offered the same variety and sophistication of products and services and are
less capable of developing their own software application products and related
information systems. In response to the needs of its target market segment,
the Company continues to develop software application products and value-added
services that it can deliver directly to the merchant at the POS through the
NOVA Network. In addition, the Company works with a variety of value-added
resellers to integrate the Company's transaction processing services with
specialized business management software written for specific industries.
Management believes that these software application products and value-added
services allow the Company to strengthen its relationships with existing
customers and attract additional merchants. Management believes that these and
other efforts may result in the development of additional software application
products and value-added services. See "Business--Technology" and "Business--
Software Application Products and Value-Added Services."
Pursue Acquisitions, Joint Ventures and Strategic Alliances. The Company
will continue to pursue purchases of merchant portfolios and the formation of
joint ventures and strategic alliances with other financial institutions as a
principal component of its growth strategy in order to facilitate growth,
expand the Company's distribution channels and achieve greater economies of
scale. This strategy focuses on the merchant portfolios and assets of banks
and ISOs that no longer desire or are unable to provide efficient and cost-
effective transaction processing services. The Company attempts to structure
its acquisitions, joint ventures and alliances both to increase its merchant
base and to expand its distribution and marketing capabilities. The Company
accomplishes this objective principally by entering into an exclusive
marketing agreement, joint venture (generally in the form of a jointly owned
limited liability company) or alliance with a bank that sells its merchant
portfolio to, or forms a joint venture with, the Company. The acquisitions,
alliances and joint ventures offer banks the opportunity to transfer
management and operational responsibility for their merchant portfolios to the
Company, while continuing to offer transaction processing services on a co-
branded basis in cooperation with the Company or the joint venture. Banks are
therefore able to view the sale of their merchant portfolio or the joint
venture as a way to maintain a full-service relationship with their merchant
depositors. See "Business--Acquisition Strategy."
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:
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<PAGE>
[GRAPHIC OF FLOW OF INFORMATION SERVICES WITH RESPECT TO A TYPICAL CREDIT CARD
TRANSACTION APPEARS HERE]
Authorization Services. The Company provides electronic transaction
authorization services for all major credit and charge cards. Authorization
generally involves approving a cardholder's purchase at the POS after
verifying that the card is not lost or stolen and that the purchase amount is
within the cardholder's credit or account limit. The electronic authorization
process for a credit card transaction begins when the merchant "swipes" the
card through its POS terminal and enters the dollar amount of the purchase.
After capturing the data, the POS terminal transmits the authorization request
via the NOVA Network to the Company's switching center, where the data is
routed to the appropriate credit card association for authorization (see paths
"A" and "B" of the above diagram). The transaction is approved or declined by
the credit card association, and the response is transmitted back to the
Company's switching center, where it is routed to the appropriate merchant
(paths "B" and "A").
Data Capture and Reporting Services. At the time of authorization, data
relating to the transaction, such as the purchase price and card number, is
recorded electronically both at the merchant's POS terminal and by the
Company. This redundancy maximizes accurate transaction reconciliation with
each merchant and protects against potential loss of data. On a periodic basis
throughout the day, the merchant aggregates and organizes this transaction
data, using a software application that the Company has programmed into the
merchant's POS terminal, and transmits this information to the Company (path
"A") where it is organized into two files. One 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
32
<PAGE>
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-NC, which serve as member clearing banks for the Company, the
Company is registered with VISA and MasterCard as a certified processor and
member service provider. The Company's clearing banks receive payment for
merchant transactions from credit card associations (net of fees payable to
the credit card associations and card issuing banks), from which the clearing
banks remit payment to the merchant for the gross amount of the merchant's
transactions (paths "E" and "F"). Once each month, the Company collects
applicable merchant discount and other fees from each merchant for
transactions effected and services provided during the preceding month. See
"Business--Merchant Accounting and Clearing Bank Relationships."
Chargeback Services. In the event of a billing dispute between a cardholder
and a merchant, the Company assists the merchant in investigating and
resolving the dispute. These billing disputes include, among others:
(i) nonreceipt of merchandise or services; (ii) unauthorized use of a credit
card; and (iii) general disputes between a customer and a merchant as to the
quality of the goods purchased or the services rendered by that merchant. The
Company provides a sophisticated chargeback control system for its merchants
that includes actively prescreening disputes and the use of proprietary
software programs to automate chargeback controls. These chargeback control
systems are designed to reduce the time and expense that the Company and
merchants spend on cardholder requests for chargebacks. In the event a billing
dispute between a cardholder and a merchant is not resolved in favor of the
merchant, the transaction is "charged back" to the merchant and that amount is
credited or otherwise refunded to the cardholder. If the Company or its
clearing banks are unable to collect such amounts from the merchant's account,
and if the merchant refuses or is unable due to bankruptcy or other reasons to
reimburse the Company for the chargeback, the Company bears the loss for the
amount of the refund paid to the cardholder. See "Business--Risk Management."
Customer Service and Support. The Company provides its merchant customers
with a variety of customer services and support. These services include
leasing, renting or selling POS terminals, downloading software application
products and services to POS terminals (path "J"), maintaining POS terminals,
and customizing software for merchant applications. In addition, the Company
maintains a 24-hours-a-day, seven-days-a-week helpline staffed by full-time
customer service representatives (path "I"). See "Business--Software
Application Products and Value-Added Services" and "Business--Customer Service
and Support."
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
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<PAGE>
WorldCom, the Company was able to design a network specifically tailored to
the services the Company desired to provide, the equipment the Company
intended to use in providing those services, and the functionality those
services were designed to achieve. As customer needs change and as technology
improves, management believes that it will be able to adapt and customize the
NOVA Network as necessary to achieve the functionality it desires. Pursuant to
its agreement with the Company, WorldCom provides long-distance and local
telecommunication access, as well as technical support, to the Company in
connection with the NOVA Network. This agreement expires February 28, 1999,
subject to earlier termination by the Company if WorldCom fails to meet
certain agreed-upon performance objectives.
The NOVA Network is the result of combining WorldCom's Common Channel
Signaling Specification Number Seven, commonly referred to as an "SS7"
switching system, with the use of advanced Integrated Services Digital Network
("ISDN") and Non-Facilities Associated Signaling ("NFAS") features. SS7 is a
high-speed call-switching technology utilized in telecommunications networks
and originally intended only for carrier-to-carrier use, such as a regional
phone company switching long-distance calls to WorldCom for transmission, as
opposed to use by end-users such as the Company and its merchants. With the
use of ISDN technology, however, end-users such as the Company can utilize an
SS7 switching system without sacrificing any of the enhanced performance
attributes derived from SS7 technology. Although significant hardware and
software obstacles currently are inherent to end-user utilization of an SS7
switching system, the Company developed a proprietary ISDN interface enabling
it effectively to employ SS7 technology as part of the NOVA Network. Further,
the NFAS features of the NOVA Network allow for a greater portability of the
NOVA Network to long-distance and local telecommunications access providers
other than WorldCom, which would reduce the Company's historical dependence on
WorldCom. The Company has developed and tested a network interface with AT&T
and management believes that, if necessary or convenient, the Company could
utilize the telecommunications access of AT&T in connection with the NOVA
Network. Management believes that transferring the NOVA Network to AT&T, or
another telecommunications access provider, can be accomplished without
sacrificing any significant performance or operational attributes of the NOVA
Network, although such a transfer may increase the Company's expenses for
network services.
The reliability of the NOVA Network is enhanced by the backup service
provided by AT&T. The existence and maintenance of this backup system, which
is designed so no single element is shared with the principal WorldCom system,
enhances the Company's ability to provide a high level of reliability in its
network service. Through an agreement with Electronic Data Systems
Corporation, the Company maintains a voice authorization backup system. This
backup system allows merchants to receive voice authorization of transactions
in the event of a POS terminal malfunction, network outage or other similar
circumstances.
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
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<PAGE>
services will be widely accepted, the Company expects such use to increase.
Further, the terms of the First Union Alliance provide that, when feasible,
the Company will assist First Union in developing new products or services
relating to transaction processing or in otherwise supporting new business
ventures. The Company and First Union are actively pursuing initiatives
relating to transaction processing via the Internet and procurement and
purchasing cards, and management believes that these and other efforts may
result in the development of additional software application products and
value-added services. See "Business--Software Application Products and Value-
Added Services."
The Company actively encourages third party software developers to write
applications to the Company's specifications and network protocols. These
applications, once certified by the Company, allow integration of the
Company's transaction processing services with the business management
software created by such developers for use at the merchant's POS. These
developers often function as value-added resellers for the Company as they
frequently market their business management software in connection with the
Company's services. For example, Squirrel Restaurant Products ("Squirrel"),
one of the leading VARs, provides software applications to accommodate the
specialized business management needs of the restaurant industry. Squirrel, in
cooperation with the Company, has modified its software to allow full
integration of the Company's transaction processing services. In this way,
VARs such as Squirrel indirectly perform a marketing function for the Company
since their software is often offered on a fully-integrated basis with the
Company's transaction processing services, creating additional opportunities
for the Company to reach small- to medium-sized merchants. The Company has
certified in excess of 30 third party software developers, including IC
Verify, Aluim Payment Groups, Southern DataCom, Inc., Datacap, Inc. and Smokey
Mountain Systems.
Use of Networked Systems for Customer Service. The information access and
retrieval capabilities of networked systems, where real-time information is
available to any of the Company's customer service representatives, allow the
Company to provide a level of customer service and support to small- to
medium-sized merchants previously available only to much larger merchants. For
example, any of the Company's customer service representatives may access, on
a real-time basis, all of the relevant information pertaining to any
particular merchant that may call and ask for assistance. The Company also
recently implemented an on-line, informational database that provides the
Company's customer services representatives user-friendly access to an array
of additional information relative to the Company's services, products and
systems, which often allows the Company to more quickly and effectively
resolve customer service inquiries. In addition to their customer service
capabilities, the Company's networked systems are highly automated and require
minimal staffing, which allows the Company to contain costs and achieve
greater operating efficiencies.
Year 2000 Updates. The card issuing members of VISA and MasterCard have
begun issuing to cardholders credit cards with expiration dates in the year
2000 or after ("Year 2000 Cards"). As a result, the Company, like other card
processors, is in the process of implementing a plan to ensure that POS
terminals at its merchant customer locations are capable of accepting Year
2000 Cards prior to the end of 1997. VISA and MasterCard required processors
to submit compliance plans setting forth the processors' plans to ensure
compliance for Year 2000 Cards. The Company, through its member clearing
banks, submitted its compliance plans within the time frames required by VISA
and MasterCard.
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.
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The Company currently offers a variety of software application products and
value-added services, including the following core products and services that
are basic to the Company's network:
Encompass. Encompass is the latest generation of the Company's user
interface. The Company presently provides Encompass to all new merchant
customers, and generally charges a one-time fee to upgrade existing merchants
to Encompass. In addition to the Company's core transaction processing
services, Encompass enables merchants to access the Company's software
application products and value-added services, including those described
below. Encompass also allows the merchant to access other business management
applications, including customized end-of-day processing (allowing, for
instance, the performance by the merchant of daily audit functions) and other
review and reporting features (e.g., summary report generation). Designed as a
flexible "modular" system, Encompass allows the merchant to add features and
capability as its business needs evolve. Generally available since July 1994,
Encompass is a POS terminal application currently used by over 60,000
merchants.
NOVA Shadow Pay. NOVA Shadow Pay, introduced by the Company in February
1996, addresses the increasing use by merchants of integrated and modem-
enabled cash registers and PCs. NOVA Shadow Pay eliminates the necessity of a
traditional, stand-alone POS terminal. Typically, merchants accepting cards
for payment key-in or input transaction data at their cash register and then
key-in certain redundant transaction data to their POS terminal for
authorization and processing. This redundant keying of data increases both the
probability of human error as well as the amount of time it takes a merchant
to process a transaction. NOVA Shadow Pay is a PC application that allows the
merchant's modem-enabled cash register or PC to capture the transaction data
that is keyed or otherwise input into the cash register or PC, and transmits
such data for authorization and processing, eliminating both the need for a
stand-alone POS terminal and the redundant keying of transaction data
associated therewith. In addition, NOVA Shadow Pay provides the merchant
access to certain review and reporting features allowing, for instance, the
merchant to more easily reconcile transaction activity for any given period
with the data captured and stored by the merchant's cash register or PC. The
Company charges a one-time license fee for access to NOVA Shadow Pay. NOVA
Shadow Pay currently is used by approximately 1,000 merchants.
Mass Transact and PC Transact It. Mass Transact is a mainframe-to-mainframe
transaction processing application that the Company developed specifically for
businesses utilizing mainframe technology and processing large numbers of
credit card transactions on a batch basis. A merchant using Mass Transact
(typically one that accepts a large number of credit card transactions by
telephone or mail) assembles a batch file of transactions and the merchant's
mainframe transmits that information to the Company for processing. Insurance
companies and magazine publishers, each of which process large numbers of
transactions for recurring payments such as insurance premiums and
subscription renewals, respectively, are examples of the type of merchant
customers who currently utilize Mass Transact. Available since September 1994,
Mass Transact currently is used by approximately 300 of the Company's
merchants. PC Transact It is a similar application that allows PCs, rather
than mainframes, to process transactions on a batch basis. Available since
October 1994, PC Transact It currently is used by approximately 3,500 of the
Company's merchants. Merchants who subscribe to Mass Transact or PC
Transact It pay a one-time license fee and a percentage of the dollar amount
of each transaction processed.
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-sight 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,
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Gratuit software integrates a time clock into the software as well as a
frequent diner program. Gratuit currently is used by over 6,000 NOVA
merchants.
In addition to the Company's core products and services, the Company offers
the following value-added software applications and services:
NOVA ACS. NOVA ACS (Automated Customer Service) is a PC-based system that
allows the Company's bank alliance and ISO partners access to the Company's
databases in order to track and compile the transaction processing activity of
their respective merchant customers. NOVA ACS also is utilized by the
Company's merchant customers to access the Company's databases to track and
compile information regarding their own transaction activity. Through such
access and related information retrieval capabilities, NOVA ACS expands
greatly the banks', ISOs' and merchants' ability to design and obtain
customized informational reports and, in the case of banks and ISOs, to
perform for their merchant customers a variety of customer service related
activities. NOVA ACS 2.5, which was introduced in 1997, incorporates retrieval
and chargeback information as well as on-line statements. These enhancements
give the ISO, bank or merchant the opportunity to retrieve information on-
line. Available since 1991, NOVA ACS currently is used by approximately 300 of
the Company's bank alliance and ISO partners.
SCAN Check Verification Services. Through an agreement with Deluxe Payment
Protection Systems, Inc. ("DPPS"), doing business as SCAN, the Company offers
check verification services to its customers. Specifically, the Company can
provide its customers with direct access via the NOVA Network to the SCAN
database managed by DPPS. The SCAN database is composed of information
relating to checks returned to subscribers of the SCAN database for
insufficient funds. This access allows merchants to compare the information
included in the database against any check presented to the merchant for
payment. This service is accessible to the merchant through the merchant's POS
terminal and was introduced in May 1995, with significant telemarketing of
SCAN to existing Company merchants commencing in January 1996. Merchants pay
per-transaction fees for access to such service. The service currently is used
by approximately 1,000 merchants.
In March 1997, the Company entered into an additional agreement with DPPS
pursuant to which DPPS agreed to refer to the Company prospective merchants
for credit, charge and debit card processing.
Cellular Digital Packet Data. The use of Cellular Digital Packet Data
("CDPD"), marketed under the name "Traverse," allows the Company to process
transactions utilizing cellular airwaves, as opposed to traditional phone
lines, enabling wireless transaction authorization and processing. The Company
currently has agreements with AT&T Wireless Services, GTE and Bell Atlantic
NYNEX Mobile to provide cellular transmission services. CDPD enables
transaction authorization and processing in environments where traditional
phone lines are unavailable, inconvenient and/or prohibitively expensive,
affording merchants increased flexibility, mobility and security in processing
card transactions. Further, CDPD will allow merchants that have relied on
paper-based processing, where the ability to check if a card is stolen or
credit limits exceeded is generally unavailable or inconvenient, to convert to
electronic processing. In so doing, such merchants can also avoid the higher
rates imposed by each of VISA and MasterCard for paper-based transactions.
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 plans a full launch of this product in the first quarter of 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
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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 year
ended December 31, 1996 and the nine months ended September 30, 1997, 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 minimize the financial risks to the Company in the event any of the
Company's bank alliance partners no longer desire to utilize the Company's
services. In contrast to the Company's approach, the typical transaction
processor/bank relationship involves a processor negotiating with a bank to
serve all of the bank's merchants, with the bank maintaining direct control
over each merchant relationship. Such a structure exposes the processor to the
risk that each of the merchant relationships, and the revenues from those
relationships, easily could be jeopardized if, for example, the bank were to
sell its merchant business portfolio to an acquiror that provided its own
transaction processing services.
MARKETING
To reach its target market segment in a cost-effective manner and to further
its market penetration, the Company markets its services through three
principal channels: (i) bank alliances, 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 Alliance, the MBNA Alliance 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.
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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 Alliance and the MBNA Alliance. Through its relationships
with its bank alliance partners, the Company offers its services to merchants
in cooperation with community and regional banks, allowing the Company to
capitalize on the presence of those banks in particular geographic markets.
The Company's bank alliances consist of four types of relationships: (i)
relationships created as a result of the Company's acquisition of a bank's
merchant portfolio, pursuant to which the Company provides transaction
processing services on a co-branded basis with such bank ("Acquisition
Alliances"); (ii) relationships created through a joint venture (generally in
the form of a limited liability company) owned jointly by the Company and a
bank, pursuant to which the Company provides transaction processing services
to the joint venture and the bank provides marketing and referral services to
the joint venture ("Joint Venture Alliances"); (iii) agent bank relationships
where the bank purchases the Company's services and markets and resells those
services directly to merchants ("Agent Bank Alliances"); and (iv) bank
referral relationships where the bank refers to the Company merchants who
desire or otherwise inquire about transaction processing services ("Bank
Referral Alliances").
Acquisition Alliances and Joint Venture Alliances are an integral part of
the Company's overall acquisition strategy pursuant to which the Company
offers banks the opportunity to transfer management and operational
responsibility for their merchant portfolios to the Company (either directly
or through the joint venture), while continuing to offer transaction
processing services on a co-branded basis in cooperation with the Company.
Because an Acquisition Alliance or a Joint Venture Alliance may involve the
Company (or the joint venture) maintaining transaction processing salespersons
on-site at the bank branch to service existing merchant customers and to
market and sell the Company's processing services to new merchant customers,
the Company can often effect a nondisruptive transition of services from the
merchants' perspective. To ease further this transition process and to assist
its Acquisition Alliance and Joint Venture Alliance partners, the Company has
created an intensive training program whereby the Company's personnel train
and educate its Acquisition Alliance and Joint Venture Alliance partners in
all aspects of the Company's transaction processing services, software
application products and value-added services. Additionally, the Company
utilizes its internal sales force to market transaction processing services on
behalf of the Acquisition Alliances and Joint Venture Alliances. The internal
sales force includes a National Account Sales team that supports Acquisition
Alliances and Joint Venture Alliances in signing larger and more
technologically sophisticated merchants.
The Company compensates its bank alliance partners through varying means.
Acquisition Alliance partners typically are compensated by the Company
remitting to them a residual for each transaction processed by the Company for
merchants attributable to the alliance. The Company compensates its Bank
Referral Alliance partners typically by paying them a one-time referral fee.
Agent Bank Alliance partners are not directly compensated by the Company;
rather, they derive revenue by reselling the Company's services to merchants
at a price determined by the Agent Bank. The Company is assisted in its
alliance efforts through a marketing agreement with Kessler Financial Services
L.P. ("Kessler"), an independent marketing organization. Pursuant to this
agreement, Kessler identifies potential alliance or acquisition prospects for
the Company. The Company's 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
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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 February 6, 1998, the Company had 32 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 85
associations. The Company expects that the MBNA Alliance will expand the
Company's association marketing opportunities.
Other Marketing Efforts. In addition to bank alliances, ISO partnering and
direct sales and telemarketing, the Company engages in other marketing efforts
that management believes complement and diversify further the Company's
overall marketing strategy:
Marketing Through VARs. The Company's marketing efforts are diversified
further through the integration of its transaction processing services with
the specialized business management software of a growing number of VARs. VARs
perform a marketing function for the Company since their software often is
offered on a fully-integrated basis with the Company's transaction processing
services, creating additional opportunities for the Company to reach small- to
medium-sized merchants. See "Business--Technology--Software Development for
POS terminals and PCs."
Procurement and Purchasing Cards. Corporate procurement and purchasing cards
are growing in popularity and flexibility of use, and the Company is exploring
opportunities intended to take advantage of this emergence. Procurement and
purchasing cards, although very similar in most respects to bank and charge
cards, are tailored to a specific business and functionality. Purchasing cards
may be used, for example, to replace the traditional use of paper-based
purchase orders, confirmations and invoices with electronically authorized,
processed and recorded transactions. Another illustrative use of a purchasing
card is an insurance company that issues purchasing cards to its policy
holders for the purchase by such policy holders of medical supplies,
prescriptions and services from certain health care providers, all of whom
have agreed, in advance, to accept the insurance company's purchasing cards.
The Company periodically reviews its marketing efforts and distribution
channels to minimize channel conflict. Although channel conflict among bank
alliances, ISO partnering and direct sales marketing may occur, to date the
Company has not experienced any significant conflict while pursuing its
overall sales strategy.
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.
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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 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 acquisition 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 acquisitions 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
acquisitions. In addition, each of the First Union Alliance and the Crestar
Alliance may create additional acquisition opportunities for the Company, as
the Company and each of First Union and Crestar Bank have agreed that the
Company generally may, at its option and subject to agreement on price and
other terms, purchase from First Union or Crestar Bank any merchant portfolios
acquired by First Union or Crestar Bank through whole-bank or other
acquisitions. In November 1997, First Union announced that it entered into an
agreement to acquire CoreStates Financial Corp. ("CoreStates"), which has an
estimated $3.0 billion merchant transaction processing portfolio. In the event
this acquisition is consummated, the Company will consider entering into
negotiations with First Union to acquire the CoreStates transaction processing
portfolio. There can be no assurance that First Union will complete its
acquisition of CoreStates or, if completed, that the Company could 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.
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
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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 acquisitions, the Company reviews any merchant
portfolio that it proposes to acquire. The review process includes analyzing
the composition of the portfolio, applying uniform standards and underwriting
guidelines developed by the Company to the portfolio and identifying any high-
risk merchants contained in the portfolio. Upon completion of this review, the
Company determines whether the portfolio meets the Company's standards and
guidelines and is otherwise a suitable acquisition target. If the Company
decides to proceed with the proposed acquisition, the Company will focus on
the high-risk merchants identified by its review and attempt to manage the
risk associated with such merchants. Typically, the Company will seek to
exclude high-risk merchants from the portfolio acquisition, require the seller
of the merchant portfolio to establish a reserve account or require the seller
of the merchant portfolio to indemnify the Company for any liability
associated with such merchants. The experience accumulated by the Company
during the course of its acquisitions is constantly drawn upon to refine the
Company's due diligence procedures and practices and management expects to
continue to improve its due diligence efforts. Nevertheless, there can be no
assurance that the Company's due diligence process will consistently identify
all high-risk merchants or that the Company will otherwise assess properly the
risk attributes of any acquired portfolio.
MERCHANT ACCOUNTING AND CLEARING BANK RELATIONSHIPS
The Company relies upon third parties to provide merchant accounting and
clearing bank services to the Company and its merchant customers. In each of
these instances, the Company has engaged multiple providers to safeguard
against the loss of services or quality of any one of these providers.
Merchant Accounting. Merchant accounting services consist of reorganizing
and accumulating daily transaction data on a merchant-by-merchant and card
issuer-by-card issuer basis, and forwarding this data to the credit card
associations for ultimate payment. These functions are performed on the
Company's behalf by each of Vital Processing Services and Mellon Bank under
agreements expiring April 30, 1998 and February 28, 1998, respectively. The
Company currently is negotiating the terms of a new agreement with Vital
Processing Services. The Company expects to renew the agreement with Mellon
Bank for an additional one year term.
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
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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-NC, 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 acquisition of the
merchant portfolio of Bank of the West. Pursuant to the First Union Alliance,
FUNB-NC, a subsidiary of First Union, acts as the exclusive clearing and
settlement bank, subject to certain exceptions and conditions, for merchant
customers of First Union. While the Company's Depositary and Settlement
Agreement with First Union does contain certain conditions relative to the
Company's ability to transfer clearing and settlement functions for the
merchant customers of First Union away from First Union, the Company's
agreements with its principal member clearing banks generally provide that the
merchant relationship is controlled by the Company. Accordingly, the Company
generally is not obligated to continue to utilize the clearing services of
these banks, and may transfer the clearing functions to another principal
member clearing bank (i.e. any member of the VISA and MasterCard
associations), although there can be no assurance that the Company would be
able to find a financial institution to sponsor it on terms acceptable to the
Company. See "Certain Relationships and Related Transactions--Transactions
Related to the First Union Alliance."
Effective May 1, 1997, MasterCard approved changes to its Member Service
Provider ("MSP") rules to, among other things, differentiate between ISOs
which perform merchant and cardholder services and third party processors
("TPPs"), such as the Company, which provide transaction processing services.
The new MSP rules implement a Processor Certification Program requiring the
Company and other TPPs to register as a TPP with MasterCard. The Company has
filed its registration as a "Type I" TPP. Type I TPPs must satisfy certain
criteria including requirements as to the number of merchant accounts
serviced, processing volume and concentration of risk. All Type I TPPs must
undergo annual reviews by MasterCard, including a review of processing
performance, authorization host availability, authorization response time and
call referral merchant response. Type I TPPs also must be financially sound
and maintain adequate financial resources. The Company believes that it meets
or exceeds all of the criteria to qualify as a Type I TPP. The failure by the
Company to qualify as a Type I TPP, or to maintain its status as a Type I TPP,
could have a material adverse effect on the business or operations of the
Company.
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
43
<PAGE>
the number of calls per customer service representative. The Company has
developed comprehensive programs and procedures for training its approximately
50 full-time customer service representatives to assist the Company's merchant
clients in a timely and efficient manner with any problems, issues or concerns
they may have. Management is dedicated to providing outstanding customer
service and support and continually reviews its policies and procedures in an
effort to improve these services.
PROPRIETARY RIGHTS
The Company has developed proprietary software for use in four principal
areas: (i) applications for POS terminals and PCs; (ii) transaction switching;
(iii) the NOVA Network; and (iv) customer service and chargebacks. The Company
regards its proprietary software as protected by trade secret and copyright
laws of general applicability. The Company attempts to safeguard its software
through the protection afforded by the above-referenced laws, employee and
third-party non-disclosure agreements, licensing agreements and other methods
of protection. Despite these precautions, it may be possible for unauthorized
third parties to copy, obtain or reverse engineer certain portions of the
Company's software or to otherwise obtain or use other information the Company
regards as proprietary. While the Company's competitive position may be
affected by its ability to protect its software and other proprietary
information, management believes that the protection afforded by trade secret
and copyright laws are less significant to the Company's success than other
factors such as the knowledge, ability and experience of the Company's
personnel and the continued pursuit and implementation of its operating
strategies.
As the number of software application products in the transaction processing
industry increases, and as the functionality of such products further
overlaps, third parties could assert that the Company's software application
products infringe or may infringe the proprietary rights of such entities.
These third parties may seek damages from the Company as a result of such
alleged infringement, demand that the Company license certain proprietary
rights from them or otherwise demand that the Company cease and desist from
its use and/or license of the allegedly infringing software. Although
management is not currently aware of any alleged infringement issues, any such
action, if it were to occur, may result in protracted and costly litigation or
royalty arrangements or otherwise have a material adverse effect on the
Company's financial condition and results of operations.
The Company currently licenses certain software from third parties to
supplement its internal software and technology development and to shorten
time-to-market software application product deliveries. For instance, the
Company licenses the software for NOVA Time. Management believes that it will
be necessary to continue this practice in the future, although there can be no
assurance that the Company will be able to do so on favorable terms or at all.
The Company's trademarks include "NOVA," "NOVA Information Systems," "NOVA
ACS," "NOVA Remote ACS," "NOVA Time," "NOVA Clock," "NOVA Perks," "PC
Transact It" and "NOVA Shadow Pay". To date, however, the Company only has
sought to have "NOVA" and "NOVA Perks" registered on the federal level. The
Company's application to register "NOVA Perks" with the U.S. Patent and
Trademark Office was approved January 23, 1996. 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
44
<PAGE>
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 82% of the total charge volume processed in 1996. The
largest bankcard processor accounted for approximately 38% of the total charge
volume processed in 1996, and the Company processed approximately 3% of the
total charge volume for the same period (approximately 4.0% after giving pro
forma effect to the Company's recent transactions discussed under "Business--
Recent Transactions").
The Company believes that it has reached a sufficient size whereby economies
of scale allow it to offer competitive pricing. However, certain of the
Company's competitors may have lower costs which could potentially give them
an advantage. As a result of its experience in payment processing, the Company
has been able to develop operating efficiencies that the Company believes
allow it to competitively bid for new business. In addition, the Company has
continually made technological improvements and is thus able to respond to the
unique needs of merchants in various industries. Management believes that the
quality, speed and reliability of the NOVA Network and the breadth,
flexibility and user-friendliness of its software application products and
services constitute a competitive advantage. The Company intends to maintain
its strategy of focusing on small- to medium-sized merchants because
management believes this market segment is somewhat less price sensitive than
larger accounts.
The Company faces increasing competition from other transaction processors
for available acquisition opportunities. In addition, in recent years
community and regional banks, whose transaction processing businesses have
been the Company's primary source of acquisition opportunities, have been
undergoing extensive consolidation reflective of underlying trends in the
financial institutions industry and unrelated to their transaction processing
businesses. As a result, smaller banks that may have sought to divest
themselves of their transaction processing businesses may be acquired by banks
that compete with the Company or banks that have a relationship or alliance
with one or more competitors of the Company, thus potentially depriving the
Company of acquisition opportunities. The First Union Alliance and the Crestar
Alliance, however, may create additional acquisition opportunities for the
Company, as the Company and each of First Union and Crestar Bank have agreed
that the Company generally may, at its option and subject to agreement on
price and other terms, purchase from First Union or Crestar Bank any merchant
portfolios acquired by First Union or Crestar Bank through whole-bank or other
acquisitions. In November 1997, First Union announced that it 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 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
45
<PAGE>
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 February 6, 1998, the Company had 572 full-time employees, of which 212
were in sales and marketing, 274 were in operations and 86 were corporate and
general administrative employees. Of these employees, 188 were based in
Atlanta, Georgia at the Company's principal executive offices, 210 were based
in Knoxville, Tennessee at the Company's operations center, seven were based
in Arvada, Colorado, and 11 were based in Jacksonville, Florida in connection
with the First Union Alliance. The Company's 212 sales and marketing employees
include 156 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 November 30, 2001. The Company relocated its
principal executive offices in October 1996 to allow for the Company's
continued growth. In connection with this relocation, the Company transferred
certain of its operational functions, including the conversion management
functions, from Knoxville, Tennessee and Boulder, Colorado to Atlanta. The
Company's operations center is located in Knoxville, Tennessee and consists of
approximately 26,000 square feet. This facility is leased pursuant to a
sublease agreement scheduled to expire September 1, 2003. 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.
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,
executive officers and certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edward Grzedzinski...... 42 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
John M. Perry........... 41 Executive Vice President--Sales and Marketing
Pamela A. Joseph........ 38 Senior Vice President and Chief Information
Officer
Rebecca L. Powell....... 45 Senior 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, 51 Director
Jr.....................
Fred Martin Winkler(2).. 54 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Grzedzinski has served with the Company or its predecessor since
February 1991, most recently as a director, Chairman of the Board, President
and Chief Executive Officer. 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 ten years experience in the bankcard industry.
Mr. Bahin has served with the Company or its predecessor since February
1991, most recently as a director, Vice Chairman of the Board, Chief Financial
Officer and Secretary. Prior to joining the Company, Mr. Bahin served in
various officer capacities with Fuqua Industries, Inc., a diversified
manufacturing and service company, most recently as Senior Vice President of
Operations. Mr. Bahin has over 25 years of financial and management
experience.
Mr. 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. Joseph has served with the Company or its predecessor since July 1994,
most recently as Senior 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.
Ms. Powell has served with the Company or its predecessor since February
1991, most recently as Senior 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 and Creative Video, and has held this position since
September 1996. Prior to joining IXL Holdings, Mr. Ellis founded and served as
the President and Chief Executive Officer of Ellis Communications 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 broadcast group. Mr. Ellis
previously 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. Mr. Ellis is a director of Promus Hotel Corporation, a
publicly-held company.
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. Winkler has served as a director of the Company since January 1996. Mr.
Winkler has served with First Union Corporation, a bank holding company, since
April 1993, most recently as Executive Vice President--Card Products Division
of First Union Corporation. Prior to joining First Union Corporation, Mr.
Winkler served for four years as Chief Operating Officer for AT&T Universal
Card and for five years as Chief Executive Officer and President of CitiBank
South Dakota (N.A.) where he operated CitiBank's credit card business. Mr.
Winkler has over 14 years experience in the financial services industry,
primarily in the bankcard industry.
The Company's Articles of Incorporation provide that the Board of Directors
will consist of not less than seven persons, with all directors to be elected
by the holders of shares of the Company's Voting Stock, as defined below, at
the annual meeting of shareholders. Such directors shall serve until the
election of their successors at the next annual meeting of shareholders. The
Company's Articles of Incorporation authorize cumulative voting by holders of
the Company's Common Stock in the election of the Company's directors. The
Company's Articles of Incorporation further provide that no bylaw, resolution,
written consent or amendment to the Articles of Incorporation purporting to
create a classified or "staggered" Board of Directors or requiring prior
notice or qualification of members for director shall be effective.
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.
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 $1.7 million during the fiscal years ended
February 28, 1994 and 1995, the ten month year ended December 31, 1995, the
year ended December 31, 1996, and the nine months ended September 30, 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 1995 credit card charge volume. Pursuant to the
First Union Alliance, First Union contributed its transaction processing
assets (the "First Union Assets"), including the transaction processing assets
of First Fidelity Bancorporation and its banking subsidiaries (which merged
with and into First Union effective January 1, 1996), to the Company.
Concurrently, the then current shareholders of the Company's predecessor (the
"Original Shareholders"), contributed to the Company all of the shares of
capital stock of the Company's predecessor owned by them, together with all of
their rights to acquire shares of capital stock of the Company's predecessor
causing the Company's predecessor to become a wholly-owned subsidiary of the
Company. In exchange for their respective contributions to the Company, First
Union received 9,149,209 shares of the Company's Common Stock, while the
Original Shareholders collectively received an aggregate of 2,228,911 shares
of the Company Common Stock, together with the right to acquire (through the
exercise of options and the conversion of Preferred Stock) an aggregate of
14,762,487 shares of Common Stock.
The Company reimbursed First Union for all taxes which First Union paid on
revenues generated by the First Union Assets between December 1, 1995 and
January 31, 1996. First Union, on behalf of and as requested by the Company,
agreed to continue to service the First Union Assets until such time as the
conversion and integration of the First Union Assets was complete, for which
the Company agreed to reimburse First Union for certain specified expenses. In
1996, the Company paid First Union an aggregate of approximately $9.5 million
for such expenses. The Company completed the conversion of the First Union
Assets to the NOVA Network in September 1996 and has reimbursed First Union
for all amounts owed in connection therewith.
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.
49
<PAGE>
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 Banks
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."
50
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of the date of this Prospectus
of (i) each person known by the Company to own beneficially 5% or more of the
Common Stock, (ii) each director of the Company who beneficially owns shares
of Common Stock, (iii) each Named Executive Officer who beneficially owns
shares of Common Stock, and (iv) all directors and executive officers as a
group, and as adjusted to reflect the sale of the Common Stock offered hereby.
Except as otherwise indicated, the persons or entities listed below have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING NUMBER OF OFFERING
--------------------- SHARES ---------------------
NAME AND ADDRESS NUMBER(1) PERCENT(2) OFFERED NUMBER(1) PERCENT(2)
- ---------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PRINCIPAL SHAREHOLDERS
Warburg, Pincus Invest-
ors, L.P.(3).......... 11,086,770 38.2% 841,057 10,245,713 29.8%
First Union Corpora-
tion(4)............... 9,149,209 31.5 694,071 8,455,138 24.6
WorldCom, Inc.(5)...... 2,371,063 8.2 179,872 2,191,191 6.4
NAMED EXECUTIVE OFFICERS
AND DIRECTORS
Edward Grzedzinski(6).. 748,971 2.3 -0- 748,971 1.9
James M. Bahin(7)...... 723,872 2.1 85,000 638,872 1.6
John M. Perry(8)....... 154,500 * -0- 154,500 *
Charles T. Cannada(5).. 2,371,063 8.2 -0- 2,194,338 6.4
Dr. James E. Carnes(9). 3,200 * -0- 3,200 *
U. Bertram Ellis(10)... 5,000 * -0- 5,000 *
Dr. Henry Kressel(3)... 11,086,770 38.2 -0- 10,260,425 29.8
Joseph P. Landy(3)..... 11,086,770 38.2 -0- 10,260,425 29.8
Maurice F. Terbrueggen,
Jr.(4)................ 9,149,209 31.5 -0- 8,467,279 24.6
Fred Martin Winkler(4). 9,149,209 31.5 -0- 8,467,279 24.6
All executive officers
and directors as a
group (10
persons)(11).......... 24,242,585 80.8 - 22,472,585 63.4
---------
Total.................. 1,800,000
---------
</TABLE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) Includes shares of Common Stock which the named shareholder has a right to
acquire upon the exercise of vested and nonvested options.
(2) Includes shares of Common Stock which the named shareholder has a right to
acquire, upon the exercise of options, within 60 days of the date of this
Prospectus but not options that become exercisable after such date. Such
shares receivable upon the exercise of options are deemed outstanding for
purposes of completing the percentage ownership of the person holding such
shares, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person shown in the table.
(3) The shares shown are owned by Warburg, Pincus Investors, L.P.
("Investors"). The sole general partner of Investors is Warburg, Pincus &
Co., a New York general partnership ("WP"). E. M. Warburg, Pincus & Co.,
LLC, a New York limited liability company ("EMW LLC"), manages Investors.
The members of EMW LLC are substantially the same as the partners of WP.
Lionel I. Pincus is the managing partner of WP and the managing member of
EMW LLC and may be deemed to control both WP and EMW LLC. WP, as the sole
general partner of Investors, has a 20% interest in the profits of
Investors. Dr. Kressel and Mr. Landy, directors of the Company, are
Managing Directors and members of EMW LLC and general partners of WP. As
such, Dr. Kressel and Mr. Landy may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") in an indeterminate
portion of the shares beneficially owned by Investors and WP. Dr. Kressel
and
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<PAGE>
Mr. Landy disclaim beneficial ownership of the shares. The named persons'
address is 477 Lexington Avenue, 10th Floor, New York, New York 10017. If
the U.S. Underwriters' over-allotment option is exercised in full,
Investors will sell an additional 522,289 shares and, as a result, would
beneficially own 9,723,424 shares, or 28.3%, after the Offering.
(4) The shares indicated are owned beneficially by indirect, wholly-owned
subsidiaries of First Union Corporation. Pursuant to the terms of a voting
agreement among FUNB-NC and such subsidiaries, FUNB-NC holds the proxy for
each of such subsidiaries with respect to such shares. Accordingly, each of
First Union Corporation and FUNB-NC may be deemed to be the beneficial
owner of all such shares within the meaning of Rule 13d-3 under the
Exchange Act. Such shares also may be attributed to Mr. Terbrueggen and Mr.
Winkler, directors of the Company, who serve as Senior Vice President and
Executive Vice President of First Union, respectively. Mr. Terbrueggen and
Mr. Winkler disclaim beneficial ownership of the shares. First Union
Corporation's, Mr. Terbrueggen's and Mr. Winkler'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-NC
and such subsidiaries will sell an additional 431,013 shares and, as a
result, would beneficially own 8,024,126 shares, or 23.4%, after the
Offering.
(5) The shares shown are owned by WorldCom. Mr. Cannada may be deemed to
beneficially own the shares within the meaning of Rule 13d-3 under the
Exchange Act due to his affiliation with WorldCom as a Senior Vice
President. Mr. Cannada disclaims beneficial ownership of these shares. Mr.
Cannada's and WorldCom's address is 515 East Amite, Jackson, Mississippi
39201. If the U.S. Underwriters' over-allotment option is exercised in
full, WorldCom will sell an additional 111,699 shares and, as a result,
would beneficially own 2,079,492 shares, or 6.1%, after the Offering.
(6) Includes 25,000 shares held in the name of Mr. Grzedzinski's spouse, 50
shares held by his spouse as custodian for a minor child, and 50 shares
held by Mr. Grzedzinski's daughter. Also includes 262,618 shares that Mr.
Grzedzinski may acquire, upon the exercise of options, within 60 days of
the date of this Prospectus, and 96,713 shares that Mr. Grzedzinski may
acquire upon the exercise of options which will not be exercisable within
the aforementioned 60 day period.
(7) Includes 268,859 shares that Mr. Bahin may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 96,713 shares
that Mr. Bahin may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(8) Includes 38,625 shares that Mr. Perry may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 115,875 shares
that Mr. Perry may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(9) 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.
(10) Includes 750 shares that Mr. Ellis may acquire, upon the exercise of
options, within 60 days of the date of this Prospectus, and 4,250 shares
that Mr. Ellis may acquire upon the exercise of options which will not be
exercisable within the aforementioned 60 day period.
(11) Includes 570,852 shares which may be acquired upon the exercise of options
within 60 days of the date of this Prospectus. Includes 9,149,209 shares
owned by indirect wholly-owned subsidiaries of First Union Corporation and
are included due to the affiliation of Messrs. Terbrueggen and Winkler
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.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 34,341,332 shares of
Common Stock outstanding (assuming the U.S. Underwriters' over-allotment
option is not exercised). Of these shares, the shares sold in this offering
together with the 4,025,000 shares sold in the Company's initial public
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act, may
generally only be sold in compliance with the limitation of Rule 144 described
below. Approximately 21,555,182 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
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.
53
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the U.S. Underwriting
Agreement dated the date hereof, each of the underwriters of the United States
and Canadian offering of Common Stock named below (the "U.S. Underwriters"),
for whom Smith Barney Inc., BT Alex. Brown Incorporated and The Robinson-
Humphrey Company, LLC are acting as the Representatives (the
"Representatives"), has severally agreed to purchase, and the Company and the
Selling Shareholders have agreed to sell to each U.S. Underwriter, shares of
Common Stock which equal the number of shares set forth opposite the name of
such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- ---------------- ---------
<S> <C>
Smith Barney Inc......................................................
BT Alex. Brown Incorporated...........................................
The Robinson-Humphrey Company, LLC....................................
---------
Total............................................................... 5,680,000
=========
</TABLE>
Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated the date hereof, each of the managers of the
concurrent international offering of Common Stock named below (the
"Managers"), for whom Smith Barney Inc., BT Alex. Brown International, a
division of Bankers Trust International PLC, and The Robinson-Humphrey
Company, LLC are acting as lead managers (the "Lead Managers"), has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed
to sell to each Manager, shares of Common Stock which equal the number of
shares set forth opposite the name of such Manager below:
<TABLE>
<CAPTION>
NUMBER OF
MANAGER SHARES
- ------- ---------
<S> <C>
Smith Barney Inc.....................................................
BT Alex. Brown International, a division of Bankers Trust Interna-
tional PLC..........................................................
The Robinson-Humphrey Company, LLC...................................
---------
Total.............................................................. 1,420,000
=========
</TABLE>
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at a price that represents a concession
not in excess of $ per share below the public offering price. The U.S.
Underwriters and the Managers may allow, and such dealers may re-allow, a
concession not in excess of $ per share to the other U.S. Underwriters or
Managers, respectively, or to certain other dealers. After the initial
offering of shares to the public, the public offering price and such
concessions may be changed by the U.S. Underwriters and the Managers.
The Selling Shareholders have granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 1,065,000 additional shares of Common Stock at the public
offering price set forth on the cover page of this Prospectus less
underwriting discounts and commissions. The U.S. Underwriters may exercise
such option to purchase additional shares solely for the purpose of covering
over-allotments, if any, incurred in connection with the sale of the shares
offered hereby. To the extent such option is exercised, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such U.S. Underwriter's name in the preceding tables
bears to the total number of shares in such tables.
In connection with this offering and in compliance with applicable law, the
U.S. Underwriters may overallot (i.e., sell more shares of Common Stock than
the total amounts shown on the list of U.S. Underwriters and participations
that appears above) and may effect transactions that stabilize, maintain or
otherwise affect the market price of the shares of Common Stock at levels
above those that might otherwise prevail in the open
54
<PAGE>
market. Such transactions may include placing bids for the shares of Common
Stock or effecting purchases of the shares of Common Stock for the purpose of
pegging, fixing or maintaining the prices of the shares of Common Stock or for
the purpose of reducing a syndicate short position created in connection with
the offering. In addition, the contractual arrangements among the U.S.
Underwriters include a provision whereby, if Smith Barney, Inc. purchases
shares of Common Stock in the open market for the account of the underwriting
syndicate and the shares of Common Stock purchased can be traced to a
particular U.S. Underwriter or member of the selling group, the underwriting
syndicate may require the U.S. Underwriter or selling group member in question
to purchase the shares of Common Stock in question at the cost price to the
syndicate or may recover from (or decline to pay to) the U.S. Underwriter or
selling group member in question the selling concession applicable to the
shares of Common Stock in question. The U.S. Underwriters are not required to
engage in any of these activities and any such activities, if commenced, may
be discontinued at any time.
The Company, the Selling Shareholders, the U.S. Underwriters and the
Managers have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
The Company, certain officers and directors of the Company and the Selling
Shareholders, holding in the aggregate approximately 21,555,182 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 5,680,000 shares offered
in the United States and Canadian offering (i) it is not purchasing any such
shares for the account of anyone other than a U.S. or Canadian Person and (ii)
it has not offered or sold, and will not, offer, sell, resell or deliver,
directly or indirectly, any of such shares or distribute any prospectus
relating to the Untied States and Canadian offering outside the United States
or Canada or to anyone other than a U.S. or Canadian Person. In addition, each
Manager has agreed that as part of the distribution of the 1,420,000 shares
offered in the international offering: (i) it is not purchasing any such
shares for the account of any U.S. or Canadian Person and (ii) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
international offering in the United States or Canada or to any U.S. or
Canadian Person. Each Manager has also agreed that it will offer to sell
shares only in compliance with all relevant requirements of any applicable
laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S.
Underwriters and Managers, including: (i) certain purchases and sales between
the U.S. Underwriters and the Managers, (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion, (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as Manager or by a Manager who is also acting
as a U.S. Underwriter and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is subject to United States or Canadian income taxation regardless of the
source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.
Each Manager agrees that (i) it will not offer or sell any shares to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as
55
<PAGE>
principal or agent) for the purposes of their businesses or otherwise in
circumstances which will not involve an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995
("the Regulations"); (ii) it will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulations with respect to anything done
by it in relation to the shares in, from, or otherwise involving the United
Kingdom; and (iii) it will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the offer of the shares
if that person is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Shareholders or the Managers that would permit an offering to the
general public of the shares offered hereby in any jurisdiction other than the
United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares as may be mutually agreed. The price of any shares so sold shall be the
public offering price as then in effect for shares being sold by the U.S.
Underwriters and the Managers, less all or any part of the selling concession,
unless otherwise determined by mutual agreement. To the extent that there are
sales between the U.S. Underwriters and the Managers pursuant to the Agreement
Between U.S. Underwriters and Managers, the number of shares initially
available for sale by the U.S. Underwriters and by the Managers may be more or
less than the number of shares appearing on the front cover of this
Prospectus.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock will
be passed upon for the Company and the Selling Shareholders by Long Aldridge &
Norman LLP of Atlanta, Georgia. King & Spalding of Atlanta, Georgia is acting
as counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby.
EXPERTS
The consolidated financial statements of the Company included elsewhere
herein and incorporated by reference in the Company's Annual Report (Form 10-
K) for the year ended December 31, 1996, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and incorporated by reference herein. Such consolidated
financial statements are included and incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 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
56
<PAGE>
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof
may be obtained from the Commission upon payment of certain fees prescribed by
the Commission.
The Company is subject to the informational filing or submission
requirements of the Exchange Act, and in accordance therewith is required to
file or submit periodic reports and other information with the Commission
under the Exchange Act relating to its business, financial condition and other
matters. Such reports, proxy statements and other information may be
inspected, without charge, and copies may be obtained at prescribed rates, at
the Commission's public reference facility at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located
in Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and Seven World Trade Center, 13th Floor, New York, New York 10048 and
can also be reviewed through the Commission's Electronic Data Gathering,
Analysis and Retrieval System which is publicly available through the
Commission's Web site (http://www.sec.gov).
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference certain documents that are not
presented herein or delivered herewith. Such documents are available without
charge upon request from: NOVA Corporation, One Concourse Parkway, Suite 300,
Atlanta, Georgia 30328, Attention: Kathryn J. Harris, Manager, Shareholder
Relations, (770) 396-1456.
The following documents filed by the Company (Commission File No. 1-14342)
with the Commission under Section 13(a) or 15(d) of the Exchange Act are
hereby incorporated by reference in this Prospectus:
(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
(ii) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997, and September 30, 1997;
(iii) The Company's Current Reports on Form 8-K dated June 12, 1997 and
November 14, 1997; and
(iv) The description of the Common Stock as contained in the Company's
Registration Statement on Form 8-A (Registration No. 1-14342) as filed with
the Commission on April 23, 1996.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of the Registration Statement and
this Prospectus to the extent that a statement contained herein, in any
supplement hereto or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Registration
Statement, this Prospectus, or any supplement hereto.
57
<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, 1995 and 1996............ F-3
Consolidated Statements of Operations for the year ended February 28,
1995, the ten month period ended December 31, 1995, and the year ended
December 31, 1996...................................................... F-4
Consolidated Statements of Shareholders' Equity for the year ended
February 28, 1995, the ten month period ended December 31, 1995, and
the year ended December 31, 1996....................................... F-5
Consolidated Statements of Cash Flows for the year ended February 28,
1995, the ten month period ended December 31, 1995, and the year ended
December 31, 1996...................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (unaudited) as of December 31,
1996 and September 30, 1997............................................ F-21
Condensed Consolidated Statements of Income (unaudited) for the three
and nine months ended September 30, 1996 and 1997...................... F-22
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1996 and 1997............................... F-23
Notes to Interim Condensed Consolidated Financial Statements............ F-24
</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, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year
ended December 31, 1996, the 10-month period ended December 31, 1995, and for
the year ended February 28, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NOVA
Corporation at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1996, the 10-
month period ended December 31, 1995, and for the year ended February 28,
1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 18, 1997
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 40,326,000 $ 630,000
Trade receivables, less allowance for
doubtful accounts of $2,707,000 and
$440,000 at December 31, 1996 and
December 31, 1995, respectively.......... 16,147,000 10,068,000
Inventory................................. 857,000 1,080,000
Deferred tax asset and other current
assets................................... 3,160,000 3,759,000
------------ ------------
Total current assets.................... 60,490,000 15,537,000
Merchant and customer contracts........... 21,868,000 20,603,000
Property and equipment, net............... 10,212,000 7,403,000
Excess cost of businesses acquired........ 13,301,000 13,795,000
Deferred tax asset and other non-current
assets................................... 1,834,000 3,663,000
------------ ------------
$107,705,000 $ 61,001,000
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable.......................... $ 4,810,000 $ 4,180,000
Accounts payable to affiliate............. 1,534,000 2,883,000
Accrued compensation and related costs.... 1,416,000 996,000
Settlement obligations.................... 7,691,000 --
Other accrued liabilities................. 5,157,000 4,003,000
Long-term debt obligations due within one
year..................................... 507,000 5,184,000
------------ ------------
Total current liabilities............... 21,115,000 17,246,000
Deferred tax liability.................... 849,000 --
Long-term debt obligations................ 859,000 17,738,000
Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Preferred Stock........................... -- 33,571,000
Common Stock, $.01 par value, 50,000,000
shares authorized, 28,721,000 and
11,378,000 shares issued at December 31,
1996, and December 31, 1995,
respectively............................. 288,000 114,000
Additional paid in capital................ 99,299,000 2,615,000
Accumulated deficit....................... (14,705,000) (10,283,000)
------------ ------------
Total shareholder's equity.............. 84,882,000 26,017,000
------------ ------------
$107,705,000 $ 61,001,000
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED 10-MONTH PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ --------------------- ------------
<S> <C> <C> <C>
REVENUES...................... $265,829,000 $129,035,000 $93,592,000
OPERATING EXPENSES:
Cost of service............... 207,595,000 100,375,000 74,032,000
Conversion costs.............. 6,395,000 3,441,000 1,827,000
Selling, general and
administrative............... 32,952,000 17,795,000 14,091,000
Depreciation and amortization. 6,982,000 4,635,000 3,887,000
------------ ------------ -----------
OPERATING INCOME (LOSS)....... 11,905,000 2,789,000 (245,000)
Interest expense (income),
net.......................... (126,000) 1,959,000 968,000
------------ ------------ -----------
Income (loss) before provision
for income taxes............. 12,031,000 830,000 (1,213,000)
Provision (benefit) for income
taxes........................ 4,764,000 (4,057,000) --
------------ ------------ -----------
NET INCOME (LOSS)............. $ 7,267,000 $ 4,887,000 $(1,213,000)
============ ============ ===========
Pro forma net income (loss)
per common and common
equivalent share............. $ 0.25 $ 0.24 $ (0.13)
============ ============ ===========
Pro forma weighted-average
common and common equivalent
shares outstanding........... 28,604,000 18,024,000 13,603,000
============ ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN ACCUMULATED TREASURY SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK RECEIVABLE
------- ----------- ---------- -------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
March 1, 1994... 32,571 $32,571,000 1,792,000 $ 18,000 $ 301,000 $ (13,815,000) $ (110,000) $ (182,000)
Issuance of
Preferred
Stock.......... 1,000 1,000,000 -- -- -- -- -- --
Purchase of
treasury
shares......... -- -- -- -- -- -- (33,000) --
Payment of
Common Stock
subscriptions.. -- -- -- -- -- -- -- 182,000
Net loss........ -- -- -- -- -- (1,213,000) -- --
------- ----------- ---------- -------- ----------- ------------- ---------- ----------
BALANCE at
February 28,
1995............ 33,571 33,571,000 1,792,000 18,000 301,000 (15,028,000) (143,000) --
Retirement of
treasury stock. -- -- (121,000) (1,000) -- (142,000) 143,000 --
Issuance of
Common Stock in
a non-monetary
transaction
with First
Union.......... -- -- 9,149,000 91,000 2,320,000 -- -- --
Issuance of
Common Stock in
exchange for
outstanding
warrants....... -- -- 558,000 6,000 (6,000) -- -- --
Net Income...... -- -- -- -- -- 4,887,000 -- --
------- ----------- ---------- -------- ----------- ------------- ---------- ----------
BALANCE at
December 31,
1995............ 33,571 33,571,000 11,378,000 114,000 2,615,000 (10,283,000) -- --
Exchange of
Preferred Stock
for Common
Stock.......... (28,571) (28,571,000) 11,876,000 119,000 28,452,000 -- -- --
Redemption of
Series D
Preferred
Stock.......... (5,000) (5,000,000) -- -- -- -- -- --
Payment of
accrued
dividends on
Preferred
Stock.......... -- -- -- -- -- (11,689,000) -- --
Exercise of
stock options.. -- -- 1,674,000 17,000 1,965,000 -- -- --
Income tax
benefit from
stock option
exercises...... -- -- -- -- 977,000 -- -- --
Issuance of
Common Stock
related to IPO. -- -- 3,793,000 38,000 72,038,000 -- -- --
IPO expenses.... -- -- -- -- (6,748,000) -- -- --
Net Income...... -- -- -- -- -- 7,267,000 -- --
------- ----------- ---------- -------- ----------- ------------- ---------- ----------
BALANCE at
December 31,
1996............ -- $ -- 28,721,000 $288,000 $99,299,000 $ (14,705,000) $ -- $ --
======= =========== ========== ======== =========== ============= ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
10-MONTHS
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................... $ 7,267,000 $ 4,887,000 $ (1,213,000)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization....... 6,982,000 4,635,000 3,887,000
Deferred income taxes............... 3,045,000 (4,057,000) --
Interest paid with in-kind
debentures......................... -- -- 38,000
Gain on disposition of non-compete
agreement.......................... (150,000) -- --
Changes in assets and liabilities,
net of the effects of business
acquisitions:
Trade receivables................. (6,079,000) (4,606,000) (1,972,000)
Inventory......................... 223,000 (303,000) 813,000
Other assets...................... (84,000) (348,000) (729,000)
Accounts payable.................. (719,000) 3,451,000 1,851,000
Accrued liabilities............... 10,242,000 1,260,000 (147,000)
------------ ----------- ------------
Net cash provided by operating
activities....................... 20,727,000 4,919,000 2,528,000
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of businesses............. (3,967,000) (3,302,000) (16,631,000)
Additions to property and equipment. (6,065,000) (1,624,000) (828,000)
Other............................... 64,000 (130,000) (92,000)
------------ ----------- ------------
Net cash used in investing
activities......................... (9,968,000) (5,056,000) (17,551,000)
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Proceeds from line of credit and
notes payable...................... 4,008,000 4,900,000 16,150,000
Payment of long-term debt and
capital leases..................... (25,692,000) (5,129,000) (1,650,000)
Payment of Preferred Stock
dividends.......................... (11,689,000) -- --
Proceeds from stock options
exercised.......................... 1,982,000 -- --
Proceeds from IPO, net.............. 65,328,000 -- --
Redemption of Preferred Stock....... (5,000,000) -- --
Purchase of treasury stock.......... -- -- (33,000)
Proceeds from Common Stock
subscriptions receivable........... -- -- 182,000
Proceeds from sale of Preferred
Stock.............................. -- -- 1,000,000
------------ ----------- ------------
Net cash provided by (used in)
financing activities............... 28,937,000 (229,000) 15,649,000
------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ 39,696,000 (366,000) 626,000
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................ 630,000 996,000 370,000
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF
YEAR............................... $ 40,326,000 $ 630,000 $ 996,000
============ =========== ============
</TABLE>
See accompanying notes.
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, capturing and transmitting transaction
data, effecting the settlement of payments and assisting merchants in
resolving billing disputes with their customers.
NOVA Corporation was incorporated in December 1995. NOVA Information
Systems, Inc., a wholly owned subsidiary and predecessor to the Company ("NOVA
Information Systems"), was incorporated in Georgia in February 1991. Effective
December 1, 1995, the then current shareholders of NOVA Information Systems
contributed to NOVA Corporation all of the shares of capital stock of NOVA
Information Systems owned by them, thereby causing NOVA Information Systems to
become a wholly owned subsidiary of NOVA Corporation.
On October 30, 1995, NOVA entered into an agreement with First Union
Corporation ("First Union") whereby First Union agreed to contribute its
transaction processing assets, including those acquired by First Union through
its acquisition of First Fidelity Bancorporation, to NOVA in exchange for
9,149,209 shares of NOVA's Common Stock. The transaction, which was
consummated on January 31, 1996, is reflected in the accompanying financial
statements since December 1, 1995, because, pursuant to the terms of the
agreement, revenues since December 1, 1995, derived from the First Union
assets have irrevocably accrued to the benefit of NOVA. The transfer of these
nonmonetary assets, primarily terminals at merchant locations, by First Union
has been accounted for at their historical cost of $2,411,000, because First
Union is deemed under the rules and regulations of the Securities and Exchange
Commission to be a promoter of NOVA.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of NOVA Corporation and its wholly owned subsidiaries as if NOVA
Corporation existed for all periods presented. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company
has made business and customer base acquisitions and has accounted for them as
purchase transactions, and, accordingly, the results of the acquired
businesses or customer bases are included since the dates of acquisition.
RECLASSIFICATIONS Certain prior year items have been reclassified to conform
to current year presentation.
FISCAL YEAR The Company changed its fiscal year end from the last day of
February to December 31, effective December 31, 1995.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS In preparing
financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE AND COST RECOGNITION Revenues derived from the electronic processing
of transactions (principally merchant discount) are recognized at the time the
merchants' transactions are processed. Related commissions and processing
charges are also recognized at that time.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When the Company purchases merchant portfolios, it generally enters into
revenue sharing agreements with sellers. The revenue sharing amounts are
determined primarily based on sales volume processed for a particular group of
merchants. The revenue sharing agreements generally have an initial term of at
least three years with renewal provisions. Revenue is shown in the
accompanying statements of operations net of revenue sharing amounts of
$6,455,000, $5,446,000 and $3,547,000 for the year ended December 31, 1996,
10-month period ended December 31, 1995, and year ended February 28, 1995,
respectively.
Cost of service includes interchange fees paid to the credit card issuing-
bank, communications costs, VISA and MasterCard assessments, and merchant
accounting processing fees. These costs are recognized at the time the
merchants' transactions are processed and the related revenue is recorded.
RENTAL EQUIPMENT The Company rents POS equipment to merchants under month- to-
month agreements. The rented equipment is capitalized and depreciated over
three years. The cost of such equipment and accumulated depreciation at
December 31, 1996, and December 31, 1995, included in property and equipment
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Cost of equipment..................................... $5,796,000 $4,357,000
Less accumulated depreciation......................... 2,939,000 1,626,000
---------- ----------
$2,857,000 $2,731,000
========== ==========
</TABLE>
ACCOUNTS RECEIVABLE Accounts receivable are primarily comprised of amounts due
from the Company's clearing and settlement banks and represent the discount
earned, after related interchange fees on transactions processed during the
month ending on the balance sheet date. Such balances are received from the
Company's clearing and settlement banks approximately 15 days following the
end of each month.
The Company's merchant customers have liability for charges disputed by
cardholders. However, in the case of merchant insolvency, bankruptcy or other
nonpayment, the Company may be liable for any of such charges disputed by
cardholders. The Company believes that the diversification of its merchant
portfolio among industries and geographic regions minimizes its risk of loss.
Based on its historical loss experience, the Company has established reserves
for estimated credit losses on transactions processed.
STOCK COMPENSATION The Company accounts for its stock option plans in
accordance with Accounting Principles Board Opinion Number 25, "Accounting for
Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no
compensation expense has been recognized, because the options had an exercise
price equal to the market value of Common Stock on the day of grant. Refer to
Note 10 regarding pro forma information provided pursuant to Financial
Accounting Standard Board (FASB) Statement No. 123, "Accounting for Stock-
Based Compensation."
INVENTORY Inventory, which consists of electronic point-of-sale equipment,
held for sale or rental to merchants, is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
CONVERSION COSTS The cost of converting acquired merchant portfolios from the
seller's processing platform and telecommunications network to the Company's
network is expensed as incurred.
PROPERTY AND EQUIPMENT Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line
method for financial reporting purposes and primarily accelerated methods for
tax purposes. For financial reporting purposes, equipment is depreciated over
three to seven years and buildings are depreciated over 30 years. Leasehold
improvements and property acquired under capital leases are amortized over the
useful life of the asset or the lease term, whichever is shorter.
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,
1996, and December 31, 1995, was $1,552,000 and $1,058,000, respectively.
Amortization of merchant and customer contracts (portfolios) is provided on
a straight-line basis over a 10-year life, based on the Company's estimates of
future merchant sales volumes. Accumulated amortization of portfolios was
$8,174,000 and $5,451,000 at December 31, 1996, and December 31, 1995,
respectively. The Company evaluates the reasonableness of the amortization
period for its portfolios by monitoring the merchant sales volume processed
for those merchants included in the portfolio at the acquisition date. The
Company will adjust the amortization period of the portfolios if actual
merchant sales volumes indicate a different amortization period is more
appropriate.
Management periodically evaluates intangibles for indications of impairment
based on the operating results of the related business or merchant portfolio
acquired. If this evaluation indicates that the intangible asset will not be
recoverable, as determined based on the undiscounted cash flows related to the
intangible asset over the remaining life of the asset, the carrying value of
the related intangible asset will be reduced to fair value.
The Company adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121") on January 1, 1996. The adoption of SFAS 121
did not have any effect on the financial statements.
SETTLEMENT OBLIGATIONS Settlement obligations result from timing differences
in the Company's settlement processes with merchants.
CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
NOTE 2--BUSINESS ACQUISITIONS
During the year ended December 31, 1996, and the 10-month period ending
December 31, 1995, the Company made similar purchases from various banks and
third parties for an aggregate purchase price of $4,095,000 and $3,476,000,
respectively.
During the fiscal year ended February 28, 1995, the Company purchased the
rights and interests under certain merchant credit card processing agreements
and the related assets and liabilities, primarily from the Bank of Boulder
("Boulder") for a purchase price which aggregated approximately $20,066,000.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the allocation of the purchase price to the major
categories of assets acquired and liabilities assumed resulting from the
acquisitions:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current assets............ $ -- $ 157,000 $ 285,000
Property and equipment.. -- 15,000 739,000
Non-compete agreement... 128,000 330,000 693,000
Excess cost of
businesses acquired.... -- 354,000 9,623,000
Merchant and customer
contracts.............. 3,967,000 2,620,000 8,726,000
---------- ---------- -----------
4,095,000 3,476,000 20,066,000
Liabilities assumed....... -- -- 459,000
Notes payable to seller... 128,000 174,000 2,976,000
---------- ---------- -----------
Net cash paid............. $3,967,000 $3,302,000 $16,631,000
========== ========== ===========
</TABLE>
The merchant business of Boulder is included in the accompanying
consolidated financial statements beginning November 1, 1994. The following
unaudited pro forma summary presents the Company's results of operations as if
the acquisition had occurred at the beginning of fiscal 1995. These pro forma
results have been prepared for comparative purposes and do not purport to be
indicative of what would have occurred had the acquisition been made at the
beginning of fiscal 1995, or of the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
1995
------------
<S> <C>
Revenues....................................................... $128,157
Net loss....................................................... (908)
Pro forma net loss per common share, assuming conversion of
Preferred Stock as described in Note 12....................... (0.11)
</TABLE>
The pro forma net income per common share results do not include adjustments
for the expected reductions from certain third-party processing costs which
will be realized as the portfolios are converted to the NOVA Network.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996, and 1995, consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land and building.................................. $ 614,000 $ 343,000
Equipment.......................................... 13,247,000 10,293,000
Furniture and fixtures............................. 1,394,000 1,190,000
Leasehold improvements............................. 1,129,000 611,000
----------- -----------
16,384,000 12,437,000
Less accumulated depreciation and amortization..... (6,172,000) (5,034,000)
----------- -----------
$10,212,000 $ 7,403,000
=========== ===========
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--INCOME TAXES
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $2,174,000 for income tax purposes that will
expire in years 2010 through 2012. In the 10-month period ended December 31,
1995, there was a $5,206,000 change in the valuation allowance which resulted
in a reduction of the excess cost of business acquired of $228,000 as a result
of deductible temporary differences acquired in businesses combinations. The
remainder of $4,978,000 was included in the provision for income taxes. In
assessing the likelihood of utilization of existing net deferred tax assets,
management considered (a) its current operating environment, (b) results of
future operations to generate sufficient taxable income and (c) the excess of
its appreciated asset values over the related tax basis and, accordingly, has
determined that it is more likely than not that the deferred tax assets at
December 31, 1996, will be realized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Property and equipment................................ $ 426,000 $ 129,000
Tax over book amortization............................ 22,000 79,000
Other................................................. 411,000 305,000
---------- ----------
Total deferred tax liabilities...................... 859,000 513,000
========== ==========
DEFERRED TAX ASSETS:
Start-up expenses..................................... 10,000 74,000
Allowance for doubtful accounts....................... 1,348,000 424,000
Accrued liabilities................................... 305,000 130,000
Credit carryforwards.................................. 39,000 --
Net operating loss carryforwards...................... 848,000 4,621,000
---------- ----------
Total deferred tax assets........................... 2,550,000 5,249,000
---------- ----------
Net deferred taxes.................................... $1,691,000 $4,736,000
========== ==========
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
10-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................. $1,541,000 $ -- $ --
State............................... 178,000 -- --
Deferred:
Federal............................. 2,638,000 871,000 (262,000)
State............................... 407,000 50,000 (21,000)
Change in valuation allowance....... -- (4,978,000) 283,000
---------- ----------- ---------
$4,764,000 $(4,057,000) $ --
========== =========== =========
</TABLE>
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>
10-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Provision (benefit) for income
taxes at statutory rate........... $4,211,000 $ 282,000 $(412,000)
Amortization of excess cost of
businesses acquired............... 57,000 48,000 57,000
Change in valuation allowance...... -- (4,978,000) --
State income taxes, net of federal
tax benefit....................... 381,000 33,000 (14,000)
Other.............................. 115,000 558,000 369,000
---------- ----------- ---------
$4,764,000 $(4,057,000) $ --
========== =========== =========
</TABLE>
NOTE 5--CAPITALIZATION
PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of
Preferred Stock in one or more series with such designations, powers,
preferences, rights, qualifications, limitations and restrictions as may be
fixed by the Board of Directors.
On May 8, 1996, upon consummation of the Company's initial public offering,
the Series A, B and C Preferred Stock totaling 28,571 shares were converted
into 11,876,218 shares of Common Stock. In addition, the Company redeemed the
5,000 shares of Series D Preferred Stock for $5,000,000 on May 8, 1996.
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, 1996 and 1995, consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- -----------
<S> <C> <C>
Term loan payable to bank, due in quarterly
principal installments of $792,000. Interest is
payable quarterly at rates based on Eurodollars... $ -- $11,083,000
Acquisition loan payable to bank, due in equal
quarterly installments of $760,000, beginning
March 1997. Interest is payable quarterly at rates
based on Eurodollars.............................. -- 7,600,000
Line of credit, due in equal quarterly installments
of $95,000, beginning March 1997. Interest is
payable quarterly at rates based on Eurodollars... -- 950,000
Non-compete payable to The Bank of Boulder,
discounted at an effective rate of 9% and due in
equal annual installments of $180,000 through
1999.............................................. 459,000 587,000
Note payable to former owner of a business
acquired, discounted at an effective rate of 9%
and due in varying payments through 1996.......... -- 574,000
Other.............................................. 182,000 320,000
Capital lease obligations (Note 7)................. 725,000 1,808,000
---------- -----------
Total long-term debt obligations................... 1,366,000 22,922,000
Less amounts due within one year................... 507,000 5,184,000
---------- -----------
Long-term debt obligations......................... $ 859,000 $17,738,000
========== ===========
</TABLE>
The annual aggregate maturities of long-term obligations, excluding capital
lease obligations, at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997................................................................ $227,000
1998................................................................ 247,000
1999................................................................ 167,000
--------
$641,000
========
</TABLE>
The Company entered into an agreement in 1994, which was amended on January
31, 1996, and May 1, 1996, for aggregate loans of up to $36,083,000. Term
loans of $11,083,000 and a combination of revolving loans, letters of credit
and acquisition loans aggregating $25,000,000 ($10,000,000 on June 30, 1997)
are available under the agreement. Amounts drawn under the revolving loans and
letters of credit are not to exceed $20,000,000 and $5,000,000, respectively.
Funds may be drawn until June 30, 1999, or until the aggregate borrowing limit
has been reached. The Company pays a quarterly commitment fee in arrears at
.25% per annum on the average daily unused portion of the funds available for
revolving loans, letters of credit and acquisition loans, and .75% per annum
on the outstanding letter of credit balance. As of December 31, 1996, no
borrowings exist under this agreement.
Borrowings under the loan agreement are collateralized by substantially all
the assets of the Company. The loan agreement contains restrictive covenants
which include, among other items, maintenance of specified ratios of EBITDA
(earnings before interest, taxes, depreciation and amortization) to fixed
charges and funded debt, minimum tangible net worth requirements and
restrictions on the payment of dividends and capital expenditures.
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, 1996, the 10-month period ended
December 31, 1995, and year ended February 28, 1995, was approximately
$912,000, $509,000 and $363,000, respectively.
Asset balances for property acquired under capital leases included in
property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1996
---------------- --------------
<S> <C> <C>
Building........................................ $ 273,000 $ 273,000
Equipment....................................... 1,658,000 2,573,000
---------- ----------
1,931,000 2,846,000
Less accumulated depreciation................... 1,409,000 1,130,000
---------- ----------
$ 522,000 $1,716,000
========== ==========
Future minimum lease payments for all non-cancelable leases at December 31,
1996, are summarized below:
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
Year ending December 31, 1997................. $1,234,000 $ 347,000
1998......................................... 1,275,000 160,000
1999......................................... 1,084,000 151,000
2000......................................... 1,081,000 95,000
2001......................................... 926,000 70,000
Thereafter.................................... 157,000 116,000
---------- ----------
Total future minimum lease payments........... $5,757,000 $ 939,000
==========
Less amount representing interest............. 214,000
----------
Present value of minimum lease payments....... 725,000
Less amounts due within one year.............. 280,000
----------
Long-term obligations under capital leases.... $ 445,000
==========
</TABLE>
NOTE 8 -- CONTINGENCIES
The Company is, from time to time, subject to claims and suits arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of any such pending matters will not have a material effect on the
Company's financial position and results of operations.
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 10-MONTH PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ --------------------- ------------
<S> <C> <C> <C>
Interest paid............... $1,178,000 $2,251,000 $ 971,000
Income taxes paid........... 230,000 -- --
Acquisition of equipment in
exchange for debt or
capital leases............. -- 383,000 1,773,000
Note payable issued in
conjunction with business
acquisition................ 128,000 174,000 2,976,000
Transfer of transaction
processing assets,
primarily terminals at
merchant locations, in
exchange for Common Stock.. -- 2,411,000 --
</TABLE>
NOTE 10 -- STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model, with the following weighted-
average assumptions for 1996: risk-free interest rate of 6.08%; a dividend
yield of 0%; volatility factors of the expected market price of the Company's
Common Stock of 0.692 and a weighted-average expected life of the option of
seven years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price 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>
1996
--------
<S> <C> <C>
Pro forma net income........................................ $6,824,000
Pro forma earnings per share:
Primary and fully diluted................................. .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. Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999.
A description and summary of the Company's stock option plans and activity
follows:
The Company has reserved 3,100,000 common shares related to options and
550,000 shares related to stock appreciation rights, pursuant to its 1991 stock
option and stock appreciation rights plan. The plan is administered by a
committee of the Board of Directors, which determines the number of shares to
be granted and the option price per share. Each option expires 10 years from
the grant date. The options may be exercised in 20% increments annually,
beginning on March 1 following the date of grant. No options or rights shall be
granted under the Plan after November 2, 2001. No appreciation rights have been
granted.
A summary of the Company's stock option activity, and related information,
follows:
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
Balance at March 1, 1994.................. 1,927,808 $1.18
Granted................................. 1,087,357 1.18
Terminated.............................. (142,976) 1.18
Balance at February 28, 1995.............. 2,872,189 1.18
Granted................................. 64,000 2.34
Terminated.............................. (24,320) 1.18
Balance at December 31, 1995.............. 2,911,869 1.21
Terminated.............................. (31,029) 1.18
Exercised............................... (1,673,432) 1.18
----------
Balance at December 31, 1996.............. 1,207,408 1.24
----------
Exercisable at December 31, 1996.......... 26,979 1.18
==========
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged from
$1.18 to $2.34. The weighted-average remaining contractual life of those
options is 7.5 years.
The Company has reserved 2,000,000 shares of Common Stock for issuance under
the 1996 Employees Stock Incentive Plan related to Incentive Stock Options,
Non-qualified Stock Options, stock appreciation rights and restricted stock
awards. The shares subject to options can be purchased, and rights exercised,
in 25% increments at the end of each of the four years subsequent to the date
of grant. The option price per share for Incentive Stock Options cannot be
less than the fair market value of the Common Stock on the date the option is
granted. Each option expires 10 years after the date of grant.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option activity, and related information,
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
Balance at December 31, 1995............. --
Granted................................ 666,890 $19.51
Terminated............................. (57,420) 25.57
-------
Balance at December 31, 1996............. 609,470 18.94
-------
Exercisable at December 31, 1996......... --
Weighted-average fair value of options
granted during the year................. 13.46
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged from
$18.75 to $19.00. The weighted-average remaining contractual life of those
options is ten years.
On October 17, 1996, the Company adopted the NOVA Corporation 1996 Directors
Stock Option Plan, and reserved 150,000 shares of Common Stock for issuance
pursuant to this plan. Stock options granted under this plan are exercisable
in 25% increments at the end of each of the four years subsequent to the date
of grant. Options are granted at a purchase price per share no less than the
market value per share on the grant date. Options totaling 3,000 were granted
in 1996 at an option price of $30.50. The weighted-average fair value of the
options granted was $12.20. As of December 31, 1996, no options had been
exercised.
NOTE 11 -- STOCK SUBSCRIPTIONS
Stock subscriptions for 768,000 shares of Common Stock were issued in 1992.
The Company canceled subscriptions for 384,000 during 1993, and the remainder
during 1994, and refunded all amounts previously paid toward the
subscriptions, including interest, at the time of cancellation. Concurrently,
the shares previously under subscription were granted to the former
subscribers as compensation. Compensation expense of $146,000 was recognized
in 1994, related to these transactions.
Stock subscriptions for 153,600 shares were issued during 1994, and paid
during 1995.
NOTE 12 -- PRO FORMA INFORMATION
Pro forma net income (loss) per common share is based on net income
attributable to holders of the Company's Common Stock (net income less
dividends on Series D Preferred Stock of $230,000 and $489,000 and 535,000 for
the year ended December 31, 1996, and the 10-month period ended December 31,
1995, and the year ended February 28, 1995, respectively) and the weighted-
average number of common and common equivalent shares outstanding during the
respective periods, assuming the conversion of Series A, B and C Convertible
Preferred Stock into Common Stock. Dilutive common equivalents consist of
stock options (calculated using the treasury-stock method). Pursuant to the
requirements of the Securities and Exchange Commission, common shares and
common equivalent shares issued at prices below the public offering price of
$19.00 per share during the 10 months immediately preceding the date of the
initial filing of the Registration Statement have been included in the
calculation of common shares and common shares equivalents, using the
treasury-stock method, as if they were outstanding for all periods presented.
Weighted-average shares outstanding do not include Common Stock equivalents
which are anti-dilutive. All common share and per share data, except par value
per share, have been retroactively adjusted to reflect the 2.56-for-one stock
split effected in the form of a stock dividend of the Company's Common Stock,
effective February 1996.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 -- NET INCOME (LOSS) PER SHARE
The historical net income (loss) per common share amounts, as required by
generally accepted accounting principles, which do not give effect to the pro
forma amounts described in Note 12, are as follows:
<TABLE>
<CAPTION>
10-MONTH PERIOD
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ---------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)................... $ 7,267 $ 4,887 $(1,213)
Less undeclared Preferred Stock
dividends.......................... (1,486) (3,178) (3,507)
------- ------- -------
Net income (loss) applicable to
common shares...................... $ 5,781 $ 1,709 $(4,720)
======= ======= =======
Net income (loss) per common share--
primary............................ $ 0.24 $ 0.38 $ (2.73)
Weighted average common and common
equivalent shares outstanding--
primary............................ 24,483 4,454 1,727
Net income (loss) per common share--
fully diluted...................... $ 0.25 $ 0.27 $ (2.73)
Weighted average common and common
equivalent shares outstanding--
fully diluted...................... 28,604 16,330 1,727
</TABLE>
The effect of the Preferred Stock conversion in the calculation of the 1996
fully diluted income per common share is anti-dilutive. Accordingly, primary
and fully diluted income per common share for 1996 are the same.
Of the net proceeds from the sale of shares of Common Stock offered by the
Company in the Initial Public Offering, approximately $15.7 million were used
to repay aggregate bank borrowings, including accrued interest, $700,000 to
pay accrued Preferred Stock dividends on the Series D Preferred Stock earned
through March 1, 1995, and $5.0 million to redeem the Series D Preferred
Stock. In addition, upon consummation of the IPO, the Series A, B and C
Preferred Stock were converted into 11,876,218 shares of Common Stock.
Assuming the conversion of the Series A, B and C Preferred Stock and the
issuance and sale of only that number of shares of Common Stock which would
generate net proceeds sufficient to repay the above indebtedness and assuming
that such indebtedness had been repaid as of March 1, 1995, supplementary pro
forma net income per common share for 1996 and 1995 would have been $0.26 and
$0.36, respectively. For purposes of this computation, the weighted-average
number of shares of Common Stock outstanding during the periods ended December
31, 1996, and 1995 is 28,994,500 and 17,455,859, respectively.
NOTE 14 -- RELATED PARTY TRANSACTIONS
The Company paid one of its shareholders $1,817,000, $1,220,000 and $901,000
in the year ended December 31, 1996, the 10-month period ended December 31,
1995, and the year ended February 28, 1995, respectively, relating to the
Company's utilization of a shareholder's telecommunications network.
The Company paid another of its shareholders $9,532,000 and $943,000 in the
year ended December 31, 1996, and the 10-month period ended December 31, 1995,
respectively, relating to the Company's utilization of the shareholder's labor
force during conversion, as well as fees paid for certain transaction
processing expenses.
The Company received $1,154,000 of interest income from one of its
shareholders in the year ended December 31, 1996.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 -- RETIREMENT PLAN
The Company maintains the NOVA Information Systems, Inc. 401(k) and Profit
Sharing Plan (the "Plan"), which covers substantially all eligible employees
of the Company. Under the Plan, the Company may match a percentage of employee
contributions. The Company may also make a profit sharing contribution to the
Plan on behalf of eligible employees. During the year ended December 31, 1996,
and the 10-month period ended December 31, 1995, contribution expenses related
to the Plan were not significant.
NOTE 16 -- FINANCIAL INSTRUMENTS
The Company's financial instruments at December 31, 1996 and 1995, consist
primarily of cash and cash equivalents, loans payable to a bank and a short-
term note payable. Due to the short maturities of the cash, cash equivalents
and note payable, carrying amounts approximate the respective fair values. The
loans payable are variable rate instruments at terms the Company believes
would be available if similar financing were obtained from another third
party. As such, their carrying amounts also approximate their fair value.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable
and cash investments. Concentrations of credit risk with respect to trade
accounts receivable are limited, due to the large number of entities
comprising the Company's customer base. The Company performs ongoing credit
evaluations of their customers' financial condition. The Company's cash and
cash equivalents at December 31, 1996, are primarily held at one financial
institution. However, the Company believes the credit risk is limited, due to
the credit standing of the financial institution. In addition, since the
amounts are invested in cash equivalents, there is limited market risk (such
as a reduction in the fair value of investment securities due to rising
interest rates).
NOTE 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996 CALENDAR QUARTER ENDED 1995 CALENDAR QUARTER ENDED
-------------------------------- -------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31(1)
------- ------- -------- ------- ------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $60,199 $67,568 $70,459 $67,603 $29,841 $34,170 $37,554 $46,259
Cost of service......... 46,634 52,624 55,223 53,114 23,754 26,724 29,162 35,660
Net income (loss)....... 1,115 1,439 2,369 2,344 (1,599) (440) 400 5,221(2)
Pro forma net income
(loss) per share....... 0.04 0.05 0.08 0.08 (0.13) (0.04) 0.02 0.26(2)
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------
(1) Includes revenues related to the December 1995 processing of the First
Union Alliance merchant portfolios aggregating approximately $9.5
million, together with related First Union costs reimbursed by the
Company derived from the transaction processing assets transferred to the
Company.
(2) Includes a one-time tax benefit of $5.0 million or $0.24.
The Company has experienced, and expects to continue to experience,
significant seasonality in its business. The Company typically realizes higher
revenues in the third calendar quarter and lower revenues in the first
calendar quarter, reflecting increased transaction volumes during the Summer
months and a significant decrease in transaction volume during the period
immediately following the holiday season. Quarterly results are also affected
by the timing of acquisitions and the timing and magnitude of expenses for
merchant portfolio conversions. Therefore, the results reported in the table
above do not necessarily indicate the Company's normal seasonal trends.
F-20
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 40,326 $ 20,411
Trade receivables, less allowance for doubtful
accounts of $2,707 and $3,641, respectively........ 16,147 25,905
Inventory........................................... 857 763
Deferred tax asset and other current assets......... 3,160 3,877
-------- --------
Total current assets.............................. 60,490 50,956
Merchant and customer contracts..................... 21,868 45,234
Property and equipment, net......................... 10,212 17,742
Excess cost of businesses acquired.................. 13,301 12,929
Deferred tax asset and other non-current assets..... 1,834 2,098
-------- --------
Total assets...................................... $107,705 $128,959
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 4,810 $ 7,185
Accounts payable to affiliate....................... 1,534 889
Accrued compensation and related costs.............. 1,416 866
Settlement obligations.............................. 7,691 9,416
Other accrued liabilities........................... 5,157 11,252
Long-term debt obligations due within one year...... 507 344
-------- --------
Total current liabilities......................... 21,115 29,952
Deferred tax liability.............................. 849 657
Long-term debt obligations.......................... 859 711
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares
authorized, 28,721,000 and 28,885,000 shares
issued, respectively............................... 288 289
Additional paid in capital.......................... 99,299 99,735
Accumulated deficit................................. (14,705) (2,385)
-------- --------
Total stockholders' equity........................ 84,882 97,639
-------- --------
Total liabilities and stockholders' equity........ $107,705 $128,959
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
F-21
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------
1996 1997 1996 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE................. $ 70,459 $ 87,489 $ 198,229 $ 232,058
OPERATING COST
Cost of service......... 55,223 67,499 154,484 179,165
Conversion cost......... 1,737 813 5,346 1,803
Selling, general and
administrative......... 8,150 8,757 24,917 24,704
Depreciation and
amortization........... 1,774 2,768 5,166 7,019
------------- ------------- ------------ ------------
TOTAL OPERATING COST.... 66,884 79,837 189,913 212,691
OPERATING INCOME........ 3,575 7,652 8,316 19,367
Interest expense
(income), net.......... (349) (166) 188 (807)
------------- ------------- ------------ ------------
Income before provision
for income taxes....... 3,924 7,818 8,128 20,174
Provision for income
taxes.................. 1,555 3,061 3,205 7,855
------------- ------------- ------------ ------------
NET INCOME.............. $ 2,369 $ 4,757 $ 4,923 $ 12,319
============= ============= ============ ============
Shares used in per share
calculation
outstanding............ 30,076,762 30,260,042 28,145,902 30,057,578
============= ============= ============ ============
Primary and fully
diluted earnings
per share (Pro forma
prior to May 7, 1996--
see Note 2)............ $ 0.08 $ 0.16 $ 0.17 $ 0.41
============= ============= ============ ============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
F-22
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 4,923 $ 12,319
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 5,166 7,018
Loss on sale of equipment............................... 121 12
Non-cash compensation................................... 2 --
Changes in assets and liabilities, net of the effects of
business acquisitions:
Trade receivables..................................... (2,907) (9,758)
Inventory............................................. 110 94
Other assets.......................................... 1,982 (1,336)
Accounts payable...................................... 29 3,454
Accrued liabilities................................... 1,087 5,353
--------- ---------
Net cash provided by operating activities............. 10,513 17,156
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of merchant and customer contracts............ (2,347) (26,626)
Additions to property and equipment..................... (3,219) (10,571)
Proceeds from the sale of equipment..................... 80 --
--------- ---------
Net cash used in investing activities................... (5,486) (37,197)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and notes payable.......... 5,600 --
Payment of long-term debt and capital leases............ (26,662) (311)
Proceeds from stock issued and stock options exercised.. 67,056 437
Payment of accrued dividends............................ (11,689) --
Redemption of preferred stock........................... (5,000) --
--------- ---------
Net cash provided by financing activities............... 29,305 126
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 34,332 (19,915)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 630 40,326
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 34,962 $ 20,411
========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures, including non-cash investing and
financing activities, are:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Interest paid............................................... $1,025 $ 126
Income taxes paid........................................... 230 4,243
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
F-23
<PAGE>
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the Company's audited financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 filed with the Securities and Exchange Commission
(Commission File No. 1-14342). The results for the nine months ended or the
quarter ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
NOTE 2--EARNINGS PER SHARE
Earnings per share and shares used in the per share calculation for periods
prior to May 7, 1996, the date of the Company's initial public offering, have
been presented on the condensed consolidated statements of income as if the
conversion of the Company's preferred stock had occurred at the later of the
beginning of the period or the issuance date.
Primary and fully diluted earnings per share is computed using the weighted
average number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents are computed for the
Company's outstanding options using the treasury stock method. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common stock
equivalents also include amounts computed on options issued during the twelve
months immediately preceding the date of the initial filing of the Company's
Registration Statement on Form S-1 relating to the Company's initial public
offering as if they were outstanding for all periods prior to the closing of
the initial public offering on May 7, 1996 using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of Statement 128
on the calculation of primary earnings per share for these quarters is not
expected to be material. The Company has not yet determined what the impact of
Statement 128 will be on the calculation of fully diluted earnings per share.
NOTE 3--CONTINGENCIES
The Company is from time to time subject to claims and suits arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of any such currently pending matters will not have a material
adverse affect on the Company's financial position and results of operations.
NOTE 4--SUBSEQUENT EVENTS
On October 31, 1997, the Company's wholly-owned subsidiary, NOVA Information
Systems, Inc., purchased a 51% interest in Elan Merchant Services, LLC, a
subsidiary of Firstar Corporation. The joint venture's existing merchant
processing contracts represent approximately $3 billion in annualized credit
and debit card volume that will be processed using the NOVA network.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING SHAREHOLDERS OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PRO-
SPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 26
Management................................................................ 47
Certain Relationships and Related Transactions............................ 49
Principal and Selling Shareholders........................................ 51
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 54
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 56
Incorporation of Certain Information by Reference......................... 57
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,100,000 SHARES
[LOGO OF NOVA CORPORATION APPEARS HERE]
COMMON STOCK
--------
PROSPECTUS
, 1998
--------
SALOMON SMITH BARNEY
BT ALEX. BROWN
THE ROBINSON-HUMPHREY
COMPANY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
7,100,000 SHARES
[LOGO OF NOVA APPEARS HERE]
COMMON STOCK
--------
Of the 7,100,000 shares of Common Stock being offered hereby, 5,300,000
shares are being sold by NOVA Corporation (the "Company") and 1,800,000 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders.
Of the 7,100,000 shares of Common Stock offered hereby, 5,680,000 are being
offered in the United States and Canada and 1,420,000 shares are being offered
in a concurrent international offering outside the United States and Canada.
The public offering price and the aggregate underwriting discount per share
will be identical for both offerings. See "Underwriting."
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "NIS." The last reported sale price of the Common
Stock on the NYSE on February 6, 1998, was $28.875 per share.
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- -----------------------------------------------------------------------------
Total(3) $ $ $ $
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) For information regarding indemnification, see "Underwriting."
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters a 30-day option
to purchase up to 1,065,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions, and Proceeds to the Selling Shareholders will be $ ,
$ , and $ , respectively.
--------
The shares of Common Stock are being offered by the several Managers named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about , 1998,
at the office of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
--------
SALOMON SMITH BARNEY INTERNATIONAL ALEX. BROWN INTERNATIONAL
THE ROBINSON-HUMPHREY COMPANY
, 1998
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING SHAREHOLDERS OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PRO-
SPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 26
Management................................................................ 47
Certain Relationships and Related Transactions............................ 49
Principal and Selling Shareholders........................................ 51
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 54
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 56
Incorporation of Certain Information by Reference......................... 57
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,100,000 SHARES
[LOGO OF NOVA CORPORATION APPEARS HERE]
COMMON STOCK
-------
PROSPECTUS
, 1998
-------
SALOMON SMITH BARNEY
INTERNATIONAL
BT ALEX. BROWN
INTERNATIONAL
THE ROBINSON-HUMPHREY
COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses of the offering, other than underwriting discounts and
commissions, are:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $
NASD filing fee........................................................
NYSE listing fee.......................................................
Blue sky fees and expenses.............................................
Printing and engraving expenses........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................
Transfer agent and registrar fees......................................
Miscellaneous expenses.................................................
----
Total................................................................
====
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14-2-202(b)(4) of the Georgia Business Corporation Code (the
"Georgia Code") provides that a corporation's Articles of Incorporation may
include a provision that eliminates or limits the personal liability of
directors for monetary damages to the corporation or its shareholders for
breach of their duty of care and other duties as directors; provided, however,
that the Section does not permit a corporation to eliminate or limit the
liability of a director for appropriating, in violation of his duties, any
business opportunity of the corporation, engaging in intentional misconduct or
a knowing violation of law, obtaining an improper personal benefit, or voting
for or assenting to an unlawful distribution (whether as a dividend, stock
repurchase or redemption or otherwise) as provided in Section 14-2-832 of the
Georgia Code. Section 14-2-202(b)(4) also does not eliminate or limit the
rights of a corporation or any shareholder to seek an injunction or other non-
monetary relief in the event of a breach of a director's fiduciary duty. In
addition, Section 14-2-202(b)(4) applies only to claims against a director
arising out of his role as a director and does not relieve a director from
liability arising from his role as an officer or in any other capacity. The
provisions of Article VII of the Registrant's Articles of Incorporation (the
"Articles") are similar in all substantive respects to those contained in
Section 14-2-202(b)(4) of the Georgia Code outlined above, and provides that
the liability of directors of the Registrant shall be limited to the fullest
extent permitted by amendments to Georgia law.
Sections 14-2-850 to 14-2-859, inclusive, of the Georgia Code govern the
indemnification of directors, officers, employees and agents. Section 14-2-851
of the Georgia Code provides for indemnification of a director of the
Registrant for liability incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including civil actions brought as derivative
actions by or in the right of the Registrant) in which he may become involved
by reason of being a director of the Registrant. Section 14-2-851 also
provides such indemnity for directors who, at the request of the Registrant,
act as directors, officers, partners, trustees, employees or agents of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan or another enterprise. The Section permits indemnification if the
director acted in a manner he believed in good faith to be in or not opposed
to the best interest of the Registrant and, in addition, in criminal
proceedings, if he had no reasonable cause to believe his conduct was
unlawful. If the required standard of conduct is met, indemnification may
include judgments, settlements, penalties, fines or reasonable expenses
(including attorneys' fees) incurred with respect to a proceeding. However, if
the director is adjudged liable to the Registrant in a derivative action or on
the basis that personal benefit was improperly received by him, the director
will only be entitled to such indemnification for reasonable expenses as a
court finds to be proper in accordance with the provisions of Section 14-2-
854.
II-1
<PAGE>
Section 14-2-852 of the Georgia Code provides that directors who are
successful with respect to any claim brought against them, which claim is
brought because they are or were directors of the Registrant, are entitled to
indemnification against reasonable expenses as of right. Conversely, if the
charges made in any action are sustained, the determination of whether the
required standard of conduct has been met will be made, in accordance with the
provisions of Section 14-2-855 of the Georgia Code, as follows: (i) by the
majority vote of a quorum of the disinterested members of the board of
directors, (ii) if a quorum cannot be obtained, by a committee thereof duly
designated by the board of directors, consisting of two or more disinterested
directors, (iii) by special legal counsel, or (iv) by the shareholders, but,
in such event, the shares owned by or voted under the control of directors
seeking indemnification may not be voted.
Section 14-2-857 of the Georgia Code provides that an officer of the
Registrant (but not an employee or agent generally) who is not a director has
the mandatory right of indemnification granted to directors under Section 14-
2-852, as described above. In addition, the Registrant may, as provided by its
Articles, Bylaws, general or specific actions by its Board of Directors, or by
contract, indemnify and advance expenses to an officer, employee or agent who
is not a director to the extent that such indemnification is consistent with
public policy.
The provisions of Article IX of the Registrant' Bylaws provide for
indemnification by the Registrant to the full extent permitted by, the
foregoing provisions of the Georgia Code outlined above.
Officers and directors of the Registrant are presently covered by insurance
which (with certain exceptions and within certain limitations) indemnifies
them against any losses or liabilities arising from any alleged "wrongful act"
including any alleged breach of duty, neglect, error, misstatement, misleading
statement, omissions or other act done or wrongfully attempted. The cost of
such insurance is borne by the Registrant as permitted by the Bylaws of the
Registrant and the laws of the State of Georgia.
Reference is hereby made to Section 9 of the Underwriting Agreement, the
form of which is filed as Exhibit 1 hereto, in which the Underwriters agree to
indemnify the directors and officers of the Registrant and certain other
persons against certain civil liabilities.
ITEM 16. EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
1 Form of Underwriting Agreement among the Registrant and Salomon Smith
Barney, BT Alex. Brown Incorporated and The Robinson-Humphrey Company,
LLC. as Representatives of the several Underwriters.*
2.1 Merchant Business Purchase Agreement, dated October 18, 1994, as
amended November 30, 1994 and December 9, 1994, among NOVA Information
Systems, Inc., the Bank of Boulder, Bolder Bancorporation and NOVA
Newco, Inc.(1)
2.2 Contribution Agreement, dated October 30, 1995, among the Registrant
(formerly NOVA Holdings, Inc.), NOVA Information Systems, Inc., the
then-current shareholders of NOVA Information Systems, Inc., First
Union Corporation, the First Union Banks, and First Fidelity
Bancorporation and its banking subsidiaries.(1)
4.1 Articles of Incorporation of the Registrant, as amended.(1)
4.2 Bylaws of the Registrant.(2)
4.3 Form of specimen Common Stock certificate.(1)
4.4 Shareholders Agreement dated January 31, 1996, among the Registrant
(formerly NOVA Holdings, Inc.), NOVA Information Systems, Inc., First
Union, WorldCom, Warburg and each of the other Original
Shareholders.(1)
II-2
<PAGE>
4.5 Registration Rights Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), Warburg, WorldCom, and
First Union.(1)
5 Opinion of Long Aldridge & Norman LLP.*
11.1 Statement re: Computation of Pro Forma Earnings Per Share. (2)
11.2 Statement re: Computation of Historical Earnings Per Share. (2)
23.1 Consent of Long Aldridge & Norman LLP (included in its opinion filed
as Exhibit 5).
23.2 Consent of Ernst & Young LLP.
24 Powers of Attorney (included on the signature page to this
Registration Statement).
- --------
* To be filed by amendment.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 333-3287) and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
(a) Filings Incorporating Subsequent Exchange Act Documents by
Reference. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Acceleration of Effectiveness. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of the
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and
will be governed by the final adjudication of such issue.
(c) Rule 430A Prospectuses. The undersigned registrant hereby undertakes
that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA, ON FEBRUARY 10, 1998.
NOVA Corporation
(Registrant)
By: /s/ Edward Grzedzinski
---------------------------------
EDWARD GRZEDZINSKI
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
POWER OF ATTORNEY
Know All Men By These Presents that each person whose signature appears
below constitutes and appoints Edward Grzedzinski and James M. Bahin, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON FEBRUARY 10, 1998.
SIGNATURE TITLE
/s/ Edward Grzedzinski Chairman of the Board, President and
- ------------------------------------- Chief Executive Officer (Principal
EDWARD GRZEDZINSKI Executive Officer)
/s/ James M. Bahin Vice Chairman of the Board, Chief
- ------------------------------------- Financial Officer and Secretary
JAMES M. BAHIN (Principal Accounting Officer)
/s/ Charles T. Cannada Director
- -------------------------------------
CHARLES T. CANNADA
/s/ Dr. James E. Carnes Director
- -------------------------------------
DR. JAMES E. CARNES
/s/ U. Bertram Ellis, Jr. Director
- -------------------------------------
U. BERTRAM ELLIS, JR.
II-4
<PAGE>
SIGNATURE TITLE
/s/ Dr. Henry Kressel Director
- -------------------------------------
DR. HENRY KRESSEL
/s/ Joseph P. Landy Director
- -------------------------------------
JOSEPH P. LANDY
/s/ Maurice F. Terbrueggen, Jr. Director
- -------------------------------------
MAURICE F. TERBRUEGGEN, JR.
/s/ Fred M. Winkler Director
- -------------------------------------
FRED M. WINKLER
II-5
<PAGE>
INDEX OF EXHIBITS
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1 Form of Underwriting Agreement among the Registrant and Salomon
Smith Barney, BT Alex. Brown Incorporated and The Robinson-
Humphrey Company, LLC as Representatives of the several
Underwriters.*
2.1 Merchant Business Purchase Agreement, dated October 18, 1994,
as amended November 30, 1994 and December 9, 1994, among NOVA
Information Systems, Inc., the Bank of Boulder, Bolder
Bancorporation and NOVA Newco, Inc.(1)
2.2 Contribution Agreement, dated October 30, 1995, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information
Systems, Inc., the then-current shareholders of NOVA
Information Systems, Inc., First Union Corporation, the First
Union Banks, and First Fidelity Bancorporation and its banking
subsidiaries.(1)
4.1 Articles of Incorporation of the Registrant, as amended.(1)
4.2 Bylaws of the Registrant.(2)
4.3 Form of specimen Common Stock certificate.(1)
4.4 Shareholders Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information
Systems, Inc., First Union, WorldCom, Warburg and each of the
other Original Shareholders.(1)
4.5 Registration Rights Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), Warburg, WorldCom,
and First Union.(1)
5 Opinion of Long Aldridge & Norman LLP.*
11.1 Statement re: Computation of Pro Forma Earnings Per Share.(2)
11.2 Statement re: Computation of Historical Earnings Per Share.(2)
23.1 Consent of Long Aldridge & Norman LLP (included in its opinion
filed as Exhibit 5).
23.2 Consent of Ernst & Young LLP.
24 Powers of Attorney (included on the signature page to this
Registration Statement).
</TABLE>
- --------
* To be filed by amendment.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 333-3287) and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
II-6
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial and Other Data" in the Registration Statement
(Form S-3) and related Prospectus of NOVA Corporation dated January 22, 1998.
We also consent to the incorporation by reference therein of our report dated
February 18, 1997 with respect to the consolidated financial statements and
schedules of NOVA Corporation for the year ended December 31, 1996, the 10-month
period ended December 31, 1995 and for the year ended February 28, 1995 included
in the Annual Report (Form 10-K) for 1996 filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 6, 1998
