<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number 1-14342
NOVA CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Georgia 58-2209575
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE CONCOURSE PARKWAY, SUITE 300, ATLANTA, GEORGIA 30328
--------------------------------------------------------
(Address of principal executive offices)
(770) 396-1456
--------------
(Registrant's telephone number, including area code)
-------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 34,233,011 shares of common
stock outstanding as of April 29, 1998.
1
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NOVA CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets-
March 31, 1998 (unaudited) and December 31, 1997........... 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1998 and 1997................. 4
Condensed Consolidated Statements of Cash Flows (unaudited)-
Three months ended March 31, 1998 and 1997................. 5
Notes to Condensed Consolidated Financial Statements......... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 9
ITEM 4. Submission of Matters to a Vote of Security Holders............ 9
ITEM 5. Other Information.............................................. 9
ITEM 6. Exhibits and Reports on Form 8-K............................... 10
Signatures................................................................ 10
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOVA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 739 $ 1,141
Trade receivables, less allowance for doubtful accounts
of $2,822 and $2,840 at December 31, 1997 and March 31, 1998,
respectively......................................................... 35,377 37,640
Inventory............................................................... 1,156 2,560
Deferred tax asset and other current assets............................. 5,373 5,927
-------- --------
Total current assets................................................. 42,645 47,268
Merchant and customer contracts......................................... 92,197 142,455
Property and equipment, net............................................. 21,017 31,740
Excess cost of businesses acquired...................................... 12,805 12,683
Deferred tax asset and other non-current assets......................... 1,864 2,451
-------- --------
Total assets......................................................... $170,528 $236,597
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 8,015 $ 11,624
Accounts payable to affiliate........................................... 3,410 2,478
Accrued compensation and related costs.................................. 726 948
Settlement obligations.................................................. 10,896 9,053
Other accrued liabilities............................................... 7,010 10,500
Long-term debt obligations due within one year.......................... 350 17,944
-------- --------
Total current liabilities............................................ 30,407 52,547
Deferred tax liability.................................................. 3,112 4,385
Long-term debt obligations.............................................. 33,296 70,031
Minority interest in subsidiary......................................... 776 3,508
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares authorized, 29,031,000
and 29,130,000 shares issued at December 31, 1997 and March 31,
1998, respectively................................................... 290 291
Additional paid in capital.............................................. 99,967 100,264
Retained earnings....................................................... 2,680 5,571
-------- --------
Total stockholders' equity.............................................. 102,937 106,126
-------- --------
Total liabilities and stockholders' equity........................... $170,528 $236,597
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1998
------- --------
REVENUE...................................... $66,525 $133,318
OPERATING COST
Cost of service............................ 52,071 105,330
Conversion cost............................ 491 4,587
Selling, general and administrative........ 7,358 11,176
Depreciation and amortization.............. 1,876 5,534
------- --------
TOTAL OPERATING COST......................... 61,796 126,627
------- --------
OPERATING INCOME............................. 4,729 6,691
Interest (income) expense, net............. (342) 1,165
Minority interest in income of subsidiary.. - 937
------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES..... 5,071 4,589
Provision for income taxes................. 1,926 1,698
------- --------
NET INCOME................................... $ 3,145 $ 2,891
======= ========
Net income per share......................... $0.11 $0.10
===== =====
Net income per share assuming dilution...... $0.11 $0.10
===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 3,145 $ 2,891
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 1,876 5,534
Deferred income tax................................................. - 545
Minority interest................................................... - 937
Changes in assets and liabilities, net of the effects of business
acquisitions:
Trade receivables................................................. (103) (2,263)
Inventory......................................................... 39 (1,067)
Other assets...................................................... (172) (511)
Accounts payable.................................................. (940) 1,978
Accrued liabilities............................................... 1,676 2,569
------ -------
Net cash provided by operating activities........................... 5,521 10,613
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of merchant contracts........................................ (142) (22,043)
Additions to property and equipment.................................... (2,047) (9,009)
------ -------
Net cash used in investing activities............................... (2,189) (31,052)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and notes payable, net.................... - 20,577
Payment of long-term debt and capital leases........................... (112) (34)
Proceeds from stock options exercised.................................. 126 298
------- -------
Net cash provided by financing activities........................... 14 20,841
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS.................................... 3,346 402
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 40,326 739
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $43,672 $ 1,141
======= =======
Supplemental Cash Flow Information
Supplemental cash flow disclosures, including non-cash investing and
financing activities, are:
FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1998
----- -----
Interest paid............................................................ $ 65 $ 675
Income taxes paid........................................................ - 39
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. These financial statements should be read in conjunction
with the Company's audited financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the
Securities and Exchange Commission (Commission File No. 1-14342). The results
for the three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
NOTE 2 - NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and, where appropriate, restated to conform to the SFAS 128
requirements.
The following table sets forth the computation of basic and diluted net income
per share in accordance with SFAS 128 (In thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
MARCH 31,
1997 1998
---- ----
<S> <C> <C>
Numerator:
Numerator for basic and diluted net income per share-income available
To common shareholders........................................... $ 3,145 $ 2,891
Denominator:
Denominator for basic net income per share-weighted-average shares.. 28,748 29,056
Effect of diluted securities:
Employee stock options........................................... 1,125 1,234
------- -------
Dilutive potential common shares
Denominator for diluted net income per share-adjusted
weighted-average shares and assumed conversions................. 29,873 30,290
======= =======
Basic net income per share............................................ $ 0.11 $ 0.10
======= =======
Diluted net income per share.......................................... $ 0.11 $ 0.10
======= =======
</TABLE>
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 - MERCHANT PORTFOLIO PURCHASES AND BUSINESS ACQUISITIONS
On January 21, 1998, the Company consummated a transaction with KeyBank National
Association ("KeyBank") pursuant to which the Company provides transaction
processing services to, and jointly owns and operates with KeyBank, a newly
created limited liability company called Key Merchant Services, LLC ("KMS"). The
purchase price of the Company's membership interest is payable over a three year
period and is contingent upon achieving certain levels of credit and debit card
transaction processing volume. The maximum consideration payable is $74 million.
The Company owns a 51% interest in KMS.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage of
revenues represented by certain line items in the Company's condensed
consolidated statements of income:
<TABLE>
<CAPTION>
Three Month Period
Ended March 31, % Increase/
1997 1998 (Decrease)
------ ------ -----------
<S> <C> <C> <C>
Revenue....................................... 100.0% 100.0% 100.4%
Cost of service............................... 78.3 79.0 102.3
Conversion cost............................... 0.7 3.4 834.2
Selling, general and administrative expenses.. 11.1 8.4 51.9
Depreciation and amortization................. 2.8 4.2 195.0
----- ----- ------
Operating cost................................ 92.9 95.0 104.9
Operating income.............................. 7.1 5.0 41.5
Interest expense (income), net................ (0.5) 0.9 (440.6)
Minority interest in income of subsidiary..... 0.0 0.7 -
----- ----- ------
Income before provision for income taxes...... 7.6 3.4 (9.5)
Provision for income taxes.................... 2.9 1.3 (11.8)
----- ----- ------
Net Income.................................... 4.7% 2.1% (8.1)%
===== ===== ======
</TABLE>
This Form 10-Q, or documents incorporated by reference, contains "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs. When used in
this Form 10-Q, the words "may," "could," "should," "believe," "anticipate,"
"expect," "intend" 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.
Prospective investors are cautioned that any forward-looking statements are not
guarantees for future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such forward-
looking statements. External influences known by management which could cause
actual performance to differ materially from forward-looking statements include,
but are not limited to, changes in general economic condition and industry
trends, interest rates, the legal and regulatory environment, and competition in
the Company's industry and markets. Additional risks and uncertainties which
could affect future performance include, but are not limited to, those found in
the Company's Form 10-K, Item 1, Part 1, for the year ended December 31, 1997.
The Company undertakes no obligation to revise or update any forward-looking
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.
GENERAL
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
and also provides access to debit card processing and check verification
services.
7
<PAGE>
REVENUES
The Company's revenues increased 100.4% to 133.3 million for the quarter ended
March 31, 1998, compared to $66.5 million for the quarter ended March 31, 1997.
The increase resulted primarily from a 96.7% increase in merchant sales volume
processed to $5.9 billion during the quarter, compared to $3.0 billion for the
quarter ended March 31, 1997. Of these increases, $50.1 million in revenues and
$2.2 billion in sales volume processed are attributable to the portfolios
purchased from Crestar Bank in May 1997 and from MBNA America Bank, N.A. in
December 1997 and to the Company's joint ventures with Firstar Bank U.S.A., N.A.
and KeyBank.
COST OF SERVICE
Cost of service increased 102.3% to $105.3 million for the quarter ended March
31, 1998, compared to $52.1 million for the quarter ended March 31, 1997. The
increase in cost of service is due to the increase in merchant sales volume
processed. The percentage increase is higher than the percentage increase in
merchant sales volume processed primarily because a substantial portion of the
volume from recent portfolio purchases and joint venture transactions has not
been converted to the Company's operating platform and is therefore being
processed by third party vendors.
CONVERSION COSTS
Conversion costs increased 834.2% to $4.6 million for the quarter ended March
31, 1998, compared to $491,000 for the quarter ended March 31, 1997. Of this
increase, $2.0 million ($1.3 million, net of tax) relates to a non-recurring
charge for early termination of a merchant processing contract with a third-
party processor. The remaining increase relates to the significance of
conversion efforts currently underway as compared to 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 51.9% to $11.2 million
for the quarter ended March 31, 1998, compared to $7.4 million for the quarter
ended March 31, 1997. This increase is attributable to the costs paid to sellers
for operating and managing merchant portfolios during transition and an expanded
sales force associated with marketing arrangements entered into in conjunction
with recent portfolio purchases and joint venture transactions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 195.0% to $5.5 million for the quarter
ended March 31, 1998, compared to $1.9 million for the quarter ended March 31,
1997 due to amortization expense associated with the recent portfolio purchases
and joint ventures.
OPERATING INCOME
For the foregoing reasons, operating income increased 41.5% to $6.7 million for
the quarter ended March 31, 1998, compared to $4.7 million for the quarter ended
March 31, 1997.
INTEREST EXPENSE (INCOME) - NET
Net interest expense increased $1.5 million for the quarter ended March 31,
1998, resulting in net interest expense of $1.2 million compared to net interest
income of $342,000 for the same period in 1997. The increase in interest expense
resulted from bank borrowings used primarily to purchase merchant portfolios and
joint venture transactions.
INCOME TAXES
Income tax expense was recorded at an effective tax rate of 37.0% for the
quarter ended March 31, 1998. Income tax expense decreased to $1.7 million for
the quarter ended March 31, 1998, compared to $1.9 million for the quarter ended
March 31, 1997. This decrease resulted primarily from decreased pre-tax income.
NET INCOME
Net income decreased 8.1% to $2.9 million for the quarter ended March 31, 1998,
compared to $3.1 million for the quarter ended March 31, 1997. The decrease in
net income resulted from the $2.0 million ($1.3 million, net of tax) non-
recurring charge for early termination of a merchant processing contract with a
third-party processor. Prior to this charge, net income increased 32.0% to $4.2
million, due to the factors discussed above.
8
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of its capital resources include purchases of
merchant portfolios, investments in joint ventures, capital expenditures and
working capital.
Net cash provided by operating activities was $10.6 million for the three months
ended March 31, 1998, as compared to $5.5 million for the three months ended
March 31, 1997.
Net cash used in investing activities was $31.1 million for the three months
ended March 31, 1998, as compared to $2.2 million for the three months ended
March 31, 1997. Cash used in purchases of merchant portfolios and investments in
joint ventures totaled $22.0 million for the three month period, as compared to
$142,000 in the comparable period in 1997. Capital equipment purchases
increased more than $7.0 million over 1997 levels and primarily consisted of
computer and software investments to expand capacity and enhance services
provided by the NOVA network and to increase internal operational efficiency.
During the quarter ended March 31, 1998, capital expenditures totaled $9.0
million. The Company anticipates that it will incur approximately $11.0 million
in additional capital expenditures during the remainder of fiscal 1998 for
additional operations facilities and for the expansion of the Company's
information systems.
The above investments were funded primarily from the net cash flow from
financing activities. Net cash flow from financing activities for the three
months ended March 31, 1998 was $20.8 million. Expenditures in 1998 were funded
by proceeds from the Company's line of credit and notes payable.
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. In addition, increasing acquisition
activity may cause variations in working capital due to conversion-period
operating costs and the transition in the payment of expenses and the collection
of receivables from the former processor to the Company. Because of the
seasonality of the Company's business, capital requirements may be greater in
certain months.
Subsequent to March 31, 1998, the Company completed a public offering of 5
million shares of its Common Stock (exclusive of an aggregate of 4.7 million
shares sold by certain selling shareholders). The net proceeds to the Company
from the sale of the Common Stock after deducting underwriting discount and
commissions and expense payable by the Company were approximately $142.7
million. On April 27 and May 11, 1998, the Company used $48.5 million of the net
proceeds for the repayment of indebtedness under the Company's bank credit
facility. The Company expects to use the balance of the net proceeds to satisfy
existing purchase obligations relating to completed acquisitions, to purchase
merchant portfolios and to enter joint ventures and alliances in the ordinary
course of business, to fund capital expenditures and for general corporate
purposes.
PART II. OTHER INFORMATION
ITEM 1 - 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 that such matters,
individually or in the aggregate, will have a material adverse affect on the
financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
9
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ITEM 6 - EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Current Report(s) on Form 8-K during the quarter
ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVA Corporation
(Registrant)
By: /s/ Edward Grzedzinski
-----------------------
Edward Grzedzinski
Date: May 12, 1998 Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ James M. Bahin
------------------
Date: May 12, 1998 James M. Bahin
Vice Chairman, Chief Financial
Officer and Secretary
(Principal Accounting Officer)
10
<PAGE>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
27. Financial Data Schedule 12
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,141,00
<SECURITIES> 0
<RECEIVABLES> 40,480,000
<ALLOWANCES> 2,840,000
<INVENTORY> 2,560,000
<CURRENT-ASSETS> 47,268,000
<PP&E> 43,853,000
<DEPRECIATION> 12,113,000
<TOTAL-ASSETS> 236,597,000
<CURRENT-LIABILITIES> 52,547,000
<BONDS> 0
0
0
<COMMON> 291,000
<OTHER-SE> 100,264,000
<TOTAL-LIABILITY-AND-EQUITY> 236,597,000
<SALES> 133,318,000
<TOTAL-REVENUES> 133,318,000
<CGS> 105,330,000
<TOTAL-COSTS> 105,330,000
<OTHER-EXPENSES> 21,297,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,165,000
<INCOME-PRETAX> 4,589,000
<INCOME-TAX> 1,698,000
<INCOME-CONTINUING> 2,891,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,891,000
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
