<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-14342
------------------------------
NOVA CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 58-2209575
(State or Other Jurisdiction (IRS Employer
of Incorporation of Organization) Identification No.)
ONE CONCOURSE PARKWAY, SUITE 300, 30328
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(770) 396-1456
Registrant's telephone number, including area code
--------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Common Stock, $0.01 par value per share registered New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
----------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of March 29, 1999, the aggregate market value of the common stock of NOVA
held by non-affiliates of the Registrant was approximately $1,516,636,817 based
upon the closing price of $25.750 per share on the New York Stock Exchange on
such date. Non-affiliate ownership is calculated by excluding all shares that
may be deemed to be beneficially owned by executive officers, directors and
other control persons, without conceding that all such persons are "affiliates"
for purposes of the federal securities laws. As of March 29, 1999, there were
72,819,789 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Registrant's Proxy Statement for the 1999
Annual Meeting of Shareholders to be held on May 26, 1999, is incorporated
herein by reference in Part III of this Annual Report on Form 10-K. Pursuant to
General Instruction G(3) of Form 10-K, the Registrant will file the definitive
Proxy Statement with the Securities and Exchange Commission no later than April
30, 1999.
<PAGE>
NOVA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
- ------ ------
<S> <C>
PART I
1. Business................................................................................... 1 - 22
2. Properties................................................................................. 23
3. Legal Proceedings.......................................................................... 23
4. Submission of Matters to a Vote of Security Holders........................................ 23
4A Executive Officers of the Company.......................................................... 23 - 24
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 25
6. Selected Financial Data.................................................................... 25
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 26 - 35
7A. Quantitative and Qualitative Disclosures About Market Risk................................. 35
8. Financial Statements and Supplementary Data................................................ 35
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 35
PART III
10. Directors and Executive Officers of the Registrant......................................... 36
11. Executive Compensation..................................................................... 36
12. Security Ownership of Certain Beneficial Owners and Management............................. 36
13. Certain Relationships and Related Transactions............................................. 36
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 36
SIGNATURES....................................................................................... 41
APPENDIX A....................................................................................... 42
</TABLE>
<PAGE>
Forward-looking Statements
In addition to historical information, this Annual Report on Form 10-K
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 (the "Securities Act"), as amended, and Section 21E of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). When
used in this report, the words "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions or
statements regarding future periods are intended to identify forward-looking
statements. All forward-looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events, which by
their nature involve substantial risks and uncertainties beyond NOVA
Corporation's control. Forward-looking statements may also be made in NOVA's
other reports filed under the Exchange Act, press releases, and other documents;
as well as by NOVA management in oral statements. NOVA undertakes no obligation
to update or revise any forward-looking statements for events or circumstances
after the date on which such statement is made. New factors emerge from time to
time, and it is not possible for NOVA to predict all of such factors. Further,
NOVA 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.
NOVA's forward-looking statements are based upon numerous assumptions, including
assumptions relating to:
. Continued growth in the level in transaction volume;
. The impact of acquisitions (including without limitation the acquisition of
PMT Services, Inc.), portfolio purchases, joint ventures and other alliances;
. Consolidation activity in the banking and transaction processing industries;
. Pricing strategies and market concentration considerations;
. Strategies relating to new technologies and product development;
. Changes in credit card association rules, laws, regulations, or other
industry standards;
. General economic conditions and industry trends; and
. The impact of NOVA's Year 2000 compliance efforts as well as those of NOVA's
vendors, supplies and customers
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinion as of the date of this report.
NOVA refers readers to the information set forth under the caption "Item 1.
Business--Certain Risks Associated with the Business of the Company" included in
this Annual Report on Form 10-K, as well as "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained herein, for
a more complete discussion of certain risk factors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NOVA Corporation Common Stock is traded on the New York Stock Exchange (its
principal market) under the symbol NIS.
The following table provides the high and low sales prices of the common stock
as reported for the periods indicated:
<TABLE>
<CAPTION>
1998 1997
---- ----
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $33.3750 $23.0000 $23.5000 $12.8750
Second Quarter $36.3750 $31.0000 $26.5625 $15.6250
Third Quarter $37.1875 $25.7500 $29.1250 $23.5000
Fourth Quarter $34.6875 $24.2500 $30.8125 $23.2500
</TABLE>
The Company has never paid cash dividends on its Common Stock. The Board of
Directors' policy is to retain any available earnings for use in the operation
and expansion of the Company's business. Therefore, no payment of cash
dividends is likely in the foreseeable future. The Company's loan agreement
restricts the payment of dividends. See Note 8 of the accompanying Consolidated
Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
In January 1998, NOVA granted Kessler Financial Services, L.P. ("Kessler")
warrants to purchase 50,000 shares of common stock of NOVA (the "Kessler
Warrants"). The Kessler Warrants were granted as consideration for Kessler
providing to NOVA certain marketing and referral services pursuant to a
marketing agreement. The transaction was effected in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues...................... $1,145,664 $680,872 $529,279 $292,698 $203,794
Net Income (loss).............. (12,779) 37,899 19,148 11,265 2,357
Total Assets................... 622,533 426,432 341,323 150,153 105,155
Total long-term debt........... 23,025 52,001 22,175 50,176 32,954
Per common share:
Earnings-Basic................. (0.18) 0.60 0.32 0.25 --
Diluted................. (0.18) 0.58 0.32 0.25 --
Cash dividends declared........ -- -- -- -- --
</TABLE>
This summary unaudited combined condensed financial information reflects the
September 1998 PMT Merger which was accounted for as a pooling-of-interests;
accordingly, the separate historical financial results of NOVA and PMT have been
combined in this table and throughout the Annual Report.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since the incorporation of NOVA's predecessor, NOVA Information Systems, in
February 1991, NOVA Corporation has grown in dollar volume processed to become
one of the five largest integrated transaction processor in the United States,
leading to significant increases in revenues and improved operating
efficiencies. This growth has been fueled by NOVA's marketing programs and
through a series of strategic merchant portfolio purchases and acquisitions,
joint venture agreements, and long-term banking alliances that provide a channel
for merchant portfolio purchases, as well as long-term exclusive marketing
arrangements.
NOVA's portfolio purchases, joint venture investments, and marketing alliances
provide significant strategic and financial benefits including: (1) enhanced
distribution channels to facilitate growth in transaction volume, (2) expansion
of the number of merchant locations served, (3) further geographic
diversification of NOVA's portfolio, and (4) economies of scale derived from
substantial increases in transaction processing volume.
SIGNIFICANT DEVELOPMENTS
The PMT Merger enables NOVA to integrate two unique sales channels, while
leveraging NOVA's existing in-house technologies of NOVA. Following the PMT
Merger, NOVA has continued to focus on the processing sector comprised primarily
of small- to medium-sized merchants, who historically have been overlooked and
could benefit from the advantages of value-added services usually offered only
to large merchants. The ISOs that operate as subsidiaries of PMT provide an
existing customer pipeline for processing over the NOVA Network and NOVA's
sophisticated client/server platforms. From its origin, NOVA has invested
significant capital to develop, expand and enhance an integrated technology
platform of hardware, software applications and network architecture to process
large volumes of transactions.
Concurrent with the PMT Merger in the third quarter of 1998, NOVA recorded
transaction costs of $15.5 million. During the fourth quarter of 1998, as the
plans for the integration and consolidation of PMT were finalized, NOVA
recognized an additional $75.2 million as the cost of implementing these plans.
In December 1998, NOVA announced its plan to accelerate the conversion and
integration of PMT's customer base from existing third-party providers to the
NOVA Network. Although this strategy will result in increased costs in 1999,
management believes it will benefit NOVA's long-term performance by improving
customer service and decreasing merchant attrition, and accelerating the
elimination of redundant selling, general and administrative functions of the
two companies. Management continues to examine and evaluate the operational
efficiencies which may result from the PMT Merger in order to leverage NOVA's
financial position and focus on its strengths in business lines, products and
services, as well as market share.
In January 1998, NOVA and KeyBank completed a transaction pursuant to which
KeyBank contributed merchant contracts to KMS. Pursuant to this agreement, NOVA
provides transaction processing services to the merchant customers of KMS and is
responsible for its operation and management. NOVA owns a 51% controlling
interest in KMS. During 1998, KMS contributed processed volume in excess of
$5.3 billion to NOVA's operating platform. In addition to KMS's direct sales
force, KeyBank exclusively markets and promotes NOVA's transaction processing
services on behalf of KMS through KeyBank's bank branch locations. In
connection with the formation of KMS, NOVA began the consolidation and
conversion of the existing merchant processing to NOVA's operating platforms.
Associated with this process and concurrent with consummating the transaction,
NOVA recognized a non-recurring charge of $2.0 million to account for the early
termination of a contract with a third party processor.
In October 1997, NOVA consummated the Elan joint venture with Firstar whereby
Firstar contributed substantially all of its then existing merchant bankcard
processing portfolio to Elan. Pursuant to the Elan joint venture, NOVA provides
transaction processing services to the merchant customers of Elan and is
responsible for its operation and management. NOVA owns a 51% controlling
interest in the Elan joint venture. During 1998, Elan contributed processed
volume in excess of $3.0 billion to NOVA's operating platforms. Firstar markets
and promotes, on an exclusive basis, the merchant transaction processing
services of NOVA on behalf of Elan through a network of correspondent financial
institutions.
27
<PAGE>
Integral to NOVA's significant revenue expansion has been the selective
purchases of merchant processing portfolios. Most notable in 1998 was the
October 1998 purchase of the merchant processing portfolio of FUBD, successor by
merger to CoreStates Bank.
The CoreStates portfolio added geographical diversity and strength to NOVA's
merchant customer base through the portfolio's approximate $3.1 billion in
annual processing volume.
On December 31, 1997, NOVA purchased substantially all of MBNA's merchant
portfolio. MBNA also agreed to market the merchant processing services of NOVA
through an exclusive referral arrangement for all merchants, trade associations,
financial institutions, ISOs, and other organizations that express to MBNA an
interest in merchant processing services. The MBNA portfolio contributed
approximately $1.1 billion in annualized credit and debit card processing volume
in 1998.
Prior to the PMT Merger and since fiscal 1997, PMT completed three significant
merger transactions with ISOs: Superior Bankcard Service, Inc. ("Superior") in
July 1998, MBN National, Inc. ("MBN") in May 1998, and Bancard, Inc. ("BCI") in
October 1997. PMT previously accounted for each of these acquisitions as a
pooling of interests transaction. Accordingly, all years presented have been
restated to reflect the operations of each entity.
<PAGE>
Revenues recognized during 1998 for the Superior, MBN and BCI operations were
$31.7 million, $15.3 million and $76.9 million, respectively.
Historically, NOVA has achieved savings through economies of scale and
operating efficiencies derived from the conversion and integration of its
purchased portfolios. The costs of these conversion activities are expensed as
incurred. As a result of the PMT Merger, the magnitude, scope, timing, duration
and expense of conversion and consolidation will, in the aggregate, be
significant. Failure to complete the conversion and consolidation in accordance
with management plans could have a material adverse effect on NOVA's financial
condition and results of operations.
27
<PAGE>
COMPONENTS OF REVENUES AND EXPENSES
REVENUES
NOVA derives revenues principally from electronic processing of credit, charge
and debit card transactions that are authorized and captured through the NOVA
Network and through third-party networks prior to conversion. Typically
merchants are charged for these processing services at a bundled rate that is a
percentage of the dollar amount of each transaction and, in some instances,
additional fees per transaction. These charges, referred to as "merchant
discount", are negotiated with each merchant and, in the aggregate, represent in
excess of 90% of NOVA's revenues. Certain merchant customers are charged a flat
fee per transaction, while others may also be charged miscellaneous fees,
including fees for handling chargebacks, monthly minimums, equipment rentals,
sales or leasing, and other miscellaneous services. Revenues are reported net
of amounts paid to ISOs, agent banks and merchant associations 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 costs directly attributable to the furnishing of
transaction processing and other services to NOVA's merchant customers. The
most significant components of cost of service include interchange and
assessment fees, which are 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 POS network service (for merchant customers acquired but not
yet converted to the NOVA Network), merchant accounting and settlement fees,
cost of equipment leased, rented or sold, NOVA Network costs and other direct
operating expenses.
Conversion costs include expenses incurred to convert acquired portfolios from
existing processing platforms to the NOVA Network and operating systems. Such
costs are expensed as incurred and 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.
Selling, general and administrative expenses include salaries and wages,
commissions, employee benefits, travel and entertainment, telecommunications,
and other costs of the operations and marketing centers, subsidiary offices, and
corporate headquarters. Depreciation and amortization costs are related to
NOVA's capital expenditures, merchant portfolio purchases and business
acquisitions.
28
<PAGE>
RESULTS OF OPERATIONS
The following table for the years ended December 31, 1998, 1997, and 1996 sets
forth the percentage of total revenues represented by certain items on NOVA's
consolidated statements of operations:
PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
- -----------------------------------------------------------------------------------------------------------
Cost of service 77.3 76.3 76.9
- -----------------------------------------------------------------------------------------------------------
Conversion costs 0.9 0.4 1.2
- -----------------------------------------------------------------------------------------------------------
Selling, general and administrative 10.5 11.2 13.1
- -----------------------------------------------------------------------------------------------------------
and amortization 3.9 3.5 2.9
- -----------------------------------------------------------------------------------------------------------
Merger and consolidation expenses 7.9 0.3 0.0
- -----------------------------------------------------------------------------------------------------------
Operating income (loss) (0.5) 8.4 5.9
- -----------------------------------------------------------------------------------------------------------
Interest income 0.6 0.9 0.7
- -----------------------------------------------------------------------------------------------------------
Interest expense (0.5) (0.6) (1.0)
- -----------------------------------------------------------------------------------------------------------
interest in income of subsidiaries (0.9) (0.1) ---
- -----------------------------------------------------------------------------------------------------------
Other income --- --- 0.2
- -----------------------------------------------------------------------------------------------------------
(Loss) income before (benefit) provision for income taxes (1.3) 8.6 5.8
- -----------------------------------------------------------------------------------------------------------
(Benefit) provision for income taxes (0.2) 3.0 2.1
- -----------------------------------------------------------------------------------------------------------
Net (loss) income (1.1) 5.6 3.7
- -----------------------------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES
NOVA's revenue increased $464.8 million, or 68.3%, to $1.1 billion for the
year ended December 31, 1998, compared with $680.9 million for the same period
in 1997. This revenue growth is primarily attributable to a 61.7% increase in
merchant sales processing volume to $47.5 billion from $29.4 billion in 1997. Of
the total increase, approximately $8.1 billion in volume and $195.8 million in
revenues are attributable to the Elan and KMS joint ventures. Other purchases,
in the aggregate, contributed approximately $4.7 billion in volume and $109.2
million in revenues over 1997 levels. The pass-through of higher interchange
rates from the credit card associations in the form of higher discount rates
accounts for approximately $40.0 million of the increased revenues. The
remaining increase is primarily due to internal growth and bank marketing
relationships.
COST OF SERVICE
Cost of service increased $366.2 million, or 70.5%, to $885.6 million for
the year ended December 31, 1998, from $519.4 million for the same period in
1997. The increase resulted from additional interchange and assessment fees and
other operating costs associated with the higher merchant sales volume
processed. Incremental increases were also recognized for interchange expenses
as a result of credit card association rate increases. Cost of service as
29
<PAGE>
a percentage of revenue increased to 77.3% from 76.3% because a substantial
portion of the volume from recent portfolio purchases and joint venture
transactions has not been converted to the NOVA Network and therefore is being
processed by third party vendors at a higher cost.
CONVERSION COSTS
Conversion costs increased $7.4 million over 1997 levels to $10.0 million
in 1998. This increase relates to the increased conversion efforts in 1998 as
compared to 1997, including the conversions the KMS and Elan joint ventures, and
the MBNA and CoreStates merchant portfolios. Conversion activity for 1999 is
expected to exceed 1998 levels due to the magnitude of the conversion of PMT's
portfolios.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $120.2 million in 1998,
an increase of $44.1 million, or 58.0%, over 1997 expenditures of $76.0 million.
Included in this expense classification are approximately $14.2 million in
unusual charges recorded in the fourth quarter associated with the PMT Merger.
Such charges primarily result from changes in management estimates pertaining to
collectibility of accounts receivable ($6.2 million), merchant credit and fraud
loss reserves ($4.7 million), and state sales and use tax reserves ($2.0
million), particularly in light of the possible effects that consolidation
activities may have.
After consideration of these charges, other selling, general and
administrative expense's increased 39.3%. These increases are attributable to
(i) the costs paid to sellers for operating and managing merchant portfolios
during transition and conversion of the portfolios to the NOVA Network and (ii)
an expanded sales force associated with marketing arrangements entered into, in
each case, in conjunction with recent portfolio purchases and joint venture
transactions. In addition, during the third and fourth quarters of 1998, NOVA
incurred additional personnel and facilities costs in anticipation of beginning
the transition of all operational functions for the PMT merchant portfolios
beginning in October 1998. Many of these costs are duplicative of costs incurred
in connection with existing PMT operations that will be eliminated as part of
the integration of PMT onto the NOVA Network.
Selling, general and administrative expenses as a percentage of revenue
decreased in 1998 to 10.5% from 11.2% in 1997. Adjusted for the unusual costs
included in 1998, these expenses represented 9.2% of revenues, illustrating the
significant economies of scale resulting from NOVA's growth.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 90.0% to $44.8 million in
1998 compared to $23.6 million in 1997 due primarily to amortization expenses
associated with recent portfolio purchases and investments in joint ventures.
MERGER AND CONSOLIDATION EXPENSES
As a result of the PMT Merger and other acquisitions completed by PMT
during 1998, NOVA recorded a $90.7 million charge in 1998. This charge was
primarily related to direct transaction costs, charges associated with the
consolidation and closure of PMT's corporate headquarters and certain operating
subsidiaries, contract termination costs related to unfavorable third party
processing contracts, and the decision to exit certain of PMT's sales
distribution channels.
Direct merger transaction costs are primarily for investment banking
commissions, professional fees, and regulatory filing expenses.
The primary costs associated with the consolidation and closure of
facilities include employee and executive severance, estimated unrecoverable
future lease obligations on vacated facilities, and the write-down of capital
assets to their net realizable value. The consolidation and closure actions
result from the elimination of overlapping functions, primarily customer
service, accounting, and administrative areas. The total number of employees
terminated was approximately 275, with 210 having received severance packages as
of December 31, 1998. The remaining employees will leave NOVA during the first
quarter of 1999. NOVA began the process of moving PMT's
30
<PAGE>
operations located in Nashville, Tennessee to other locations in December 1998,
and expects the process to be completed in the first quarter of 1999, at which
time the premises in Nashville will be completely vacated.
Consistent with past practice, management developed a plan in 1998 to
convert the front-end and back-end transaction processing of PMT's merchants to
the NOVA Network. As a result of this action, NOVA negotiated the termination of
certain long-term processing contracts between PMT and third-party processors
which resulted in early termination fees. The majority of these terminations
were finalized and paid in 1998. NOVA expects to complete the negotiation and
payment of the remaining contracts during the first half of 1999.
Capital asset write-downs are substantially attributable to the computer
software and equipment, including PMT's management information and financial
reporting systems which were abandoned in December 1998. Additional assets
written down include telephone systems, and office furniture and equipment that
will not be redeployed for use at another NOVA facility.
In 1998 management formulated plans to exit unique distribution channels
based upon the type of merchant business generated through these channels.
Specifically, servicing and maintaining the type of merchant generated through
these channels is not compatible with NOVA's operating philosophy and not
strategically aligned with NOVA's plan of business. The charge related to
exiting this distribution channel includes a contract termination fee and the
write-down of certain related intangible assets resulting from an analysis of
discounted future cash flows generated from the subject merchants.
The majority of these costs were paid in the fourth quarter of 1998 and the
Company expects the plans associated with the remaining costs to be
substantially complete during the first half of 1999. Details of merger related
charges, including charges relating to the PMT merger are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
CASH/ RESERVE BALANCE AT
<S> <C> <C> <C> <C>
DESCRIPTION NON-CASH CHARGE ACTIVITY DECEMBER 31, 1998 (1)
- ----------------------------------------------------------------------------------------------------------
Direct transaction costs..................... Cash $15,515 $(11,412) $ 4,103
- ----------------------------------------------------------------------------------------------------------
Severance packages........................... Cash 14,050 (1,404) 12,646
- ----------------------------------------------------------------------------------------------------------
Lease abandonment............................ Cash 4,658 -- 4,658
- ----------------------------------------------------------------------------------------------------------
Contract termination charges................. Cash 35,506 (13,689) 21,817
- ----------------------------------------------------------------------------------------------------------
Asset write-down............................. Non-cash 7,121 (7,121) --
- ----------------------------------------------------------------------------------------------------------
Costs to exit a distribution channel......... Non-cash 11,370 (11,370) --
- ----------------------------------------------------------------------------------------------------------
Costs to exit a distribution channel......... Cash 2,500 -- 2,500
- ----------------------------------------------------------------------------------------------------------
Total $90,720 $(44,996) $45,724
==========================================================================================================
</TABLE>
(1) Represents reserve balances of $35.0 million at October 31, 1998, for PMT.
Approximately $15.8 million of these reserves were paid as of February 19,
1999.
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that will continue through August 2007 if
the Company is unable to sublease this space.
31
<PAGE>
OPERATING LOSS
NOVA's consolidated operating loss for 1998 was $5.6 million, as compared
to operating income of $57.4 million during 1997. The loss in 1998 includes non-
recurring merger and consolidation charges of $90.7 million and $14.2 million in
unusual selling, general and administrative costs. The 1997 operating income
included a $1.9 million merger related charge incurred by PMT. Absent the merger
and consolidation charges and unusual costs, operating income would have been
$99.3 million in 1998 compared to $59.2 million in 1997, an increase of $40.1
million, or 67.7%, due to the factors noted above.
INTEREST INCOME AND EXPENSE
Interest income increased 4.8% to $6.6 million in 1998, compared to $6.3
million in 1997. NOVA had higher average cash balances during 1998 due to a
public offering of common stock in April 1998 that yielded net proceeds of
$142.6 million.
Interest expense increased 36.4% to $6.0 million in 1998, compared to $4.4
million in 1997, due to higher average debt obligations outstanding in 1998.
Average borrowings increased due to draws against NOVA's bank credit facility in
late 1997 and early 1998 to fund the Elan and KMS investments and the MBNA
portfolio purchase. In addition, NOVA recorded deferred purchase obligations in
January 1998 related to the KMS investment. Although all bank borrowings were
repaid during the second quarter using a portion of the offering proceeds, NOVA
continued to incur interest expense throughout the year related to the deferred
purchase obligation.
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
Minority interest in income of subsidiaries increased to $10.1 million in
1998 from $776,000 in 1997. This increase reflects the ten-month incremental
inclusion of Elan and approximately eleven months incremental inclusion of KMS.
INCOME TAXES
NOVA's effective tax rate for 1998 was approximately 15.6%, compared with
an effective income tax rate of 35.2% for 1997. The decrease in the effective
rate primarily reflects the impact of the non-deductible portion of the merger
costs incurred in connection with the PMT Merger. Excluding the effect of the
non-deductible charges and the effect of Subchapter S corporation income which
is not subject to income tax, the effective tax rate for 1998 would be 40.4%.
The increase from the 1997 comparable rate of 38.2% is due to an increase in
state tax rates.
NET LOSS
A net loss of $12.8 million, or $0.18 per share, in 1998 compares to net
income in 1997 of $37.9 million, or $0.58 per share. Excluding both years'
merger related charges and the unusual selling, general and administrative
charges recognized during 1998, net income for 1998 of $57.9 million represented
an increase of approximately 45.5% over net income of $39.8 million in 1997 due
to the factors noted above.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES
Revenues increased $160.5 million, or 30.8%, to $680.9 million for the year
ended December 31, 1997, compared to $520.4 million for the year ended December
31, 1996. The increase resulted from a 29.7% growth in merchant sales volume
processed to $29.4 billion in 1997, compared to $22.7 billion in 1996. Of these
increases, $1.5 billion in sales volume processed and $34.0 million in revenues
is attributable to the Elan joint venture and the Crestar portfolio purchase.
Other individually insignificant portfolio purchases, in the aggregate,
contributed approximately $3.7 billion in volume and $84.2 million in revenues
over 1997 levels. The remaining increase is primarily due to internal growth and
bank marketing relationships.
32
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COST OF SERVICE
Cost of service increased $119.3 million, or 29.8%, to $519.4 million for
the year ended December 31, 1997, from $400.1 million for the same period in
1996. Additional interchange and assessment fees and other direct operating
costs associated with the incremental increase in volume processed contributed
to the increase in expenses. Cost of service as a percentage of revenues
decreased slightly from 76.9% to 76.3%, reflecting cost efficiencies arising
from proportionately lower payments to third-party networks. This trend reflects
the substantial completion during 1996 of the conversion of the First Union
portfolio purchased in 1995, resulting in fewer merchant customers utilizing
external service providers during 1997 as compared to 1996.
CONVERSION COSTS
Conversion costs decreased 59.4% to $2.6 million for 1997 compared with
$6.4 million for 1996. The decrease resulted primarily from the substantial
completion of the conversion of the First Union merchant portfolio in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 11.7% to $76.0
million for the year ended 1997, compared with $68.1 million for the year ended
1996. Higher expenses in 1997 resulted from increased personnel support in
NOVA's primary operations center due to transaction volume growth. This growth
also accounts for the decrease in expenses as a percentage of revenue to 11.2%
in 1997 as compared to 13.1% in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 57.4% to $23.6 million in
1997 compared to $15.0 million in 1996. The principal component of this increase
was the incremental addition of amortization expense from merchant portfolio
purchases. Other factors contributing to this increase were significant capital
investments in the technology infrastructure to expand transaction processing
capacity.
INTEREST INCOME AND EXPENSE
Interest income increased 85.3% to $6.3 million for fiscal year 1997,
compared with interest income of $3.4 million for fiscal year 1996. During 1996,
NOVA made three public offerings of stock and generated $206.3 million in net
proceeds. The offerings, which occurred primarily during the second and third
quarters of 1996, resulted in substantially higher average cash balances during
fiscal 1997, generating greater interest income.
Interest expense decreased 17.0% to $4.4 million in 1997 compared to $5.3
million in 1996. The favorable trend in interest expense is attributable to
using a portion of the 1996 offering proceeds to reduce outstanding debt.
INCOME TAXES
NOVA's effective tax rate for 1997 was approximately 35.2%, compared with
an effective income tax rate of 36.3% for 1996. The decrease from the 1996
effective rate primarily reflects the impact of pooling transactions in 1997
with Subchapter S Corporations that are not subject to income tax.
NET INCOME
Net income increased to $37.9 million, or $0.58 per share, in 1997 from net
income of $19.1 million, or $0.32 per share, in 1996, due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
NOVA's primary uses of its capital resources include the purchase of
merchant portfolios, investments in joint ventures, capital expenditures and
working capital requirements.
33
<PAGE>
NOVA produces significant cash flow from operating activities, amounting to
$37.8 million in 1998, $42.2 million in 1997, and $42.2 million in 1996. Cash
flow is generated primarily from operating earnings, after considering the
effect of depreciation and amortization and, for 1998, the non-cash portion of
the merger and consolidation charges. These cash flows are significantly
impacted by increases in trade receivables, primarily in 1998 and 1997, directly
attributable to the increases in processing volume and revenues. During 1998,
deferred tax assets resulting from merger related timing differences also had a
significant unfavorable affect on cash flows from operating activities.
Investing activities utilized a net $108.0 million cash in 1998, compared to
$182.1 million in 1997, and $52.9 million in 1996. Significant 1998 investments
include $91.1 million for portfolio purchases, $46.4 million in enhancing and
improving the technology platforms and operating centers, and $27.9 million to
fund equipment leases. The nature of these uses is consistent with historical
uses.
Net cash provided by financing activities was $94.4 million, $15.9 million,
and $157.5 million for the years ended December 31, 1998, 1997, and 1996,
respectively. NOVA's financing sources during 1998 relate primarily to a stock
offering completed in April 1998, which provided $142.6 million, net of
expenses, and bank borrowings totaling $21.8 million. Subsequent to the public
offering, NOVA used $53.1 million of the net proceeds to repay amounts
outstanding under its bank credit facilities. Net cash provided in 1997
consists primarily of proceeds received from short-term and long-term debt
obligations, offset for cash outlays for the issuance of a note receivable of
$8.8 million.
NOVA has available a credit facility of $80.0 million which is expandable
to $100.0 million. At December 31, 1998, no borrowings were outstanding under
this facility. See Note 8 to the Consolidated Financial Statements. In
connection with the PMT Merger and other acquisitions closed in 1998 and 1999,
NOVA obtained a waiver of certain covenants under the credit facility, which is
effective for all applicable periods.
NOVA typically has relatively low working capital requirements because
merchant discount fees charged are collected in an average of 20 days, while
normal vendor payables are paid in 30 days or longer. In addition, 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 NOVA. Because of the seasonality of
NOVA's business, capital requirements may be greater in certain months.
NOVA anticipates that it will incur approximately $25.0 million in capital
expenditures during 1999 for upgrading and expanding existing facilities and the
expansion and enhancement of its information systems. Such investments are
generally attributable to the closure and consolidation of the PMT operations
and the migration of the PMT merchants to the NOVA Network. Since electronic
transaction processing is virtually all technology based, NOVA expects to
continue the trend in capital investments in its technology infrastructure and
solutions for the foreseeable future. However, there can be no assurances that
NOVA will not incur higher capital expenditures in 1999 and 2000 to support the
business.
NOVA believes its existing cash and cash equivalents, cash generated from
operations, and available credit facilities are sufficient to fund future
merchant portfolio purchases, capital investment needs, and working capital
requirements for the foreseeable future.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of date sensitive computer software
programs being written using two digits rather than four digits to define the
applicable year. Consequently, unless corrected, computer software programs will
be unable to read and accurately process date information on or after the year
2000. NOVA has critical reliance on technology systems, telecommunications
systems, facilities infrastructure and embedded systems, such as heating and
ventilation systems, in conducting its business. NOVA also has business
relationships with third party providers, such as telecommunication vendors,
financial institutions, and data processors, who are highly reliant on
information technology and other systems to conduct their business.
Due to the significance of technology systems and other support systems, in
1997 NOVA launched its Year 2000 compliance efforts with a comprehensive
evaluation of its critical systems, applications, computing platforms, and
merchant terminals to ensure potential risks are identified and non-compliant
information systems upgraded or
34
<PAGE>
replaced. The initial phase of the project was the identification of all
technology systems and determining which were at risk. After completion of this
phase, steps were taken to remediate and test those systems initially determined
to be non-compliant.
In June 1997, VISA U.S.A. and Mastercard International certified NOVA as
capable of processing transactions for cards issued with expiration dates of
2000 and beyond. Also completed in 1997 was the validation and correction of
merchant terminals for Year 2000 functionality. In 1998, NOVA substantially
completed the review and correction of its identified systems. As an added
measure of validation, an independent review and evaluation was initiated for
the following: building infrastructure, client/server platforms, NOVA Network,
software applications, principal and strategic vendors' products or services,
and telecommunication platforms and equipment. NOVA believes that its Year 2000
project is on schedule and expects completion by mid 1999.
Through 1998, NOVA has replaced or upgraded personal computers,
client/server applications, and certain computer software programs to be Year
2000 compliant. The nature of NOVA's business requires continuous development of
its technologies and systems, extensively utilizing internal resources in this
effort. Accordingly, it is difficult to determine with certainty the costs that
have been incurred to date, and costs expected to be incurred in the future to
support the Year 2000 effort.
Despite NOVA's efforts, there cannot be absolute assurance that NOVA will
be completely successful in eliminating all business and operations risk. The
risks associated with the Year 2000 Issue include the possibility of a failure
of the information and non-information technology systems. System malfunction or
failure could result in incomplete or inaccurate transaction processing.
Additionally, NOVA may be adversely affected by a system malfunction or failure
of third parties that hold a business, financial or operational relationship
with NOVA; such as processing banks, telecommunication providers, and utilities.
If these third parties fail to adequately address Year 2000 issues, NOVA could
experience a negative impact on its business operations, such as business
interruption or shutdown. The consequences of interruption could cause NOVA to
suffer a material adverse impact on its financial condition and results of
operations.
NOVA has begun to develop contingency and recovery plans as a precautionary
measure targeted at ensuring the continuation and continuity of critical
business functions before and after December 31, 1999. NOVA will continue to
identify aspects of its business and that of its third-party providers and take
necessary corrective action, primarily the expedient replacement of any critical
vendor who does not provide proof of compliance. The contingency efforts
described above are expected to minimize the business risk connected to the Year
2000 Issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates: NOVA is exposed to changes in interest rates due to
variable rate debt facilities. Based on the Company's debt profile at December
31, 1998, and 1997, a 1% increase in market interest rates would increase
interest expense and decrease income before income taxes by $744,000, and
$200,000, respectively. These amounts were determined by calculating the effect
of the hypothetical interest rate on our debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION APPEARS ON PAGES 1-29 TO
EXHIBIT 13 OF THIS REPORT.
PART III
Certain information required by Part III is omitted from this report but is
incorporated herein by reference to NOVA's definitive Proxy Statement for the
1999 Annual Meeting of Shareholders (the "Proxy Statement"). Such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than 120 days after December 31, 1998.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements
The consolidated financial statements of NOVA and the related reports of
independent auditors thereon which are required to be filed as part of this
Report are included in NOVA's 1998 Annual Report to Shareholders are filed as
part of Exhibit 13 to this Report on pages 1 - 28.
2. Financial Statement Schedules
See Index to Financial Statements on page 29.
3. EXHIBITS
The following exhibits are incorporated by reference or filed herewith:
36
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger dated as of June 17, 1998, among the
Registrant, Church Merger Corp. and PMT Services, Inc.(8)
3.1 Articles of Incorporation of the Registrant, as amended(1)
3.2 Bylaws of the Registrant, as amended(2)
4.1 Specimen Common Stock certificate(1)
4.2 See Articles of Incorporation of the Registrant and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively
4.6 Registration Rights Agreement, dated as of June 17, 1998, by and among
the Registrant, Richardson M. Roberts and Gregory S. Daily(8)
4.7 Registration Rights Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), Warburg, Pincus Investors,
L.P., WorldCom, Inc., and First Union Corporation(1)
10.1 Shareholders Agreement, incorporated by reference to Exhibit 4.3(1)
10.2 Shareholder Agreement, incorporated by reference to Exhibit 4.4(8)
10.3 Shareholder Agreement, incorporated by reference to Exhibit 4.5(8)
10.4 Registration Rights Agreement, incorporated by reference to Exhibit
4.6(8)
10.5 Registration Rights Agreement, incorporated by reference to Exhibit
4.7(1)
10.6 PMT Services, Inc. 1997 Nonqualified Stock Option Plan(9)
10.7 PMT Services, Inc. 1994 Non-Employee Director Stock Option Plan(9)
10.8 PMT Services, Inc. 1994 Incentive Stock Plan(9)
10.9 1991 Employees Stock Option and Stock Appreciation Rights Plan as
mended (1)
10.10 1996 Employees Stock Incentive Plan, as amended by the First Amendment
(1), the Second (8) and the Third Amendment (10)
10.11 1996 Directors Stock Option Plan, as amended and restated(10)
10.12 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)
10.13 Lease Agreement dated May 31, 1996, by and between NOVA Information
Systems and Concourse I, LTD.(3)
10.14 Sublease, dated April 1, 1991, between Inter-Banc, Inc. and The
Baptist Health System of East Tennessee, Inc.(1)
37
<PAGE>
10.15 Credit Agreement, dated October 27, 1997, among NOVA Information
Systems, the Lenders named therein, First Union National Bank as
Documentation Agent and Bank of America National Trust and Savings
Association, as Agent(6)
10.16 Service Agreement dated July 2, 1998, between NOVA Information Systems
and WorldCom Technologies, Inc.(11)
10.17 Processing Services Agreement, dated July 1, 1998, between NOVA
Information Systems and Vital Processing Services, L.L.C.(11)
*10.18 Marketing Agreement, dated June 30, 1994, between NOVA Information
Systems and Kessler Financial Services, L.P.(1), and Addendum to
Marketing Agreement dated July 24, 1997, effective January 1, 1997,
between NOVA Information Systems and Kessler Financial Services,
L.P.(6)
*10.19 Agreement Regarding Merchant Processing Services and Other Matters,
dated May 5, 1995, among NOVA Information Systems, First Alabama Bank
and Regions Financial Corp.(1)
*10.20 Agreement dated June 3, 1992, as amended December 9, 1992, and
November 2, 1994, between NOVA Information Systems and Mellon Bank,
together with the Letter Agreement dated June 3, 1992, between NOVA
Information Systems and Mellon Bank relating to fees, as amended
December 10, 1992, and June 10, 1997(1), both as amended by Letter
Agreement June 10, 1997(6)
10.21 Depositary and Processing Agreement, dated September 30, 1993, between
NOVA Information Systems and Bank of the West(1) 10.22 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)
10.23 Marketing Agreement, dated October 1, 1992, between NOVA Information
Systems and MBNA America Bank, N.A.(1)
10.24 Agreement Not to Compete, dated October 1, 1992, between NOVA
Information Systems and MBNA America Bank, N.A.(1)
10.25 Depositary and Settlement Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems
and FUNB(1)
10.26 Marketing Support Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems
and the First Union Banks(1)
10.27 Merchant Asset Purchase Agreement, dated May 29, 1997, between NOVA
Information Systems and Crestar Bank(4)
10.28 Agreement Respecting a Limited Liability Company, dated October 7,
1997, by and among NOVA Information Systems, Firstar Bank U.S.A., N.A.
d/b/a Elan Financial Services and Firstar Bank Milwaukee, N.A.(5)
*10.29 Agreement Respecting a Limited Liability Company, dated December 12,
1997, by and among the Registrant, NOVA Information Systems and Key
Bank National Association(6)
*10.30 Merchant Asset Purchase Agreement, dated December 30, 1997, by and
between NOVA Information Systems and MBNA American Bank, N.A.(6)
10.31 Merchant Asset Purchase Agreement, dated October 8, 1998, among the
Registrant, Core States Bank of Delaware, N.A., First Union National
Bank and NOVA Information Systems, Inc. (12)
10.32 Stock Option Agreement dated June 17, 1998, between the Registrant (as
issuer) and PMT Services, Inc.
38
<PAGE>
10.33 Stock Option Agreement dated June 17, 1998, between PMT Services, Inc.
(as issuer) and the Registrant
10.34 Employment Agreement, dated June 17, 1998, by and between Richardson
M. Roberts and the Registrant(8)
10.35 Employment Agreement, dated June 17, 1998, by and between Gregory S.
Daily and the Registrant(8)
10.36 Employment Agreement, dated July 31, 1998, effective March 1, 1998,
between the Registrant and Rebecca L. Powell(11)
10.37 Employment Agreement, dated July 31, 1998, effective March 1, 1998
between the Registrant and Pamela A. Joseph(11)
10.38 Employment Agreement, dated July 31, 1998, effective March 31, 1998,
between the Registrant and John Perry(11)
10.39 Employment Agreement, dated October 27, 1995, effective January 31,
1996, between NOVA Information Systems and Edward Grzedzinski(1)
10.40 Employment Agreement, dated October 27, 1995, effective January 31,
1996, between NOVA Information Systems and James M. Bahin(1)
13.1 Consolidated Financial Statements**
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP.**
23.2 Consent of PricewaterhouseCoopers LLP relating to the audited
financial statements of PMT Services, Inc.**
24 Powers of Attorney (included on the signature page of this Annual
Report on Form 10-K/A, as amended).
27 Financial Data Schedule
- ------
* Confidential treatment pursuant to 17 CFR ((S)(S)) 200.80 and 230.406 has
been requested regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.
** Filed herewith.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-3287), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, Commission File No. 1-14342, and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, Commission File No. 1-14342, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K, Commission
File No. 1-14342, and incorporated herein by reference.
39
<PAGE>
(5) Filed as an exhibit to the Company's Current Report on Form 8-K, Commission
File No. 1-14342, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, Commission File No. 1-14342, and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-45997), and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, Commission file No. 1-14342, and incorporated
herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-64681), and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-64683), and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Registration Statement on Form S-4
(Registration No. 333-61867), and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, Commission file No. 1-14342, and
incorporated herein by reference.
(B) REPORTS ON FORM 8-K
Report on Form 8-K/A filed on December 12, 1998, Commission file number 1-
14342 in connection with the PMT Merger (financial statements included).
Report on Form 8-K filed on October 9, 1998, Commission file number 1-14342
in connection with the PMT Merger.
(C) EXHIBITS
All exhibits required by Item 601 of Regulation S-K are incorporated herein
by reference or are filed herewith.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, NOVA has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 23rd day of
April, 1999.
By: /s/ Edward Grzedzinski
------------------
Edward Grzedzinski
Chairman of the Board,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Amendment No. 1 to the Annual Report on Form 10-K has been signed
by the following persons on behalf of NOVA and in the capacities indicated on
April 23, 1999.
/s/ Edward Grzedzinski Director, Chairman of the Board,
-----------------------
Edward Grzedzinski President and Chief Executive
Officer (Principal Executive Officer)
/s/ James M. Bahin Director, Vice Chairman of the Board,
-----------------------
James M. Bahin Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ Richardson M. Roberts * Vice Chairman of the Board
-----------------------
Richardson M. Roberts
/s/ Gregory S. Daily * Vice Chairman of the Board
-----------------------
Gregory S. Daily
/s/ Charles T. Cannada * Director
-----------------------
Charles T. Cannada
/s/ Stephen D. Kane * Director
-----------------------
Stephen D. Kane
/s/ Dr. Henry Kressel * Director
-----------------------
Dr. Henry Kressel
/s/ George M. Miller, II * Director
-----------------------
George M. Miller, II
/s/ Stephen E. Wall * Director
-----------------------
Stephen E. Wall
* By: /s/ James M. Bahin
------------------
James M. Bahin, as
Attorney-in-Fact
41
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger dated as of June 17, 1998, among the
Registrant, Church Merger Corp. and PMT Services, Inc.(8)
3.1 Articles of Incorporation of the Registrant, as amended(1)
3.2 Bylaws of the Registrant, as amended(2)
4.1 Specimen Common Stock certificate(1)
4.2 See Articles of Incorporation of the Registrant and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively
4.6 Registration Rights Agreement, dated as of June 17, 1998, by and among
the Registrant, Richardson M. Roberts and Gregory S. Daily(8)
4.7 Registration Rights Agreement dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), Warburg, Pincus Investors,
L.P., WorldCom, Inc., and First Union Corporation(1)
10.1 Shareholders Agreement, incorporated by reference to Exhibit 4.3(1)
10.2 Shareholder Agreement, incorporated by reference to Exhibit 4.4(8)
10.3 Shareholder Agreement, incorporated by reference to Exhibit 4.5(8)
10.4 Registration Rights Agreement, incorporated by reference to Exhibit
4.6(8)
10.5 Registration Rights Agreement, incorporated by reference to Exhibit
4.7(1)
10.6 PMT Services, Inc. 1997 Nonqualified Stock Option Plan(9)
10.7 PMT Services, Inc. 1994 Non-Employee Director Stock Option Plan(9)
10.8 PMT Services, Inc. 1994 Incentive Stock Plan(9)
10.9 1991 Employees Stock Option and Stock Appreciation Rights Plan as
mended (1)
10.10 1996 Employees Stock Incentive Plan, as amended by the First Amendment
(1), the Second (8) and the Third Amendment (10)
10.11 1996 Directors Stock Option Plan, as amended and restated(10)
10.12 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)
10.13 Lease Agreement dated May 31, 1996, by and between NOVA Information
Systems and Concourse I, LTD.(3)
10.14 Sublease, dated April 1, 1991, between Inter-Banc, Inc. and The
Baptist Health System of East Tennessee, Inc.(1)
<PAGE>
10.15 Credit Agreement, dated October 27, 1997, among NOVA Information
Systems, the Lenders named therein, First Union National Bank as
Documentation Agent and Bank of America National Trust and Savings
Association, as Agent(6)
10.16 Service Agreement dated July 2, 1998, between NOVA Information Systems
and WorldCom Technologies, Inc.(11)
10.17 Processing Services Agreement, dated July 1, 1998, between NOVA
Information Systems and Vital Processing Services, L.L.C.(11)
*10.18 Marketing Agreement, dated June 30, 1994, between NOVA Information
Systems and Kessler Financial Services, L.P.(1), and Addendum to
Marketing Agreement dated July 24, 1997, effective January 1, 1997,
between NOVA Information Systems and Kessler Financial Services,
L.P.(6)
*10.19 Agreement Regarding Merchant Processing Services and Other Matters,
dated May 5, 1995, among NOVA Information Systems, First Alabama Bank
and Regions Financial Corp.(1)
*10.20 Agreement dated June 3, 1992, as amended December 9, 1992, and
November 2, 1994, between NOVA Information Systems and Mellon Bank,
together with the Letter Agreement dated June 3, 1992, between NOVA
Information Systems and Mellon Bank relating to fees, as amended
December 10, 1992, and June 10, 1997(1), both as amended by Letter
Agreement June 10, 1997(6)
10.21 Depositary and Processing Agreement, dated September 30, 1993, between
NOVA Information Systems and Bank of the West(1) 10.22 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)
10.23 Marketing Agreement, dated October 1, 1992, between NOVA Information
Systems and MBNA America Bank, N.A.(1)
10.24 Agreement Not to Compete, dated October 1, 1992, between NOVA
Information Systems and MBNA America Bank, N.A.(1)
10.25 Depositary and Settlement Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems
and FUNB(1)
10.26 Marketing Support Agreement, dated January 31, 1996, among the
Registrant (formerly NOVA Holdings, Inc.), NOVA Information Systems
and the First Union Banks(1)
10.27 Merchant Asset Purchase Agreement, dated May 29, 1997, between NOVA
Information Systems and Crestar Bank(4)
10.28 Agreement Respecting a Limited Liability Company, dated October 7,
1997, by and among NOVA Information Systems, Firstar Bank U.S.A., N.A.
d/b/a Elan Financial Services and Firstar Bank Milwaukee, N.A.(5)
*10.29 Agreement Respecting a Limited Liability Company, dated December 12,
1997, by and among the Registrant, NOVA Information Systems and Key
Bank National Association(6)
*10.30 Merchant Asset Purchase Agreement, dated December 30, 1997, by and
between NOVA Information Systems and MBNA American Bank, N.A.(6)
10.31 Merchant Asset Purchase Agreement, dated October 8, 1998, among the
Registrant, Core States Bank of Delaware, N.A., First Union National
Bank and NOVA Information Systems, Inc. (12)
10.32 Stock Option Agreement dated June 17, 1998, between the Registrant (as
issuer) and PMT Services, Inc.
<PAGE>
10.33 Stock Option Agreement dated June 17, 1998, between PMT Services, Inc.
(as issuer) and the Registrant
10.34 Employment Agreement, dated June 17, 1998, by and between Richardson
M. Roberts and the Registrant(8)
10.35 Employment Agreement, dated June 17, 1998, by and between Gregory S.
Daily and the Registrant(8)
10.36 Employment Agreement, dated July 31, 1998, effective March 1, 1998,
between the Registrant and Rebecca L. Powell(11)
10.37 Employment Agreement, dated July 31, 1998, effective March 1, 1998
between the Registrant and Pamela A. Joseph(11)
10.38 Employment Agreement, dated July 31, 1998, effective March 31, 1998,
between the Registrant and John Perry(11)
10.39 Employment Agreement, dated October 27, 1995, effective January 31,
1996, between NOVA Information Systems and Edward Grzedzinski(1)
10.40 Employment Agreement, dated October 27, 1995, effective January 31,
1996, between NOVA Information Systems and James M. Bahin(1)
13.1 Consolidated Financial Statements**
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP.**
23.2 Consent of PricewaterhouseCoopers LLP relating to the audited
financial statements of PMT Services, Inc.**
24 Powers of Attorney (included on the signature page of this Annual
Report on Form 10-K/A, as amended).
27 Financial Data Schedule
- ------
* Confidential treatment pursuant to 17 CFR ((S)(S)) 200.80 and 230.406 has
been requested regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.
** Filed herewith.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-3287), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, Commission File No. 1-14342, and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, Commission File No. 1-14342, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K, Commission
File No. 1-14342, and incorporated herein by reference.
<PAGE>
(5) Filed as an exhibit to the Company's Current Report on Form 8-K, Commission
File No. 1-14342, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, Commission File No. 1-14342, and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-45997), and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, Commission file No. 1-14342, and incorporated
herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-64681), and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-64683), and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Registration Statement on Form S-4
(Registration No. 333-61867), and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, Commission file No. 1-14342, and
incorporated herein by reference.
(B) REPORTS ON FORM 8-K
Report on Form 8-K/A filed on December 12, 1998, Commission file number 1-
14342 in connection with the PMT Merger (financial statements included).
Report on Form 8-K filed on October 9, 1998, Commission file number 1-14342
in connection with the PMT Merger.
(C) EXHIBITS
All exhibits required by Item 601 of Regulation S-K are incorporated herein
by reference or are filed herewith.
<PAGE>
NOVA CORPORATION
INDEX TO EXHIBIT 13 - FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
<S> <C>
(Item 14(a)) Page Number
Consolidated Financial Statements:
Report of Ernst & Young LLP Independent Auditors 1
Report of Pricewaterhouse Coopers LLP Independent Auditors 2
Consolidated Balance Sheets at December 31, 1998 and 1997. 3
Consolidated Statements of Operations for the years ended
December 31, 1998, and 1997, and 1996. 4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, and 1997, and 1996. 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, and 1997, and 1996. 6
Notes to Consolidated Financial Statements 7-28
2. Financial Statement Schedules
The following consolidated financial statement schedule of NOVA is included in Item 14(d):
Schedule II Valuation and Qualifying Accounts 29
</TABLE>
All other schedules not included above have been omitted because they are not
applicable, not material, or the required information is given in the financial
statements or notes thereto.
42
<PAGE>
EXHIBIT 13.1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of NOVA
Corporation (and subsidiaries) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statements schedule listed in the Index at Item 14(a).
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 did not audit the 1997 and 1996 financial statements or
schedule of PMT Services, Inc. ("PMT"), a wholly-owned subsidiary, and certain
of its subsidiaries which statements and schedule reflect total assets of 48%
and 40% as of December 31, 1997 and 1996, respectively, and total revenues of
45% and 43% for the years ended December 31, 1997 and 1996, respectively. Those
statements and schedule were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the 1997 and 1996
data included for PMT, is based solely on the report of the other auditors.
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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of NOVA Corporation and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the report of the other auditors,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/S/ Ernst & Young LLP
Atlanta, Georgia
February 19, 1999
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of PMT Services, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of changes in shareholders' equity and of cash flows (not
presented separately herein) present fairly, in all material respects, the
financial position of PMT Services, Inc. and its subsidiaries at July 31, 1997
and 1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Nashville, Tennessee
September 25, 1998
2
<PAGE>
NOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
In thousands, except shares
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents..................................... $ 51,131 $ 26,823
Investments................................................... - 49,168
Trade receivables, less allowance for doubtful accounts of
$8,466 and $2,822 at December 31, 1998 and
December 31, 1997, respectively.......................... 85,245 54,929
Current portion of net investment in finance leases........... 11,775 9,250
Inventory..................................................... 8,460 3,052
Deferred income taxes......................................... 31,884 3,894
Other current assets.......................................... 22,638 5,084
-------- --------
Total current assets................................ 211,133 152,200
-------- --------
Merchant and customer contracts............................... 263,992 176,540
Long-term portion of investment in finance leases............. 33,910 24,637
Property and equipment, net................................... 65,732 30,765
Excess cost of businesses acquired............................ 14,707 13,188
Long-term note receivable..................................... 13,781 8,773
Other non-current assets...................................... 19,278 20,329
-------- --------
$622,533 $426,432
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable.............................................. $ 30,365 $ 17,830
Accounts payable to affiliate................................. 827 3,410
Settlement obligations........................................ 9,263 10,896
Accrued liabilities........................................... 20,046 15,235
Credit and fraud loss reserve................................. 12,777 6,738
Accrued merger and consolidation charges...................... 45,724 -
Long-term debt obligations due within one year................ 31,534 14,962
-------- --------
Total current liabilities........................... 150,536 69,071
-------- --------
Long-term debt................................................ 23,025 52,001
Minority interest in subsidiaries............................. 7,754 776
Commitments and
Shareholders' Equity
Common stock, $.01 par value, 200,000,000 shares
authorized, 72,597,045 and 65,014,746 shares
outstanding at December 31, 1998 and 1997, respectively.. 726 650
Additional paid in capital.................................... 422,499 271,314
Accumulated retained earnings................................. 17,993 32,620
-------- --------
Total shareholders' equity.................................... 441,218 304,584
-------- --------
$622,533 $426,432
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOVA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Revenues..................................................... $1,145,664 $680,872 $520,417
Operating Expenses:
Cost of service.............................................. 885,606 519,387 400,077
Conversion costs............................................. 9,991 2,595 6,395
Selling, general and administrative.......................... 120,154 76,038 68,080
Depreciation and amortization................................ 44,839 23,603 14,995
Merger and consolidation expenses............................ 90,720 1,889 --
---------- -------- --------
Total operating expenses................................ 1,151,310 623,512 489,547
---------- -------- --------
Operating income (loss)...................................... (5,646) 57,360 30,870
Other income (expense)
Interest income.............................................. 6,560 6,265 3,437
Interest expense............................................. (5,999) (4,388) (5,256)
Minority interest in income of subsidiaries.................. (10,056) (776) --
Other income................................................. -- -- 1,000
---------- -------- --------
(9,495) 1,101 (819)
---------- -------- --------
Income (loss) before provision (benefit)
for income taxes........................................ (15,141) 58,461 30,051
Provision (benefit) for income taxes......................... (2,362) 20,562 10,903
---------- -------- --------
Net income (loss)............................................ $ (12,779) $ 37,899 $ 19,148
========== ======== ========
Per share amounts:
Basic earnings per share (pro forma prior to May 8, 1996).... $(0.18) $0.60 $0.32
Diluted earnings per share (pro forma prior to May 8, 1996).. $(0.18) $0.58 $0.32
Shares used in per share calculations
Weighted averages shares - basic............................. 70,061 63,571 58,567
Weighted averages shares - diluted........................... 70,061 65,668 59,553
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NOVA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands, except preferred stock shares
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED COMMON PAID IN EARNING TREASURY
STOCK STOCK CAPITAL (DEFICIT) STOCK TOTAL
------------ ------- ----------- ----------- ---------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------------ ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996,
as previously reported... 33,571 $ 33,571 11,378 $114 $ 2,615 $(10,283) - $ - $ 26,017
Restatement for pooling
of interests........ - - 8,586 86 26,096 7,817 9 (69) 33,930
------- ----------- ------ ---- -------- -------- ------ ------------- --------
As restated........... 33,571 33,571 19,964 200 28,711 (2,466) 9 (69) 59,947
------- ----------- ------ ---- -------- -------- ------ ------------ --------
Exchange of Preferred
Stock for common stock.. (28,571) (28,571) 11,876 119 28,452 - - - -
Redemption of Series D
Preferred Stock....... (5,000) (5,000) - - - - - (5,000)
Issuance of common stock
related to secondary
offering............. - - 4,184 42 140,763 - - - 140,805
Payment of accrued
dividends on
Preferred Stock....... - - - (11,689) - - (11,689)
Stock options exercised.. - - 1,706 17 2,123 - - - 2,140
Income tax benefit from
stock
options exercises..... - - - - 1,295 - - - 1,295
Issuance of common stock
related to NOVA
initial public
offering, net of
expenses............. - - 3,793 38 65,291 - - - 65,329
Stock splits............. - - 21,400 214 (214) - - - -
Purchases of treasury
stock................... - - - - - - 557 (2,093) (2,093)
Reissuance of treasury
stock................... - - - - (69) - (9) 69 -
Distribution of
Subchapter
S Corporations prior
to poolings.......... - - - - - (1,504) - - (1,504)
Subsidiary fiscal year
conversion.............. - - - - - (358) - - (358)
Minority shareholders'
contribution............ - - - - - 120 - - 120
Net and comprehensive
net income.............. - - - - - 19,148 - - 19,148
------- ----------- ------ ---- -------- -------- ------ ------------ --------
Balance at December 31,
1996...................... - - 62,923 630 266,352 3,251 557 (2,093) 268,140
------- ----------- ------ ---- -------- -------- ------ ------------ --------
Issuance of common stock. - - 1 - 14 - - - 14
Stock options exercised.. - - 574 5 1,440 - - - 1,445
Income tax benefit from
stock
options exercises..... - - - - 1,986 - - 1,986
Cancellation of treasury
stock................... - - (557) (6) (74) (2,013) (557) 2,093 -
Distribution of
Subchapter
S Corporations prior
to poolings.......... - - - - - (6,756) - - (6,756)
Pooling of interest
transactions............ - - 2,074 21 1,072 239 - - 1,332
Minority shareholders'
contribution............ - - - - 524 - - - 524
Net and comprehensive
net income.............. - - - - - 37,899 - - 37,899
------- ----------- ------ ---- -------- -------- ------ ------------ --------
Balance at December 31,
1997...................... - - 65,015 650 271,314 32,620 - - 304,584
------- ----------- ------ ---- -------- -------- ------ ------------ --------
Issuance of common stock
related
to NOVA offering, net
of expenses........... - - 5,000 50 142,539 - - - 142,589
Stock options exercised.. - - 615 6 6,614 - - - 6,620
Income tax benefit from
stock
options exercises..... - - - - 1,057 - - - 1,057
Subsidiary fiscal year
conversion.............. - - 307 3 163 5,506 - - 5,672
Pooling of interest
transactions............ - - 1,660 17 812 (2,593) - - (1,764)
Distribution of
Subchapter
S Corporations prior
to poolings.......... - - - - - (4,761) - - (4,761)
Net and comprehensive
net loss................ - - - - - (12,779) - - (12,779)
------- ----------- ------ ---- -------- -------- ------ ------------ --------
Balance at December 31,
1998...................... - $ - 72,597 $726 $422,499 $ 17,993 - $ - $441,218
======= =========== ====== ==== ======== ======== ====== ============ ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................................... $(12,779) $ 37,899 $ 19,148
Subsidiary fiscal year conversion...................................... 4,820 - (358)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Non-cash portion of merger and consolidation charges................. 18,491 -
Depreciation and amortization........................................ 44,839 23,603 14,995
Deferred income taxes................................................ (30,429) 1,376 2,740
Loss on disposal of equipment........................................ 265 12 -
Minority interest.................................................... 5,182 776 -
Interest on debt obligations......................................... 2,062
Gain on disposition of non-compete agreement......................... - - (150)
Changes in assets and liabilities, net of the
effects of business acquisitions:
Trade receivables................................................... (32,179) (22,351) (4,537)
Inventory........................................................... (4,503) (613) 133
Other assets........................................................ (21,674) (9,944) (50)
Accounts payable.................................................... 11,131 9,177 (735)
Accrued liabilities................................................. 52,608 2,309 10,997
-------- --------- ---------
Net cash provided by operating activities............................ 37,834 42,244 42,183
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of merchant portfolios and customer contracts................. (91,125) (108,804) (36,004)
Purchase of property and equipment..................................... (46,385) (20,576) (8,884)
Purchase of equipment for leasing...................................... (27,906) (19,297) (20,865)
Purchase of investments................................................ - (49,168) -
Proceeds from sale of investments...................................... 39,123 - -
Amounts received on leases............................................. 18,329 14,650 12,789
Other.................................................................. - 1,076 64
-------- --------- ---------
Net cash used in investing activities............................. 107,964) (182,119) (52,900)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings and notes payable, net............. 1,496 32,800 4,008
Proceeds from the issuance of long-term debt........................... 20,353 34,189 36,018
Payments on long-term debt and capital leases.......................... (70,074) (38,657) (72,055)
Payment of Preferred Stock dividends................................... - - (11,689)
Proceeds from public offerings of
common stock, net of offering expenses............................... 142,589 14 206,291
Redemption of Preferred Stock.......................................... - - (5,000)
Proceeds from stock options exercised.................................. 6,620 1,445 1,982
Purchase of treasury stock............................................. - (630)
Issuance of note receivable............................................ (1,785) (8,773) -
Distributions of Subchapter S Corporations............................. (4,761) (5,083) (1,504)
Other.................................................................. - - 120
-------- --------- ---------
Net cash provided by financing activities............................ 94,438 15,935 157,541
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 24,308 (123,940) 146,824
-------- --------- ---------
Cash and cash equivalents, beginning of the year....................... 26,823 150,763 3,939
-------- --------- ---------
Cash and cash equivalents, end of the year............................. $ 51,131 $ 26,823 $150,763
======== ========= =========
SUPPLEMENTARY INFORMATION
Income taxes paid.................................................... $ 28,181 $ 19,763 $ 5,696
Interest paid........................................................ $ 6,944 $ 3,866 $ 4,632
Notes payable issued in connection with business acquisition......... $ 33,758 $ 433 $ 209
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND ORGANIZATION. NOVA Corporation (the "Company" or
"NOVA") is a provider of integrated electronic transaction processing services,
related software application products and value-added services primarily to
small-to-medium-sized merchants. The Company provides merchants with 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. NOVA provides
merchants a broad range of transaction processing services, including
authorizing card transactions at the point-of-sale ("POS"), capturing and
transmitting transaction data, payment settlement, and assisting in resolving
billing disputes with customers.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of NOVA Corporation and its majority-owned subsidiaries. All
significant intercompany transactions have been eliminated.
COMBINED FINANCIAL RESULTS. On September 24, 1998, NOVA completed a merger
transaction with PMT Services, Inc. ("PMT"), pursuant to which PMT became a
wholly-owned subsidiary of NOVA. In addition to the PMT merger, PMT completed
various mergers prior to the merger with NOVA. These mergers were intended to
qualify as tax-free reorganizations and were accounted for as poolings of
interests. Accordingly, the consolidated historical financial statements for all
periods presented combined the financial results of NOVA and PMT. Although prior
to the merger PMT reported on the fiscal year ended July 31 basis, PMT changed
their year end to October 31 in 1998. Conforming PMT to a calendar year fiscal
year was not practicable for 1998 due to the timing and cost associated with
establishing and auditing the beginning of year balances as of January 1, 1998.
Beginning in 1999, PMT's fiscal year will be changed to conform to a calendar
year.
The NOVA balance sheet as of December 31, 1998, has been combined with the PMT
balance sheet as of October 31, 1998. The NOVA balance sheet as of December 31,
1997, has been combined with the PMT balance sheet as of July 31, 1997. The NOVA
statement of operations and cash flows for the year ended December 31, 1998, has
been combined with the PMT statement of operations and cash flows for the
twelve months ended October 31, 1998. The NOVA statements of operations and cash
flows for the years ended December 31, 1997 and 1996, have been combined with
the PMT statements of operations and cash flows for the fiscal years ended July
31, 1997 and 1996. The results of operations of PMT for the period August 1,
1997 through October 31, 1997, of $7.6 million have been reported as an increase
to shareholders equity for the year ended December 31, 1998. Revenues for this
interim period were $101.1 million and expenses, including income taxes, were
$93.5 million.
There were no transactions between NOVA and PMT prior to the combination, and
immaterial adjustments were recorded to conform PMT's accounting policies.
Certain reclassifications were made to the PMT financial statements to conform
to NOVA's presentations.
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 OF SERVICE RECOGNITION. Revenues derived principally from
the electronic processing of transactions (principally merchant discount) are
recognized, net of revenue sharing amounts, at the time the merchants'
transactions are processed. Directly related cost of service are also recognized
at the time of processing and include interchange fees paid to the credit card
issuing bank, VISA and MasterCard assessments, telecommunications expenses, and
merchant accounting processing fees.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
When the Company purchases merchant portfolios, it typically enters into
revenue sharing agreements with the sellers. The revenue sharing amounts are
determined primarily 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 $35.3 million, $16.3
million, and $15.3 million for the years ended December 31, 1998, 1997, and
1996, respectively.
Additional revenue sources include the sale, lease and rental of POS
processing equipment. Revenues related to direct financing leases are recognized
over the term of the lease using the effective interest method. Equipment sales
revenues are recorded when the equipment is shipped. Rental income is recognized
as earned.
CONVERSION COSTS. The cost of converting purchased merchant portfolios from
the seller's processing platform and telecommunications network to the NOVA
Network is expensed as incurred.
CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of
cash flows, NOVA considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
RESTRICTED CASH. Restricted cash represents funds held-on-deposit with
certain processing banks pursuant to agreements to cover potential merchant
losses, and funds held by lending institutions pursuant to loan agreements to
provide additional collateral. These amounts are classified as "Other Non-
current Assets" for financial statement purposes, and total $8.2 million and
$9.3 million at December 31, 1998 and 1997, respectively.
INVESTMENTS. The investments held at December 31, 1997, consist of United
States Government Treasury Notes that have a term of less than one year. These
investments are classified as held-to-maturity in accordance with Statement of
Financial Accounting Standards No.115, "Accounting for Certain Debt and Equity
Securities" ("SFAS 115"), and are carried at amortized cost as determined by
specific identification. The fair value of these investments was $49.2 million
at December 31, 1997. The Company held no investments at December 31, 1998.
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
clearing and settlement banks approximately twenty 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 reduces its risk of loss.
Based on its historical loss experience, the Company has established reserves
for estimated credit losses on transactions processed.
FINANCING LEASES. The Company provides direct financing leases and sales-
type leases to its customers. The significant difference between the two types
of leases is dealer profit recognized in a sales-type lease. At inception of a
POS equipment lease, the Company records an investment in direct financing
leases which is equal to the total of future lease rentals and the estimated
residual value of the leased equipment less unearned income. The unearned income
is the difference between the cost of the equipment and the total of future
lease rentals plus the estimated residual value of the leased equipment.
Residual value is based on the estimated proceeds from the sale or lease of the
asset at the end of the lease term. Amortization of unearned income is recorded
using the effective interest method. The investment in financing leases is
reduced by an allowance for rental payments that are expected to be
uncollectible.
INVENTORY. Inventory, which consists of electronic POS 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.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 thirty 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. Direct costs
associated with the development of software for internal use are capitalized and
depreciated over the useful life of the software, up to seven years. Maintenance
and repairs are charged to expense as incurred. Expenditures for renewals and
improvements that extend the useful life are added to the property and equipment
accounts. The Company rents POS equipment to merchants under operating leases.
The rented equipment is capitalized and depreciated over three years.
FINANCIAL INSTRUMENTS. The Company's financial instruments at December 31,
1998 and 1997 consist primarily of cash and cash equivalents and loans payable
to financial and lending institutions. Due to the short maturities of the cash
and cash equivalents, 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 customer base and the ongoing credit evaluations conducted to monitor the
status of a customer's financial condition. Cash investments are held by
numerous financial institutions and present minimal risk to the Company.
INTANGIBLES. The excess cost of businesses acquired is amortized on the
straight-line basis over thirty years. Accumulated amortization at December 31,
1998 and 1997, was $2.6 million and $2.1 million, respectively. Amortization
expense was approximately $573,000, $500,000 and $496,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Amortization of merchant portfolios is provided on a straight-line basis over
a ten-year life, based on the Company's estimates of future merchant sales
volumes. Accumulated amortization of portfolios was $63.1 million and $31.9
million at December 31, 1998 and 1997, respectively. Amortization expense was
approximately $ 30.0 million, $14.0 million, and $8.4 million for the years
ended December 31, 1998, 1997, and 1996, respectively.
Management periodically evaluates intangibles for indications of impairment
based on the operating results of the related business or merchant portfolio
purchased. If this evaluation indicates that the intangible asset will not be
recoverable, as determined based on the undiscounted cash flows over the
remaining life of the asset, the carrying value and remaining amortization
period of the related intangible asset will be adjusted to reflect fair value.
INCOME TAXES. The Company accounts for income taxes pursuant to the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Under this method, deferred tax assets and
liabilities are recorded to reflect the future tax consequences attributable to
the effects of differences between the carrying amounts of existing assets and
liabilities for financial reporting and their respective amounts used for income
tax purposes.
SETTLEMENT OBLIGATIONS. Settlement obligations result from timing differences
in the Company's settlement processes with merchants.
STOCK COMPENSATION. NOVA has elected under the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") to continue to use the intrinsic-value method of
accounting for employee stock-based compensation in accordance with Accounting
Principles Board Opinion Number 25, "Accounting for Stock Issued to Employees"
("APB 25"). Refer to Note 12 regarding pro forma net income (loss) and earnings
per share information.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE. Basic earnings per common share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share is computed using the weighted average number of
common shares outstanding during the period and reflects any dilutive effects of
options, warrants and convertible securities outstanding during the period.
RECENT PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June 15,
1999. Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
PRESENTATION. Certain 1997 and 1996 amounts have been reclassified to conform
to the 1998 presentation.
10
<PAGE>
NOTE 2
BUSINESS COMBINATIONS
PMT SERVICES, INC. MERGER
In September 1998, NOVA completed the acquisition of PMT Services, Inc., in a
merger transaction by exchanging 37,651,000 shares of its common stock for all
of the outstanding common stock of PMT. Each share of PMT was exchanged for
0.715 of one share of NOVA common stock. In addition, outstanding PMT options
and warrants were converted at the same exchange factor of NOVA common stock.
See Note 12.
The combined results reflect reclassifications to conform financial
statementpresentation, as follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Years ended December 31,
========================================= ============================
1997 1996
---- ----
<S> <C> <C>
Revenues:
NOVA.................................................... $335,625 $265,829
PMT..................................................... 355,010 263,450
Reclassification to conform
financial presentation............................... (9,763) (8,862)
-------- --------
Combined................................................ $680,872 $520,417
======== ========
Net income:
NOVA.................................................... $ 17,385 $ 7,267
PMT..................................................... 20,514 11,881
-------- --------
Combined................................................ $ 37,899 $ 19,148
======== ========
Net income per share (on a diluted basis):
NOVA.................................................... $ 0.58 $ 0.25
PMT (1)................................................. $ 0.58 $ 0.38
Combined................................................ $ 0.58 $ 0.32
</TABLE>
(1) Adjusted for effect of exchange ratio of 0.715 shares of NOVA common stock
for each share of PMT common stock.
11
<PAGE>
OTHER BUSINESS COMBINATIONS
As previously stated, PMT completed various business combinations in the
year ended October 31, 1998, and the two years ended July 31, 1997, by issuing
common stock in exchange for all of the outstanding common stock of the
companies acquired. These transactions were accounted for as pooling of
interests. The consolidated accompanying financial statements have been prepared
to reflect the restatement of all periods presented. Nine of these transactions
were considered material for restatement of prior period consolidated financial
statements and are summarized below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
COMPANY ACQUIRED DATE SHARES ISSUED(1)
<S> <C> <C>
Martin-Howe Associates
(MHA)........................ July 1, 1996 425
Fairway Marketing Group
(Fairway).................... December 23, 1996 304
Bancard Systems, Inc. (BSI)... January 27, 1997 2,239
Retail Payment Services,
Inc. (RPS)................... January 30, 1997 406
Eric Krueger, Inc
(Krueger).................... June 3, 1997 414
LADCO Financial Group (LFG)... July 14, 1997 1,046
Bancard, Inc. (BCI)........... October 2, 1997 2,768
MBN National, Inc. (MBN)...... May 14, 1998 706
Superior Bankcard Service,
Inc. (Superior).............. July 30, 1998 2,660
</TABLE>
(1) Adjusted for effect of exchange ratio of 0.715 shares of NOVA common stock
for stock for each share of PMT common
Separate revenues, net income (loss) of the acquired operating businesses
for the periods prior to each of the mergers are presented in the following
table. In addition, the table includes unaudited pro forma net income which
reflect pro forma adjustments to present income taxes on the basis on which they
will be reported in future periods.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1996
------------- -------------
(In thousands)
<S> <C> <C>
Revenues:
PMT.................. $240,756 $136,254
MHA.................. - 13,586
Fairway.............. 7,125 19,524
BSI.................. 12,218 21,540
LFG.................. 12,882 11,008
BCI.................. 40,827 31,852
MBN.................. 12,651 8,788
Superior............. 17,319 7,919
Other................ 11,232 12,979
-------- --------
Revenues, as reported..... $355,010 $263,450
======== ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Net income (loss):
PMT............................... $13,806 $ 8,952
MHA............................... - (327)
Fairway........................... 183 (858)
BSI............................... 746 288
LFG............................... 1,319 1,024
BCI............................... 2,656 1,179
MBN............................... (1,041) (118)
Superior.......................... 2,500 594
Other............................. 345 1,147
------- -------
Net income, as reported................ 20,514 11,881
Pro forma tax effect of Subchapter
S Corporations......................... (1,798) (755)
------- -------
Pro forma net income................... $18,716 $11,126
======= =======
</TABLE>
MHA had a calendar year end. In order to conform MHA's year end to PMT's
fiscal year end, results of operations for MHA for the six-month period ended
June 30, 1996, have been excluded from the consolidated statement of operations
for the year ended July 31, 1996. Accordingly, an adjustment has been made in
1996 to retained earnings for the exclusion of the net loss of $356,914 for such
six-month period. MHA's results of operations for this six-month period include
revenues of $10.7 million, expenses of $11.0 million and net loss before
provision for income taxes of $279,053.
Fairway, RPS, Krueger, Bancard, MBN and Superior were Subchapter S
Corporations for income tax purposes; therefore, these entities did not pay U.S.
federal income taxes. These entities will be included in the Company's U.S.
federal income tax return effective from the date of each merger.
In addition to these transactions, PMT completed six separate operating
business combinations during the year ended October 31, 1998, and the year ended
July 31, 1997, with six unrelated entities. PMT issued an aggregate of 3,577,914
shares of common stock, on a converted basis, in exchange for all the
outstanding stock of the six entities. On an individual basis these
transactions, which were accounted for as poolings of interests, were not
considered material for retroactive restatement of the consolidated financial
statements. Retroactive restatement would have increased total assets by 1% as
of December 31, 1997. Retroactive restatement would have increased revenue by 4%
and 5%, and net income by 4% and 8%, during 1997 and 1996, respectively.
NOTE 3
MERCHANT PORTFOLIO PURCHASES AND JOINT VENTURES
MERCHANT PORTFOLIOS
NOVA purchases various merchant portfolios, whereby servicing rights for
electronic authorization and payment processing to specific merchants under
contract to processing banks are acquired. The Company's operating results
reflect each of these purchases from the effective dates of the transactions.
During 1998 there was one significant portfolio purchase and several
individually insignificant purchases.
Effective November 4, 1998, the Company completed a transaction with First
Union Bank of Delaware, successor by merger to CoreStates Bank of Delaware, N.A.
("CoreStates"), whereby NOVA acquired all rights, title, and interest in and
assumed certain liabilities of the CoreStates merchant processing portfolio. The
remaining purchase price, payable over a two-year period, is contingent upon
achieving certain minimum performance levels over the next two years. An initial
non-refundable payment of $25.0 million was made at the time of the purchase.
Contingent payments of up to $46.0 million may be required based upon the
performance of the portfolio.
13
<PAGE>
Significant 1997 merchant portfolio purchases include the Crestar Bank
merchant portfolio effective May 29, 1997, and the MBNA America Bank, N.A.
merchant portfolio effective December 31, 1997. Purchase price consideration
paid approximated $21.7 million and $20.3 million, respectively.
JOINT VENTURES
In addition to merchant portfolio purchases, the Company also entered into
joint venture agreements with certain financial institutions for the purpose of
expanding and strengthening its merchant processing base. On January 21, 1998,
NOVA consummated a transaction with KeyBank National Association ("KeyBank")
whereby the Company purchased a 51% membership interest in Key Merchant
Services, LLC ("KMS"). NOVA provides transaction processing and other services
to the merchant contracts KeyBank initially contributed to the venture. The
purchase price of the membership interest is payable over a three-year period.
The purchase price recorded was $51.0 million, of which $37.1 million was paid
as of December 31, 1998. The remaining amount due is included in long-term debt
at December 31, 1998. The maximum consideration payable is approximately $74.1
million.
Effective October 31, 1997, the Company entered into a joint venture with
Firstar Bank, U.S.A., N.A. ("Firstar") whereby NOVA purchased a 51% interest in
the joint venture for $24.0 million. The Company performs the transaction
processing services for the joint venture's merchant contracts.
The following summarizes the allocation of the aggregate purchase price to
the major categories of assets acquired and liabilities assumed resulting from
all portfolio purchases and joint venture investments made by the Company:
<TABLE>
<CAPTION>
December 31,
(IN THOUSANDS)
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Merchant contracts....... $122,814 $109,247 $36,004
Property and equipment... 2,069 -- --
Non-compete agreement.... 932 250 128
-------- -------- -------
125,815 109,497 36,132
-------- -------- -------
Notes payable to seller.. (33,758) (443) (128)
-------- -------- -------
Net cash paid............ $ 92,057 $109,054 $36,004
======== ======== =======
</TABLE>
NOTE 4
MERGER AND CONSOLIDATION CHARGES
As a result of NOVA's merger with PMT and other mergers completed by PMT
during 1998, the Company recorded a $90.7 million charge in 1998. This charge
was primarily related to direct merger transaction costs, charges associated
with the consolidation and closure of PMT's corporate headquarters and certain
operating subsidiaries, contract termination costs related to unfavorable third-
party processing contracts, and the decision to exit certain of PMT's sales
distribution channels.
Direct merger transaction costs are primarily investment banking
commissions, professional fees, and regulatory filing expenses.
The primary costs associated with consolidation and closure of facilities
include employee and executive severance, estimated unrecoverable future lease
obligations on vacated facilities, and the write-down of capital assets to their
net realizable value. The consolidation and closure actions result from the
elimination of overlapping functions, primarily customer service, accounting,
and administrative areas. The total number of employees terminated was
approximately 275, with 210 having received severance packages as of December
31, 1998. Of these employees certain executives' severance will be paid out over
two years. The remaining employees will leave the Company during the first
quarter of 1999. The Company began the process of moving PMT's operations from
14
<PAGE>
Nashville, Tennessee to other locations in December 1998, and expects the
process to be completed in the first quarter of 1999, at which time the premises
in Nashville will be completely vacated.
Consistent with past practice, management developed a plan in 1998 to
convert the front-end and back-end transaction processing of PMT's merchants to
the NOVA Network. As a result of this plan, in 1998 the Company negotiated the
termination of long-term processing contracts with third parties which resulted
in early termination fees. The majority of these terminations were finalized and
paid in 1998. The Company expects to complete the negotiation and payment of the
remaining contracts during the first half of 1999, and the estimated costs are
included in the remaining reserve balance at December 31, 1998.
Capital asset write-downs are substantially attributable to the computer
software and equipment, including PMT's management information and financial
reporting systems. Additional assets written down include telephone systems, and
office furniture and equipment that will not be redeployed for use at another
NOVA facility.
In 1998 management formulated plans to exit unique distribution channels
based upon the type of merchant business generated through these channels.
Specifically, servicing and maintaining the type of merchant generated through
these channels is not compatible with NOVA's operating philosophy and not
strategically aligned with NOVA's plan of business. The charge related to
exiting this distribution channel includes a contract termination fee and the
write-down of certain related intangible assets resulting from an analysis of
discounted future cash flows generated from the subject merchants.
The majority of these merger related costs were paid in the fourth quarter
of 1998 and the Company expects the plans associated with the remaining costs to
be substantially complete during the first half of 1999.
Details of the merger related charges are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
Cash/ Reserve Balance at
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DESCRIPTION NON-CASH CHARGE ACTIVITY 12/31/98 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Direct transaction costs.......... Cash $15,515 $(11,412) $ 4,103
- ------------------------------------------------------------------------------------------------------------------------------------
Severance packages................ Cash 14,050 (1,404) 12,646
- ------------------------------------------------------------------------------------------------------------------------------------
Lease abandonment................. Cash 4,658 -- 4,658
- ------------------------------------------------------------------------------------------------------------------------------------
Contract termination
charges.......................... Cash 35,506 (13,689) 21,817
- ------------------------------------------------------------------------------------------------------------------------------------
Asset write-down.................. Non-cash 7,121 (7,121) --
- ------------------------------------------------------------------------------------------------------------------------------------
Costs to exit a
distribution channel............. Non-cash 11,370 (11,370) --
- ------------------------------------------------------------------------------------------------------------------------------------
Costs to exit a
distribution channel............. Cash 2,500 -- 2,500
- ------------------------------------------------------------------------------------------------------------------------------------
Total $90,720 $(44,996) $ 45,724
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents reserve balances of $35.0 million October 31, 1998, for PMT.
Approximately $15.8 million of these reserves were paid as of February 19,
1999.
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that will continue through August 2007
if the Company is unable to sublease this space.
15
<PAGE>
NOTE 5
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1998 1997
==== ====
<S> <C> <C>
Land and building.................................. $ 10,680 $ 744
Equipment.......................................... 35,525 24,029
Credit card terminals held for rent................ 22,610 10,759
Software, internally developed..................... 5,686 4,125
Furniture and fixtures............................. 6,019 2,790
Leasehold improvements............................. 2,414 1,641
Work-in-progress, including software development... 11,446 2,701
-------- --------
94,380 46,789
Less accumulated depreciation and amortization..... (28,648) (16,024)
-------- --------
$ 65,732 $ 30,765
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997, and 1996
was approximately $12.6 million, $6.6 million, and $4.4 million, respectively.
NOTE 6
NET INVESTMENT IN DIRECT FINANCE LEASES
The components of the investment in direct financing leases for POS
equipment are as follows:
<TABLE>
<CAPTION>
December 31,
(IN THOUSANDS) 1998 1997
--------- ---------
<S> <C> <C>
Minimum lease payments..................................... $ 60,383 $ 48,502
Residual values - unguaranteed............................. 9,700 5,725
Allowance for doubtful accounts............................ (3,217) (2,482)
-------- --------
Net minimum lease payments receivable...................... 66,866 51,745
Unearned income............................................ (21,181) (17,858)
-------- --------
Net investment in direct financing leases.................. $ 45,685 $ 33,887
======== ========
Changes in the allowance for doubtful accounts at December 31, 1998, 1997, and1996 were as follows:
(IN THOUSANDS) 1998 1997 1996
- ------------- ------- -------- --------
Balance at beginning of year.............................. $ 2,482 $ 1,659 $ 1,017
Subsidiary fiscal year conversion......................... 78 -- --
Provision for bad debt expense............................ 2,987 2,390 2,133
Charged off lease contracts............................... (2,776) (2,043) (1,638)
Bad debt recoveries....................................... 446 476 147
------- -------- --------
Balance at end of year.................................... $ 3,217 $ 2,482 $ 1,659
======= ======== ========
</TABLE>
16
<PAGE>
At December 31, 1998, minimum lease payments receivable, including
estimated residual values receivable, are due as follows:
<TABLE>
<CAPTION>
(In thousands) MINIMUM LEASE UNGUARANTEED RESIDUAL VALUES
PAYMENTS RECEIVABLE
----------
RECEIVABLE
----------
<S> <C> <C>
YEARS ENDED DECEMBER 31,
- -----------------------
1999...................... $24,527 $ 982
2000...................... 18,559 2,201
2001...................... 12,339 2,628
2002...................... 4,733 3,637
Thereafter................ 225 252
------- ------
$60,383 $9,700
======= ======
</TABLE>
The Company's experience indicates a portion of the leases will terminate
at dates other than the end of the contractual period. Accordingly, the
foregoing table should not be regarded as a forecast of future collections.
NOTE 7
NOTE RECEIVABLE
In March 1997, PMT entered into a ten year lease agreement for a portion of
office space available in a building that served as its corporate headquarters.
PMT granted a mortgage loan to an independent developer and advanced funds for
the purchase and renovation of the building. The outstanding loan amount of
$13.8 million, bears interest at 5%, with principal and interest of $80,562 due
monthly in arrears. The loan principal was issued in various draws based upon
completion of certain stages of renovation. The outstanding balance is payable
in full in August 2007. The mortgage loan is secured by a first lien on the
property. An independent appraisal of the property determined its fair value for
the purpose of classifying the related leasing transaction in accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases." The
lease is classified as an operating lease, and the minimum lease commitment is
included in Note 11.
17
<PAGE>
NOTE 8
LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
December 31,
------------
(In thousands) 1998 1997
- -------------- ---- ----
<S> <C> <C>
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash,
principal and interest at a variable rate
based on the one month Commercial Paper rate
then in effect (5.91% - 6.38%) at October 31,
1998), are payable monthly, with all unpaid
principal and interest due by May 2003..................... $ 24,879 $ 5,258
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash,
principal and interest at rates ranging from
10.11% to 12.21% per annum, are payable monthly,
with all unpaid principal and interest due by
April 2000................................................. 640 5,085
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash,
principal and interest at 7.22% per annum, are
payable monthly, with all unpaid principal and interest
due by March 2002.......................................... 9,401 18,761
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash,
principal and interest at 12.00% per annum
are payable monthly, with all unpaid principal
and interest due by March 1999............................. 31 481
Revolving line of credit obligation (maximum
available balance of $3.0 million), secured by
the remaining payment stream of certain leases
and restricted cash, principal and interest at
a variable rate based on the prime rate (9.5% at
July 31, 1997), are payable monthly, with all
unpaid principal and interest due on demand................ - 1,290
Revolving line of credit obligation (maximum
available balance of $1.5 million), secured by
the remaining payment stream of certain leases
and restricted cash, principal and interest
at variable rate based on the prime rate (10.0%
at July 31, 1997), are payable monthly, with
all unpaid principal and interest due by
May 1998................................................... - 346
Revolving credit facility due through 2002,
at a weighted rate of 7.88%.................................. -- 32,800
Deferred purchase price installment,
discounted at 6.5%, due 1999................................. 17,362 --
Other........................................................ 2,246 2,942
-------- ---------
Total long-term debt obligations............................. 54,559 66,963
Less amounts due within one year............................. (31,534) (14,962)
-------- --------
Long-term debt obligations................................... $ 23,025 $ 52,001
======== ========
</TABLE>
The maturities of long-term obligations at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999............................................................. $ 31,534
2000............................................................. 8,909
2001............................................................. 5,838
2002............................................................. 5,453
2003............................................................. 2,825
--------
$ 54,559
========
</TABLE>
18
<PAGE>
In October 1997, the Company entered into an agreement with a bank for
aggregate loans of up to $80.0 million. The Company, at its option and subject
to the satisfaction of certain conditions, may increase the aggregate amount
available on the credit facility to $100.0 million. On September 30, 2000, all
outstanding borrowings in excess of $50.0 million automatically convert to term
loans due in eight equal quarterly installments commencing December 31, 2000,
and ending September 30, 2002. All outstanding borrowings under the then
remaining $50.0 million revolving loan commitment are due September 30, 2002.
There were no outstanding borrowings against this facility at December 31, 1998.
The Company pays a quarterly commitment fee in arrears on the average daily
unused portion of the funds available for revolving loans and letters of credit.
This commitment fee ranges from .125% to .200% depending on certain financial
ratios. The Company also pays commitment fees for outstanding letters of credit.
Such fees range from .35% to .65% depending on certain financial ratios.
Interest on outstanding borrowings is charged using, at the Company's option,
either the bank's base rate, as defined, or the prevailing Eurodollar rate plus
a margin determined from certain financial ratios.
Borrowings under the loan agreement are collateralized by substantially all
the assets of the Company. The loan agreement contains restrictive covenants
that include, among other items, maintenance of specified ratios of EBITDA
(earnings before interest, taxes, depreciation and amortization) to fixed
charges and funded debt and restrictions on the payment of dividends. In
connection with the PMT Merger and other acquisitions closed in 1998 and 1999,
the Company obtained a waiver of certain covenants under the Credit Agreement,
which is effective for all applicable periods.
As a result of the PMT acquisition, the Company also has a $20.0 million
revolving line of credit available, which expired without renewal on January 31,
1999. There were no outstanding borrowings at December 31, 1998 or 1997.
19
<PAGE>
NOTE 9
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31,
============
1998 1997
------- -------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Property and equipment................. $ 7,757 $ 3,094
Gross lease receivable................. 23,489 21,743
Residual values, including portfolios.. 4,495 3,355
Mark - to - market accounting for
accounts receivable................. 1,052 540
Other.................................. 1,467 2
------- -------
Total deferred tax liabilities...... 38,260 28,734
DEFERRED TAX ASSETS:
Leased equipment....................... 14,870 12,800
Merger related costs................... 18,663 --
Unearned income........................ 8,659 8,006
Allowance for doubtful accounts
and merchant loss reserve........... 10,463 2,977
Accrued liabilities.................... 3,588 793
Book over tax amortization............. 12,619 3,466
Net operating loss carryforwards....... 332 1,299
Other.................................. 225 4
------- -------
Total deferred tax assets........... 69,419 29,345
Valuation allowance...................... (332) (332)
------- -------
Net deferred tax assets.................. $30,827 $ 279
======= =======
</TABLE>
In assessing the likelihood of utilizing existing net deferred tax assets,
management considered its current operating environment, future ability to
generate sufficient taxable income, and the excess of its appreciated asset
values over the related tax basis. At this time, management believes it is more
likely than not that the deferred tax assets will be realized based on its
assessment of current financial condition.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
============
(In thousands) 1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
CURRENT:
Federal...................... $ 25,735 $16,878 $ 6,936
State........................ 2,332 2,308 1,227
DEFERRED:
Federal...................... (26,681) 1,214 2,168
State........................ (3,748) 162 377
CHANGE IN VALUATION ALLOWANCE.. -- -- 195
-------- ------- -------
$ (2,362) $20,562 $10,903
======== ======= =======
</TABLE>
20
<PAGE>
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>
December 31,
=====================
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Federal statutory rate.......................... (35.0)% 35.0% 34.4%
State income taxes, net of federal tax benefit.. (6.1) 2.8 3.5
Non-deductible merger-related charges........... 32.2 -- --
Amortization of excess cost of businesses
Acquired...................................... 0.5 0.1 0.2
Change in valuation allowance................... -- -- 0.7
Subchapter S Corporations income
not subject to tax............................ (7.4) (2.9) (2.5)
Other........................................... 0.2 0.2 --
------- ----- -----
Effective tax rate.............................. (15.6)% 35.2% 36.3%
====== ==== ====
</TABLE>
The Company has approximately $300,000 of federal and state net operating loss
carryforwards available to offset future taxable income of certain subsidiaries.
These cumulative net operating loss carryforwards expire in varying amounts
through fiscal 2013. A valuation allowance has been established for certain of
these net operating losses as utilization by the applicable subsidiaries is not
reasonably assured.
NOTE 10
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 outstanding 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.
COMMON STOCK. In connection with the PMT merger, NOVA amended its Articles
of Incorporation to increase the number of authorized shares of NOVA common
stock from 50,000,000 shares to 200,000,000 shares. The NOVA shareholders
approved the amendment at the special meeting of NOVA's shareholders held on
September 24,1998.
On April 21, 1998, NOVA completed a public offering in which the Company sold
5,000,000 shares of common stock for a purchase price to the public of $30.00.
The net proceeds received from the sales of the shares on common stock were
approximately $142.6 million after deducting underwriting discounts and
commissions and estimated expenses. The Company used its net proceeds to repay
all amounts outstanding under its bank credit facility and to purchase various
merchant portfolios.
21
<PAGE>
NOTE 11
COMMITMENTS, CONTINGENCIES, AND LEASE OBLIGATIONS
CONTINGENCIES
NOVA is involved in ordinary and routine litigation incidental to its
business. The Company is not party to any pending legal proceedings that, in the
opinion of management, would have a material adverse effect on the results of
operations or financial position.
OPERATING LEASE OBLIGATIONS
The Company has leases for various real property and equipment that expire at
various dates.
The future minimum rental commitments, net of future sublease income, for all
non-cancelable leases at December 31, 1998, are payable as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDING DECEMBER 31,
-------------------------
<S> <C>
1999................................. $ 4,319
2000................................. 3,974
2001................................. 3,633
2002................................. 2,510
2003................................. 1,470
Thereafter........................... 6,344
-------
Total future minimum lease payments.. $22,250
=======
</TABLE>
Rental expense, net of sublease income, for the years ended December 31, 1998,
1997, and 1996, was approximately $4.9 million, $3.3 million, and $2.3 million,
respectively.
NOTE 12
STOCK OPTION PLANS
The Company applies APB 25 and related interpretations in accounting for its
employee stock options. Under APB 25, if the exercise price of NOVA's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. As discussed below, the
alternative fair value accounting provided for under SFAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options.
Pro forma disclosures of net income (loss) and earnings per share pursuant to
SFAS 123, 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Risk free interest rate............. 4.5% - 5.7% 5.7% - 6.9% 5.7% - 6.8%
Dividend yield...................... 0% 0% 0%
Expected volatility of stock price.. 0.577 0.544 0.692
Expected life in years.............. 7 7 7
</TABLE>
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
22
<PAGE>
of highly subjective assumptions, including the expected stock price volatility.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options because
the stock options have characteristics significantly different from those of
traded options, and changes in the subjective assumptions can materially affect
the fair value estimate.
The pro forma amounts are indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1998 1997 1996
-------------- ------------ -----------
<S> <C> <C> <C>
NET INCOME (LOSS):
As reported................ $(12,779) $37,899 $19,148
Pro forma.................. $(18,045) $35,398 $18,073
BASIC EARNINGS PER SHARE:
As reported................ $ (0.18) $ 0.60 $ 0.36
Pro forma.................. $ (0.26) $ 0.46 $ 0.28
DILUTED EARNINGS PER SHARE:
As reported................ $ (0.18) $ 0.58 $ 0.32
Pro forma.................. $ (0.25) $ 0.44 $ 0.25
</TABLE>
The pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The
Company sponsors seven stock option plans whereby the Company has reserved for
issuance upon exercise of stock options a maximum of 11,540,610 of NOVA common
stock, and 550,000 shares related to stock appreciation rights.
The 1991 Employees Stock Option and Stock Appreciation Rights Plan ("1991
Plan"), the 1996 Employees Stock Incentive Plan ("1996 Employees Plan"), and the
NOVA Corporation 1996 Directors Stock Option Plan ("1996 Directors Plan") are
available to grant options. These plans are administered by a committee of the
Board of Directors that determines the number of shares to be granted and the
option price per share. Under these plans, the options expire no later than ten
years from the grant date.
The 1991 Plan option awards 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.
Under the 1996 Directors Plan, options granted are exercisable in 25%
increments at the end of each of the four years subsequent to the date of grant,
and at a purchase price per share no less than the market value per share on the
grant date.
The 1996 Employees Plan allows for the grants of incentive stock options, non-
qualified stock options, stock appreciation rights, and restricted stock awards.
On September 24, 1998, NOVA shareholders approved an amendment to increase the
number of shares issuable under the plan from 2,000,000 shares to 6,000,000
shares to facilitate future grants to all employees of NOVA after the PMT
Merger. Under the 1996 Employees Plan, options may be exercised in 25%
increments at the end of each of the four years subsequent to the grant date.
The administrative committee under the plan may amend or alter the vesting
schedule of the outstanding options. Incentive stock options cannot be granted
at a per share price less than the fair market value of the common stock on the
grant date.
In connection with the PMT Merger, each outstanding option or warrant to
purchase PMT common stock became fully vested and was automatically converted
into an option or warrant to purchase the number of shares of NOVA common stock
in an amount and per share price adjusted to reflect the exchange ratio of
0.715. Each assumed option contains terms and provision similar to those terms,
conditions, and provisions contained in the original grant. The PMT plans are no
longer available for option grants. Approximately 2,300,000 million shares of
NOVA common stock have been reserved for issuance upon the exercise of such
options and warrants. Information contained in the tables presents the option
activity as if PMT shares had been converted from December 31, 1995.
23
<PAGE>
A summary of option activity follows (share amounts in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
WEIGHTED AVERAGE
OPTIONS EXERCISABLE EXERCISE PRICE
------------------- --------------
<S> <C> <C>
Balance at December 31, 1995.......... 4,164 $ 1.82
Granted and assumed................... 1,064 17.90
Exercised............................. (1,759) 1.21
Terminated............................ (278) 8.02
------- -------
Balance at December 31, 1996.......... 3,191 6.98
Granted and assumed................... 803 17.11
Exercised............................. (587) 3.02
Terminated............................ (195) 14.67
------- -------
Balance at December 31, 1997.......... 3,212 9.74
GRANTED AND ASSUMED................... 4,507 27.14
Exercised............................. (722) 12.61
Terminated............................ (198) 18.20
------- -------
Balance at December 31, 1998.......... 6,799 $ 20.73
======= =======
</TABLE>
The following table summarizes information concerning outstanding and
exerciseable options at December 31, 1998:
<TABLE>
<CAPTION>
(SHARE AMOUNTS IN THOUSANDS)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
===================== ===================
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.16 - $ 2.34 711 5.3 $ 1.18 541 $ 1.18
$ 3.73 - $ 8.34 618 5.8 3.83 618 3.83
$ 12.28 - $ 16.78 652 8.0 13.87 321 14.12
$ 18.12 - $ 22.03 1,172 8.6 19.59 955 19.74
$ 23.51 - $ 27.45 258 9.1 25.38 254 25.38
$ 28.22 - $ 34.34 3,388 9.7 29.27 43 30.68
----- --- ---- --- -----
Total 6,799 7.7 $20.73 2,732 $12.50
===== === ====== ===== ======
</TABLE>
The Company realizes income tax benefits from the exercise of certain stock
options. This benefit results in a decrease in current income taxes payable and
an increase in additional paid in capital.
24
<PAGE>
NOTE 13
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share in accordance with Statement of Financial Accounting Standards No.
128, "Earnings per Share":
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
1998 1997 1996
--------- ------------ --------
<S> <C> <C> <C>
Numerator:
Net income (loss).................................... $(12,779) $37,899 $19,148
Preferred stock dividends............................ --- --- (1,486)
-------- ------- -------
Numerator for basic earnings per share available
to common shareholders............................... (12,779) 37,899 17,662
income available to common shareholders
Effect of dilutive securities:
Preferred stock dividends for Series A, B, and C..... --- --- 1,256
-------- ------- -------
Numerator for diluted earnings per share available to
common shareholders after assumed conversion............ (12,779) 37,899 18,918
Denominator:
Denominator for basic earnings per share -
Weighted-average shares.............................. 70,061 63,571 52,774
Effect of dilutive securities:
Employee stock options and warrants (1).............. --- 2,097 2,658
Effect of conversion of preferred stock.............. --- --- 4,121
-------- ------- -------
Adjusted weighted-average shares and assumed conversions.. 70,061 65,668 59,553
======== ======= =======
Basic earnings per share.................................. $ (0.18) $ 0.60 $ 0.33
======== ======= =======
Diluted earnings per share............................... $ (0.18) $ 0.58 $ 0.32
======== ======= =======
</TABLE>
(1) 1998 excludes approximately 2,127,000 stock options and warrants which
were antidilutive for fully diluted earnings per share calculations.
NOTE 14
PRO FORMA INFORMATION
Pro forma earnings 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 for the year ended December 31, 1996) and the
weighted-average number of common and common equivalent shares outstanding
during the period, assuming the conversion of Series A, B, and C Convertible
Preferred Stock into common sock. Pursuant to the requirements of the Securities
and Exchange Commission, common shares and common equivalent shares issued at
prices below the initial public offering price of $19.00 per share during the
ten 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 shares
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.
25
<PAGE>
NOTE 15
RELATED PARTIES
The Company has entered into a multi-year agreement with a shareholder that
provides telecommunications service and support, primarily for the Company's
transaction processing network. The amounts paid were approximately $ 7.0
million, $3.8 million and $2.5 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company paid another of its shareholders approximately $3.0 million, $3.3
million and $9.9 million in the years ended December 31, 1998, 1997 and 1996,
respectively, primarily for the utilization of the shareholder's labor force
during conversion and certain other transaction processing fees. Additionally,
the Company received approximately $1.5 million, $.9 million, and $1. 6 million
of interest income in the years ended December 31, 1998, 1997 and 1996,
respectively.
As discussed in Note 3, the Company purchased the merchant processing
portfolio of CoreStates in November 1998. First Union, a shareholder of the
Company, acquired CoreStates prior to NOVA's acquisition of the Corestates
merchant processing portfolio.
NOTE 16
RETIREMENT PLANS
The Company maintains two non-qualified benefits plans, the NOVA Information
Systems, Inc. 401(k) and Profit Sharing Plan and the PMT Services, Inc. 401(k)
Retirement Plan ("the Plans"), which cover substantially all eligible employees
of the Company. Participation eligibility is generally based upon completing
twelve consecutive months of employment and 1,000 hours or more of service.
Participants may elect to contribute up to 15% of their annual compensation,
subject to an annual limit of $10,000 in 1998. Contributions can be made to
various available investment options.
Under the NOVA Information Systems, Inc. 401(k) and Profit Sharing Plan, the
employer contribution is discretionary and may match a percentage of employees'
contributions. Under the PMT Services, Inc. 401(k) Retirement Plan, contribution
amounts were 50% of employee voluntary contributions, up to a maximum of 6% of
the employee's annual compensation. The Company may also elect to make an
additional contribution to the Plans on behalf of eligible employees. During the
years ended December 31, 1998, 1997, and 1996, Company contribution expenses for
the Plans were not significant.
26
<PAGE>
NOTE 17
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Previously reported quarterly financial information for the years ended
December 31, 1998 and 1997 has been restated below to reflect the acquisition of
PMT in a pooling-of-interests business combination.
<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Previously reported.................... $ 133,318 $ 165,555 $ - $ -
PMT.................................... 107,224 109,631 - -
--------- --------- --------- -------------
240,542 275,186 307,209 322,727
========= ========= ========= =============
Cost of service
Previously reported.................... 105,330 130,594 - -
PMT.................................... 77,983 79,985 - -
--------- --------- --------- -------------
183,313 210,579 238,697 253,017
========= ========= ========= =============
Net income (loss) before income taxes
Previously reported.................... 4,589 9,645 - -
PMT.................................... 11,669 10,955 - -
--------- --------- --------- -------------
16,258(1) 20,600(2) 13,496(3) (65,495)(4),(5)
========= ========= ========= =============
Provision (benefit) for income taxes
Previously reported.................... 1,698 3,569 - -
PMT.................................... 3,873 4,080 - -
--------- --------- --------- -------------
5,571 7,649 8,281 (23,863)
========= ========= ========= =============
Net income (loss)
Previously reported.................... 2,891 6,076 - -
PMT.................................... 7,796 6,875 - -
--------- --------- --------- -------------
$ 10,687 $ 12,951 $ 5,215 $ (41,632)
========= ========= ========= =============
Per share:
Earnings per share - basic
Previously reported.................... 0.10 0.18 - -
PMT.................................... 0.06 - - -
--------- --------- --------- -------------
$ 0.16 $ 0.18 $ 0.07 $(0.58)
========= ========= ========= =============
Earnings per share - diluted
Previously reported.................... 0.10 0.18 - -
PMT.................................... 0.06 - - -
--------- --------- --------- -------------
$ 0.16 $ 0.18 $ 0.07 $(0.58)
========= ========= ========= =============
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
- ---- ----------- ----------- ----------- --------
Revenue
<S> <C> <C> <C> <C>
Previously reported............... $ 66,525 $ 78,044 $ 87,489 $103,567
PMT............................... 82,961 80,093 81,203 100,990
-------- -------- -------- --------
149,486 158,137 168,692 204,557
======== ======== ======== ========
Cost of service
Previously reported............... 52,071 59,595 67,499 80,893
PMT............................... 63,033 59,855 60,385 76,056
-------- -------- -------- --------
115,104 119,450 127,884 156,949
======== ======== ======== ========
Net Income (before income taxes)
Previously reported............... 5,071 7,284 7,818 8,134
PMT............................... 6,808 5,643 7,571 10,132
-------- -------- -------- --------
11,879(6) 12,927(6) 15,389(6) 18,266(6)
======== ======== ======== ========
Income taxes
Previously reported............... 1,926 2,868 3,061 3,067
PMT............................... 2,215 2,121 2,116 3,188
-------- -------- -------- --------
4,141 4,989 5,177 6,255
======== ======== ======== ========
Net income
Previously reported............... 3,145 4,416 4,757 5,067
PMT............................... 4,593 3,522 5,455 6,944
-------- -------- -------- --------
$ 7,738 $ 7,938 $ 10,212 $ 12,011
======== ======== ======== ========
Per share:
Earnings per share - basic
Previously reported............... 0.11 0.15 0.16 0.17
PMT............................... 0.01 (0.02) - 0.01
-------- -------- -------- --------
$ 0.12 $ 0.13 $ 0.16 $ 0.18
======== ======== ======== ========
Earnings per share - diluted
Previously reported............... 0.11 0.15 0.16 0.17
PMT............................... 0.01 (0.03) - 0.01
-------- -------- -------- --------
$ 0.12 $ 0.12 $ 0.16 $ 0.18
======== ======== ======== ========
</TABLE>
The Company has experienced, and expects to continue to experience,
significant seasonality in its business. The Company typically realizes higher
revenues in the fourth 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 merchant portfolio purchases 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.
(1) Net income and net income per share include a pre-tax charge of $2.5 million
associated with merger activities.
(2) Net income and net income per share include a pre-tax charge of $1.6 million
associated with merger activities.
(3) Net income and net income per share include a pre-tax charge of $11.2
million associated with merger activities.
(4) Net income and net income per share include a pre-tax charge of $75.4
million associated with merger activities.
(5) Includes $14.2 million of unusual charges for collectibility of accounts
receivables, increase allowance for doubtful accounts, merchant credit and
fraud losses reserves, and state sales and use tax reserves.
(6) Net income and net income per share include a pre-tax charge of $1.9 million
associated with merger activities: 1st Quarter of $.2 million, 2nd Quarter
of $.6 million, 3rd Quarter of $.6 million, and 4th Quarter of $.5 million.
See Notes 2 and 4 to the Consolidated Financial Statements for additional
information on the above transactions.
28
<PAGE>
SCHEDULE II
NOVA CORPORATION, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE
AT THE SUBSIDIARY CURRENT
BEGINNING FISCAL CURRENT YEAR BALANCE
OF THE YEAR YEAR WRITE- THE END OF
PERIOD CONVERSION COST/EXPENSE OFFS(1) THE PERIOD
--------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDING DECEMBER 31, 1998:
Reserve for Doubtful Accounts and Chargebacks.. $5,304 $ 78 $14,688 $ 8,387 $11,683
Credit and Fraud Loss Reserve.................. 6,738 991 10,823 5,775 12,777
Accrued merger and consolidation charges....... - - 90,720 44,996 45,724
FISCAL YEAR ENDING DECEMBER 31, 1997:
Reserve for Doubtful Accounts and Chargebacks.. $4,366 $ 0 $ 3,608 $ 2,670 $ 5,304
Credit and Fraud Loss Reserve.................. 4,534 0 6,296 4,092 6,738
FISCAL YEAR ENDING DECEMBER 31, 1996:
Reserve for Doubtful Accounts and Chargebacks.. $1,457 $ 0 $ 5,378 $ 2,469 $ 4,366
Credit and Fraud Loss Reserve.................. 3,078 0 2,922 1,466 4,534
</TABLE>
(1) The 1998 net change to the merger and consolidation reserve includes non-
cash items of $18,491 and cash payments of $26,505.
29
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-04351) pertaining to the NOVA Corporation 1991 Employees Stock
Option and Stock Appreciation Rights Plan and the NOVA Corporation 1996
Employees Stock Incentive Plan, the Registration Statement (Form S-8 No. 333-
64683) pertaining to the NOVA Corporation 1996 Employees Stock Incentive Plan
and NOVA Corporation Directors Stock Option Plan and the Registration Statement
(Form S-8 No. 333-64681) pertaining to the PMT Services, Inc. 1997 Nonqualified
Stock Option Plan, 1994 Non-Employee Director Stock Option Plan and 1994
Incentive Stock Plan of our report dated February 19, 1999 with respect to the
consolidated financial statements and schedule of NOVA Corporation included in
its Annual Report (Form 10-K/A) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 22, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-04351, 333-64681 and 333-64683) of NOVA
Corporation of our report dated September 25, 1998, relating to the consolidated
financial statements of PMT Services, Inc., which appears in this Annual Report
on Form 10-K/A(1) of NOVA Corporation. We also consent to the application of
such report to the Financial Statement Schedule for the two years ended July 31,
1997 listed under Item 14(a) of this Form 10-K/A(1) when such schedule is read
in conjunction with the financial statements referred to in our report. The
audits referred to in such report also included this schedule.
PricewaterhouseCoopers LLP
Nashville, Tennessee
April 22, 1999
