<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14342
------------------------------------
NOVA CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-2209575
- ------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
ONE CONCOURSE PARKWAY,
SUITE 300
ATLANTA, GEORGIA 30328
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(770) 396-1456
(Registrant's telephone number, including area code)
-------------------------
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares Outstanding as of November 11, 1999
- ---------------------------- -------------------------------------------
Common Stock, $.01 par value 73,624,576 shares
<PAGE>
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999, (unaudited) and December 31, 1998 ............................. 3
Condensed Consolidated Statements of Operations (unaudited)
Three months and nine months ended September 30, 1999, and 1998 ................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1999, and 1998 .................................... 5
Notes to Condensed Consolidated Financial Statements ............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ................................. 16
Item 6. Exhibits and Reports on Form 8-K .................................................... 16
Signatures .......................................................................... 17
</TABLE>
2
<PAGE>
NOVA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents ................................................................... $ 44,105 $ 51,131
Trade receivables, less allowance for doubtful accounts of $16,715
and $8,466 at September 30, 1999, and December 31, 1998, respectively .................. 118,469 85,245
Current portion of net investment in finance leases ......................................... 14,597 11,775
Inventory ................................................................................... 12,268 8,460
Deferred income taxes ....................................................................... 12,952 31,884
Other current assets ........................................................................ 21,429 22,638
--------- ---------
Total current assets ........................................................... 223,820 211,133
Merchant and customer contracts ............................................................. 282,264 263,992
Long-term portion of investment in finance leases ........................................... 39,978 33,910
Property and equipment, net ................................................................. 74,808 65,732
Excess cost of businesses acquired .......................................................... 11,939 14,707
Long-term note receivable ................................................................... 13,688 13,781
Other non-current assets .................................................................... 21,512 19,278
--------- ---------
$ 668,009 $ 622,533
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................................................................ $ 28,325 $ 30,365
Accounts payable to affiliat ................................................................ 447 827
Settlement obligations ...................................................................... 2,143 9,263
Accrued liabilities ......................................................................... 35,973 20,046
Credit and fraud loss reserve ............................................................... 16,148 12,777
Accrued merger and consolidation charges .................................................... 14,420 45,724
Long-term debt obligations due within one year .............................................. 34,077 31,534
--------- ---------
Total current liabilities ...................................................... 131,533 150,536
Long-term debt .............................................................................. 168,380 23,025
Minority interest in subsidiaries ........................................................... 10,872 7,754
Shareholders' Equity
Common stock, $.01 par value, 200,000,000 shares authorized,
73,607,547 and 72,597,045 shares outstanding at September 30, 1999,
and December 31, 1998, respectively .................................................... 736 726
Additional paid in capital .................................................................. 426,966 422,499
Accumulated retained earnings ............................................................... 75,988 17,993
Treasury stock, at cost; 5,474,863 at September 30, 1999, and
and 0 at December 31, 1998 ............................................................. (146,466) --
--------- ---------
Total shareholders' equity ..................................................... 357,224 441,218
--------- ---------
$ 668,009 $ 622,533
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------------ --------------------------------
1999 1998 1999 1998
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenues...................................... $387,471 $307,209 $1,078,580 $822,938
Operating expenses:
Cost of service.......................... 294,764 238,697 824,501 632,592
Conversion costs......................... 6,419 2,553 22,071 7,165
Selling, general and administrative...... 26,939 26,811 83,097 78,272
Depreciation and amortization............ 14,362 11,912 42,071 32,167
Merger and consolidation expenses........ -- 11,198 -- 15,246
-------- -------- ---------- --------
Total operating expenses......... 342,484 291,171 971,740 765,442
-------- -------- ---------- --------
Operating income.............................. 44,987 16,038 106,840 57,496
Other income (expense):
Interest income............................... 850 1,654 2,395 3,021
Interest expense.............................. (2,346) (1,078) (3,848) (2,580)
Minority interest in income of subsidiaries... (5,445) (3,118) (12,219) (7,584)
-------- -------- ---------- --------
(6,941) (2,542) (13,672) (7,143)
-------- -------- ----------- ---------
Income before provision for income taxes...... 38,046 13,496 93,168 50,353
Provision for income taxes.................... 14,248 8,281 34,828 21,500
-------- -------- ---------- --------
Net income.................................... $ 23,798 $ 5,215 $ 58,340 $ 28,853
======== ======== ========== ========
Per Share amounts:
Basic earnings per share...................... $ 0.34 $ 0.07 $ 0.81 $ 0.41
Diluted earnings per share.................... $ 0.33 $ 0.07 $ 0.79 $ 0.40
Shares used in per share calculations:
Weighted averages shares - basic.............. 70,744 71,926 72,151 69,555
Weighted averages shares - diluted............ 72,002 74,171 73,667 71,657
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................................... $ 58,340 $ 28,853
Subsidiary fiscal year conversion ................................................................ 2,547 --
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................................................. 42,071 32,167
Deferred income taxes ...................................................................... 22,941 (743)
Minority interest .......................................................................... 3,118 4,803
Interest on debt obligations ............................................................... 865 --
Changes in assets and liabilities, net of the effects of business acquisitions:
Trade receivables ...................................................................... (23,017) (36,345)
Inventory .............................................................................. (3,698) (3,650)
Other assets ........................................................................... (8,418) (2,796)
Accounts payable ....................................................................... (138) 21,152
Accrued liabilities .................................................................... (22,167) 13,324
--------- ---------
Net cash provided by operating activities .......................................... 72,444 56,765
--------- ---------
Cash flows from investing activities:
Purchase of merchant portfolios and customer contracts ..................................... (43,944) (60,072)
Amounts placed in escrow related to business purchase
transactions .......................................................................... (8,700) --
Purchase of property and equipment ......................................................... (19,403) (38,968)
Purchase of equipment for leasing .......................................................... (24,104) (19,618)
Proceeds from sale of investments .......................................................... -- 39,123
PMT cash used from August 1, 1997 through October 31, 1997 ................................. -- (44,346)
Amounts received on leases ................................................................. 14,114 10,638
--------- ---------
Net cash used in investing activities .............................................. (82,037) (113,243)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings and long-term debt, net ................................ 145,549 38,404
Payments on long-term debt and capital leases .............................................. (971) (71,890)
Proceeds from public offerings, net of offering expenses ................................... -- 142,589
Proceeds from stock options exercised ...................................................... 4,455 2,241
Issuance of note receivable ................................................................ -- (1,710)
Distributions of Subchapter S Corporations ................................................. -- (4,761)
Purchase of treasury stock ................................................................. (146,466) --
--------- ---------
Net cash provided by financing activities .......................................... 2,567 104,873
--------- ---------
Net (decrease) increase in cash and cash equivalents ............................................. (7,026) 48,395
--------- ---------
Cash and cash equivalents, beginning of period ................................................... 51,131 26,823
--------- ---------
Cash and cash equivalents, end of period ......................................................... $ 44,105 $ 75,218
========= =========
Supplementary information:
Income taxes paid ................................................................................ $ 17,751 $ 21,715
Interest paid .................................................................................... $ 2,613 $ 2,944
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the consolidated financial
statements reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position and results of
operations of NOVA Corporation ("NOVA" or the "Company") as of the end of and
for the periods indicated.
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 (the "Merger"). Prior to the Merger, PMT
completed various transactions intended to qualify as tax-free reorganizations
and 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 a fiscal
year ended July 31 basis, PMT changed its 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 was
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 statements of operations for
the three months and nine months ended September 30, 1998, have been combined
with the PMT statements of operations for the three months and nine months ended
July 31, 1998. The NOVA statement of cash flows for the nine months ended
September 30, 1998, has been combined with the PMT statement of cash flows for
the nine months ended July 31, 1998. The results of operations of PMT for the
period November 1, through December 31, 1998, was a net loss of $345,000 and was
reported as a decrease in shareholders' equity during the three months ended
March 31, 1999. Revenues for this interim period were $90.8 million and
expenses, including income tax benefits, were $91.1 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.
Results of interim periods are not necessarily indicative of results to be
expected for the year as a whole. The effect of seasonal business fluctuations
and the occurrence of costs and expenses in annual cycles require certain
estimations in the determination of interim results.
These interim financial statements should be read in conjunction with
NOVA's audited financial statements included in the Annual Report on Form 10-K
and as amended on Form 10-K/A No. 1 for the year ended December 31, 1998, filed
with the Securities and Exchange Commission.
NOTE 2 - BUSINESS ACQUISITIONS
On February 15, 1999, NOVA acquired the assets of American National Bancard
Company ("ANC"), an independent sales organization ("ISO"), through NOVA's
wholly-owned subsidiary PMT. The acquisition was accounted for as a purchase
transaction, and the net assets and results of operations are included in the
condensed consolidated financial statements from the date of acquisition. Cash
disbursed to the seller at the time of the transaction totaled approximately
$11.1 million and was allocated to "Merchant and customer contracts" based on
the estimated fair market value of the assets acquired. Additional
consideration of $8.7 million has been placed in escrow with a third party
until January 31, 2000.
6
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 - BUSINESS ACQUISITIONS (Continued)
This amount may be released subject to ANC's achieving certain performance
thresholds as set forth in the purchase agreement. This amount was recorded as
an "Other current assets" for financial statement purposes.
During January 1999, NOVA paid additional consideration of $6.0 million to
Key Bank, N.A. based on satisfying certain contingency thresholds established in
connection with the Key Merchant Services, LLC transaction in January 1998.
Additional merchant portfolio purchase activity through September 30, 1999, of
$26.8 million relates to numerous individually insignificant merchant portfolio
purchases.
Effective May 1, 1999, Elan Merchant Services, LLC ("Elan"), a joint
venture between Nova Information Systems, Inc., a wholly-owned subsidiary of
NOVA, and Firstar Bank U.S.A., N.A ("Firstar") acquired the merchant processing
portfolio of Star Banc through a contribution of merchant processing rights from
Firstar. NOVA contributed $6.2 million in cash to complete the transaction.
NOTE 3 - 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" (in thousands, except per share data):
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per share-income
available to common shareholders .................................... $23,798 $ 5,215 $58,340 $28,853
Denominator:
Denominator for basic net income per share-
weighted-average shares ............................................ 70,744 71,926 72,151 69,555
Effect of diluted securities:
Stock options .......................................................... 1,258 2,245 1,516 2,102
Dilutive potential common shares:
Denominator for diluted net income per share-adjusted
weighted-average shares and assumed conversions ...................... 72,002 74,171 73,667 71,657
------- ------- ------- -------
Basic earnings per share ........................................... $ 0.34 $ 0.07 $ 0.81 $ 0.41
======= ======= ======= =======
Diluted earnings per share ......................................... $ 0.33 $ 0.07 $ 0.79 $ 0.40
======= ======= ======= =======
</TABLE>
NOTE 4 - MERGER AND CONSOLIDATION EXPENSES
As a result of the Merger and other merger transactions completed by PMT
during 1998, the Company recorded a $90.7 million charge in 1998. This charge
was related primarily 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.
7
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 - MERGER AND CONSOLIDATION EXPENSES (Continued)
Direct merger transaction costs are primarily 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 are a result of 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. NOVA began the process of consolidating PMT's corporate
headquarters from Nashville, Tennessee to other locations in December 1998, and
completed this process in the first quarter of 1999.
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 Company's proprietary telecommunications platform (the "NOVA Network"). In
1998, NOVA negotiated the termination of long-term processing contracts with
third parties that resulted in early termination fees. The majority of these
terminations were finalized and the fees paid in 1998. The Company expects to
complete the negotiation and payment of the termination fees during 1999.
Capital asset write-downs are substantially attributable to 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 these distribution channels 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
remaining costs are expected to be paid during 1999.
A summary of the merger related charges are as follows (in thousands):
<TABLE>
<CAPTION>
Reserve Reserve
Cash/ Balance Balance
Description Non-cash Charge Activity at 12/31/98 Activity at 9/30/99
- ------------------------------------------- ----------- ------------ ------------ ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Direct transaction costs .................... Cash $15,515 $(11,412) $ 4,103 $ (4,103) $ --
Severance packages .......................... Cash 14,050 (1,404) 12,646 (5,055) 7,591
Lease abandonment ........................... Cash 4,658 -- 4,658 (1,194) 3,464
Contract termination charges ............... Cash 35,506 (13,689) 21,817 (18,452) 3,365
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 (2,500) --
------- -------- ------- -------- -------
TOTAL .................................. $90,720 $(44,996) $45,724 $(31,304) $14,420
======= ======== ======= ======== =======
</TABLE>
8
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 - SHAREHOLDERS' EQUITY
COMMON SHARE REPURCHASE PROGRAM. In June 1999, the Board of Directors
authorized a share repurchase program approving share purchases of up to $250.0
million from time to time on the open market, or pursuant to privately
negotiated transactions, at price levels the Company deems attractive. The
shares may be used to meet funding requirements for benefit plans and other
business purposes. As of September 30, 1999, NOVA had acquired 5,474,863 shares
at an aggregate cost of $146.5 million. The purchase of the shares was funded
primarily through the draw down of funds from the existing credit facility.
RIGHTS AGREEMENT. On June 8, 1999, the Board of Directors approved the
adoption of a share Rights Agreement which provides for a dividend distribution
to shareholders of record on June 8, 1999, of one Right for each outstanding
share of common stock. The Rights are attached to the common stock, do not have
voting or dividend rights, and until they become exercisable, they can have no
dilutive effect on earnings. Each Right, when exercisable, entitles the holder
to purchase ten shares of common stock (subject to adjustment based upon a
predetermined formula) at a purchase price per share of 20% of market value,
measured as of the date that an announcement is made that a person has acquired
sufficient shares to become an Acquiring Person (any person who acquires, after
July 9, 1999, 10% of the outstanding shares of the Company) multiplied by the
number of shares of common stock to be received upon exercise. The distribution
date will occur upon the earlier of (i) ten days following a public announcement
that a person or group of affiliated or associated persons has acquired
beneficial ownership of 10% or more of the outstanding shares, or (ii) ten days
following the commencement of a tender offer or an exchange offer that would
result in a person or group beneficially owning 10% or more of such outstanding
shares of common stock. The Rights are not exercisable until the distribution
date and will expire at the close of business on July 9, 2009, unless earlier
redeemed by the Company.
In the event that, after the Rights become exercisable (i) the Company is
acquired in a merger or other business combination in which the Company is not
the surviving corporation, (ii) all of its shares are acquired in a share
exchange or the Company engages in a merger or consolidation in which all or
part of its outstanding shares are changed or exchanged for stock, other
securities or assets of any other person or (iii) 50% or more of the Company's
assets or earning power is sold or transferred, each Right holder shall have the
right to receive, upon exercise, a number of shares of common stock of the
acquiring company equal to the calculated conversion exchange ratio.
Unless the terms of an offer for all shares are first approved by the Board
and the Rights Agreement amended to permit the transaction, or the Rights are
redeemed by the Company, the Rights will cause substantial dilution, if they
become exercisable.
In general, the Company may redeem the Rights in whole, but not in part, at
a price of $.01 per Right, at any time before a person becomes a beneficial
owner of 10% or more of the outstanding common stock of NOVA. Immediately upon
the action of the Board of Directors ordering redemption of the Rights, the
Rights will terminate and the only right of the holders will be to receive the
$.01 redemption price.
NOTE 6 - LONG-TERM DEBT
On August 25, 1999, NOVA completed a third amendment to its existing credit
agreement dated October 27, 1997. Under the amendment, a term loan was granted
in the amount of $70.0 million. The loan bears a variable interest rate of
Eurodollar, plus 1%, and is scheduled to mature on November 30, 1999. Proceeds
from the loan were used to acquire shares of the Company under the common share.
Subsequent to this amendment, NOVA's existing available credit facility was
$170.0 million.
9
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6 - continued
repurchase program. NOVA expects to complete an amended and expanded credit
agreement in the amount of $250.0 million, on or before November 30, 1999.
NOVA expects to roll the new term loan into the amended credit facility at
maturity.
NOTE 7 - 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, 2000. 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.
FORWARD-LOOKING STATEMENTS. In addition to historical information, this
report on Form 10-Q 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 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'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.
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", as well as
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a more complete discussion of certain risk factors contained
in the Annual Report on Form 10-K for the year ended December 31, 1998, filed
with the Securities and Exchange Commission.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS. The following table presents, for the periods
indicated, the percentage of revenues represented by certain line items in
NOVA's condensed consolidated statements of operations, as well as the
percentage increase/(decrease) of such items from period to period:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, Increase/ September 30, Increase/
-------------------- ----------------------
1999 1998 (Decrease) 1999 1998 (Decrease)
-------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................................. 100.0% 100.0% 26.1% 100.0% 100.0% 31.1%
Cost of service ...................................... 76.1 77.7 23.5 76.4 76.9 30.3
Conversion costs ..................................... 1.7 0.8 151.4 2.0 0.9 208.0
Selling, general and administrative .................. 6.9 8.7 0.5 7.8 9.5 6.2
Depreciation and amortization ........................ 3.7 3.9 20.6 3.9 3.9 30.8
Merger and consolidation expenses .................... 0.0 3.6 (100.0) 0.0 1.9 (100.0)
----- ----- ----- -----
Operating expenses ................................... 88.4 94.7 17.6 90.1 93.1 27.0
----- ----- ----- -----
Operating income ..................................... 11.6 5.3 180.5 9.9 6.9 85.8
Interest income ...................................... 0.2 0.5 (48.6) 0.2 0.4 (20.7)
Interest expense ..................................... (0.6) (0.4) 117.6 (0.4) (0.3) 49.1
Minority interest .................................... (1.4) (1.0) 74.6 (1.1) (0.9) 61.1
----- ----- ----- -----
Income before provision for income taxes ............. 9.8 4.4 181.9 8.6 6.1 85.0
Provision for income taxes ........................... 3.7 2.7 72.1 3.2 2.6 62.0
----- ----- ----- -----
Net income ........................................... 6.1% 1.7% 356.3% 5.4% 3.5% 102.2%
===== ===== ===== =====
</TABLE>
GENERAL. NOVA is a provider of integrated point-of-sale transaction
processing services, related software application products, and value-added
services. The Company provides transaction processing support for all major
credit and charge cards and also provides access to debit card processing and
check verification services.
REVENUES. NOVA's revenues increased 26.1% to $387.5 million for the
quarter ended September 30, 1999, compared to $307.2 million for the quarter
ended September 30, 1998. The increase resulted primarily from a 17.0% increase
in merchant sales volume processed to approximately $14.8 billion compared to
$12.7 billion for the same period in 1998. Principal contributors to the
increase include internal growth and the incremental effect of the increased
discount related to the pass through of higher interchange rates from credit
card associations, effective April 10, 1999. For the nine months ended
September 30, 1999, revenues increased $255.6 million, or 31.1%, to $1.1
billion from $822.9 million for the same period in 1998. The revenue increase
corresponds to a $4.9 billion increase in merchant sales volume processed to
$25.4 billion.
COST OF SERVICE. Cost of service increased 23.5% to $294.8 million for the
quarter ended September 30, 1999, compared to $238.7 million for the quarter
ended September 30, 1998. For the nine months ended September 30, 1999, the
cost of service increased 30.3% to $824.5 million from $632.6 million during the
same period in 1998. The increase resulted from the interchange, assessment
fees and other direct operating costs associated with the higher merchant sales
volume processed. Another significant factor was increased VISA and MasterCard
interchange rates that went into effect on April 10, 1999.
CONVERSION COSTS. Conversion costs increased to $6.4 million for the
quarter ended September 30, 1999, compared to $2.6 million for the quarter ended
September 30, 1998. The increase relates to the magnitude of the conversion
efforts currently underway for the PMT merchants. For the nine months ended
September 30, 1999, conversion costs increased to $22.1 million, or 208.0%, from
$7.2 million during the same period in 1998.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses of $26.9 million for the quarter ended September 30, 1999, were flat
compared to $26.8 million for the same period in 1998, due to the benefit of
substantial reduction or elimination of redundant functions related to the PMT
transaction. Selling, general and administrative expenses for the nine months
ended September 30, 1999 were $83.1 million, an increase of 6.2% from the $78.3
million reported for the nine months ended September 30, 1998. These increases
are attributable primarily to the additional personnel, primarily customer
service and support, and facilities costs in connection with transitioning all
operational functions for the PMT merchant portfolios begun in October 1998.
Expenses as a percentage of revenues declined to 6.9% for the three months
ending September 30, 1999, compared to 8.7% for the three months ending
September 30, 1998. Expenses as a percentage of revenues for the nine months
ended September 30, 1999, dropped to 7.8% from 9.5% for the same period ended
September 30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
20.6% to $14.4 million for the quarter ended September 30, 1999, compared to
$11.9 million for the quarter ended September 30, 1998, due primarily to the
increase in amortization expense associated with the portfolio purchases made in
the latter part of 1998. Depreciation expense increases are attributable to the
increase in fixed assets held as of September 30, 1999, compared to September
30, 1998, mainly for facilities and technology infrastructures. Depreciation
and amortization expense for the nine months ended September 30, 1999, of $42.1
million increased 30.8% from the $32.2 million during the first nine months of
1998.
MERGER AND CONSOLIDATION EXPENSES. There were no merger and consolidation
expenses in the quarter ended September 30, 1999, or the nine months ended
September 30, 1999. This is compared to $11.2 million for the quarter ended
September 30, 1998, and $15.2 million for the nine months ended September 30,
1998. The charges in 1998 relate primarily to the merger transaction with PMT.
OPERATING INCOME. For the foregoing reasons, operating income for the
quarter ended September 30, 1999, increased $28.9 million, or 180.5%, to $45.0
million from the same quarter in 1998 of $16.0 million. Operating margins
improved to 11.6% for the three months ended September 30, 1999, compared to
5.3% for the same period in 1998. Operating income for the nine months ended
September 30, 1999, of $106.8 million increased $49.3 million, or 85.8%, from
the same period in 1998. Operating margins improved to 9.9% for the nine months
ended September 30, 1999, compared to 6.9% from the same period in 1998.
Excluding merger related charges, operating income increased 65.2% and 46.9% for
the three months and nine months ended September 30, 1999, respectively,
compared to the same periods in 1998.
INTEREST INCOME. Interest income decreased approximately $800,000 to
$850,000 for the quarter ended September 30, 1999, compared to $1.7 million for
the quarter ended September 30, 1998. For the nine months ended September 30,
1999, interest income declined 20.7% to $2.4 million from $3.0 million during
the same period in 1998. The most significant factor for the decrease relates
to the income earned during 1998 from the investment in debt securities. Upon
maturity of these debt securities during fiscal 1998, the Company used the
proceeds primarily to fund merchant portfolio purchases and other operating
requirements. NOVA utilized other available cash to fund portfolio purchases and
purchases of property and equipment. Accordingly, such balances are unavailable
for investment purposes.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
INTEREST EXPENSE. Interest expense increased approximately $1.3 million,
or 117.6%, for the quarter ended September 30, 1999, to $2.3 million, compared
to $1.1 million in the quarter ended September 30, 1998. The primary components
of this increase were increased borrowings to fund treasury share purchases and,
to a lesser extent, merchant portfolio acquisitions and capital asset
investments. Offsetting this decrease was the pay down of approximately $53.0
million in debt obligations in April 1998 from a portion of the proceeds
received from a public offering of shares of NOVA common stock.
INCOME TAXES. Income tax expense of $14.2 million for the quarter ended
September 30, 1999, increased 72.1%, or $6.0 million, compared to $8.3 million
for the same period in 1998. The effective tax rate of 37.5% in the third
quarter of 1999 decreased from the 61.4% effective rate for the third quarter of
1998. This decrease is attributable to the substantial portion of merger and
consolidation expenses that were non-deductible for income tax purposes in 1998.
For the nine months ended September 30, 1999, income tax expense of $34.8
million increased $13.3 million, or 62.0%, from the $21.5 million for the same
period in 1998. The effective tax rate of 37.4% for the first nine months of
1999 declined from a 42.7% effective rate for the first nine months of 1998.
This decrease is attributable to the aforementioned reasons. After adjusting
the results for 1998 for non-deductible merger and consolidation expenses, the
effective income tax rate for 1999 increased over the 1998 rate. NOVA's
increased tax presence in states where former Subchapter S corporations resided,
and the pre-merger acquisitions made by PMT of Subchapter S corporations whose
income is included in earnings, but not subject to income taxes in 1998,
contribute to this increase compared to the same period in 1998.
NET INCOME. Due to the factors discussed above, net income rose 356.3% to
$23.8 million, for the quarter ended September 30, 1999, compared to $5.2
million for the quarter ended September 30, 1998. This increase was also
accompanied by improvement in net operating margins in the third quarter of 1999
to 6.1% compared to 1.7% in the third quarter of 1998. Net income increased
102.2% in the nine months ended September 30, 1999 to $58.3 million from $28.9
million during the first nine months of 1998. Net margins also improved to 5.4%
in 1999 from 3.5% in the first nine months of 1998. Excluding the effect of the
merger charges in 1998, net income rose $7.7 million, or 47.6%, to $23.8 million
from the $16.1 million for the three months ended September 30, 1998. For the
nine months ended September 30, 1999, net income increased $18.8 million, or
47.4%, from $39.6 million to $58.3 million.
NOVA reported earnings per diluted common share of $0.33 and $0.79 per
share for the third quarter and nine months ended September 30, 1999,
respectively. This represents a per share increase for the third quarter 1999
of $0.26, or 370.1%, from the $0.07 reported in the third quarter of 1998, and
an increase of $0.39, or 96.7%, from the $0.40 reported in the first nine months
of 1998. After adjusting 1998 for the effect of merger and consolidation
expenses, net earnings per common share increased 52.0% and 33.2%, respectively,
for the third quarter and nine months ended September 30, 1999 compared to the
same periods in 1998.
OTHER MATTERS. As discussed in Note 1 to the condensed consolidated
financial statements, PMT incurred a net loss of $345,000 during the two months
ended December 31, 1998. These results include approximately $4.1 million of
costs associated with the merger transaction with NOVA that were not accrued
during fiscal 1998, and conversion related costs of approximately $850,000.
Additional factors adversely affecting this period include operating under
unfavorable third party processing contracts that were not renewed in
anticipation of conversion to the NOVA Network and redundant operations that
occurred during the consolidation and integration phase.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary uses of its capital
resources include treasury share repurchases, purchases of merchant portfolios,
capital expenditures, equipment for leasing, and working capital. Net cash
provided by operating activities was $72.4 million for the nine months ended
September 30, 1999, as compared to $56.8 million for the nine months ended
September 30, 1998. Primary uses of operating cash were for accounts
receivable and the settlement of liabilities. During the first nine months of
1999, $27.2 million was used to satisfy certain liabilities related to the $90.7
million in merger related charges recognized in 1998. The Company used its
operating cash resources to support operating requirements and reinvest in
existing business and technology platforms.
Net cash used in investing activities was $82.0 million for the nine months
ended September 30, 1999, as compared to $68.9 million for the nine months ended
September 30, 1998, adjusted for PMT's fiscal period conversion. Increases in
the cash needed to fund the purchases of merchant portfolios include the use of
approximately $19.9 million to acquire ANC and establish contractual escrow
balances. Historically, NOVA has required considerable cash outlay to
consummate the portfolio purchases and this requirement is expected to continue
for the 1999 fiscal year. Capital equipment purchases decreased approximately
$19.6 million to $19.4 million during the nine months ended September 30, 1999,
compared to the same period in 1998. Significant expenditures in 1998 included
the development of internal merchant processing systems and the refurbishment
and expansion of facilities in Knoxville, Tennessee. Major expenditures during
the first nine months of 1999 include the enhancement and improvement of
technology platforms. NOVA's cash requirement for capital expenditures is
projected to be approximately $30.0 million during 1999.
Net cash flow from financing activities was $2.6 million during the nine
months ended September 30, 1999, compared to $104.9 million for the same period
in 1998. Proceeds from short-term and other borrowings of $145.6 million were
used primarily to fund the share repurchase program and merchant portfolio
purchase activity. During 1998 proceeds from the draw down of available credit
facilities in the first quarter of 1998 were used primarily to fund merchant
portfolio purchases and capital expenditures. In April 1998, the Company
completed a public offering of its common shares for $142.6 million, net of
expenses. Subsequent to the public offering, NOVA used $53.1 million of the net
proceeds to repay amounts outstanding under its bank credit facilities.
In June 1999, NOVA announced that its Board of Directors had authorized the
repurchase of up to $250.0 million of its common shares on the open market or
through privately negotiated transactions. The Company has supported the share
repurchases through operating cash flows and funds from available credit
facilities. As of September 30, 1999, NOVA had repurchased approximately 5.5
million shares under this program. There has been no share repurchase activity
thus far during the fourth quarter.
Effective June 17, 1999, NOVA amended its existing credit facilities
agreement to allow, among other things, for the repurchase of NOVA shares.
Additionally, an agreement to expand the revolving loan commitment amount from
$80.0 million to $100.0 million was entered into in June 1999. On August 25,
1999, NOVA completed a term loan of $70.0 million, due November 30, 1999.
Proceeds were used to purchase the Company's common shares under the repurchase
program. The Company is currently completing the negotiation of an expanded
credit facility of up to $250.0 million. NOVA expects to finalize the agreement
on or before November 30, 1999.
The Company typically has relatively low working capital requirements
because discount fees charged to merchants are generally collected in an average
of thirty days, while normal payables are paid in an average of thirty days or
longer. In addition, increasing acquisition activity may cause variations in
working capital due to conversion-period operating costs and the transition in
the payment of expenses and the collection of receivables from the former
processor, as is the case with the consolidation of PMT. Because of the
seasonality of NOVA's business, capital requirements may be greater in certain
months than others.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
At September 30, 1999, the Company had cash and cash equivalents of $44.1
million. NOVA believes its existing cash and cash equivalents, cash generated
from operations, and impending expansion of it bank credit facilities are
sufficient to fund merchant portfolio purchases, capital asset investments,
share repurchases and to meet 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 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 substantially complete. 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 expended 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 developed 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 continues 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. Currently, the core vendors
that NOVA relies upon have provided documentation that they are year 2000
compliant. The contingency efforts described above are expected to minimize the
business risk connected to the Year 2000 Issue.
15
<PAGE>
PART II.--OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation in the normal
course of its business. While management is aware of and dealing with certain
pending or threatened litigation, management does not believe that such matters,
individually or in the aggregate, will have a material adverse affect on the
financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description of Exhibit
- ------- ----------------------
*10.52 Third Amendment to Credit Agreement, dated August 25, 1999, among NOVA
Corporation and NOVA Information Systems, the Lenders named therein,
First Union National Bank as Documentation Agent, and Bank of America
National Trust and Savings Associations.
*27 Financial Data Schedule
- ----------------
* Filed herewith
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 9, 1999, with respect to the adoption of a
Rights Agreement, dated as of July 9, 1999, between the Company and First Union
National Bank, as Rights Agent.
16
<PAGE>
FORM 10-Q
NOVA CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVA CORPORATION
(Registrant)
By: /s/ Edward Grzedzinski
-----------------------------
Edward Grzedzinski
Date: November 12, 1999 Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ Philip J. Mazzilli
-----------------------------
Philip J. Mazzilli
Chief Financial Officer
(Principal Accounting Officer)
17
<PAGE>
Exhibit 10.52
THIRD AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("Amendment"), dated as of August
25, 1999, and to be effective as of August 25, 1999 (the "Effective Date"), is
entered into by and among NOVA CORPORATION ("NOVA" and sometimes also called
"Parent"), NOVA INFORMATION SYSTEMS, INC. ("NIS" and together with NOVA,
individually a ("Borrower"), the lenders party hereto (collectively, the
"Lenders"), FIRST UNION NATIONAL BANK, as Documentation Agent, and BANK OF
AMERICA, N.A. (f/k/a BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION), as
agent for itself and the Lenders (the "Agent"). Unless otherwise defined
herein, capitalized terms used herein shall have the meanings, assigned to them
in the Credit Agreement.
R E C I T A L S:
---------------
WHEREAS, NIS, NOVA, the Lenders and the Agent are parties to a certain
Credit Agreement dated as of October 27, 1997, as amended or modified (the
"Credit Agreement"), pursuant to which the Lenders have agreed to make loans to
NIS and/or NOVA;
WHEREAS, NIS and NOVA desire to amend the Credit Agreement, so as to, among
other things, (i) provide for a new term loan facility, and (ii) revise the
share repurchase limitation, and (iii) make certain other changes to the Credit
Agreement and the Related Documents; and
WHEREAS, the Lenders are willing to amend the Credit Agreement, subject to
the terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
The parties agree that the Credit Agreement and the Related Documents are
hereby amended as follows:
I. AMENDMENTS
1.1 New Definitions. Section 1 of the Credit Agreement is amended by
---------------
adding in alphabetical order the definitions of "Applicable Percentage", "Term
Loan", "Term Loan Commitments", "Term Loan Maturity Date" and "Term Note" as
follows:
<PAGE>
"Applicable Percentage" shall mean, relative to any Lender, (i)
in the case of the Revolving Loans and/or the Revolving Loan
Commitments, and/or the Letters of Credit or L/C Obligations, the
percentage set forth opposite such Lender's name on Schedule 1.1A
-------------
under heading "Revolving Loan Commitments", and (ii) in the case of
the Term Loans and/or the Term Loan Commitments, the percentage set
forth opposite such Lender's name on Schedule 1.1A under the heading
"Term Loan Commitments", in each case as such percentage may be
adjusted from time to time pursuant to Section 16.1.
"Term Loan" - see Section 2.5.
-----------
"Term Loan Commitments" - see Section 2.5.
"Term Loan Maturity Date" - shall mean the earlier of (i)
November 30, 1999, or (ii) the date of termination in whole of the
Commitments pursuant to Section 14.2.
------------
"Term Note" shall mean shall mean a promissory note,
substantially in the form of Exhibit M with blanks appropriately
---------
completed in conformity herewith, evidencing the Term Loans of any
Lender, together with any promissory note issued and accepted by any
Lender in replacement of or substitution for such promissory note.
1.2 Amendment of Existing Definitions. Section 1 of the Credit Agreement is
---------------------------------
amended be deleting the definition of "Percentage". Section 1 is further amended
so that the definitions of "Borrowing", "Commitment", "Loans", and "Notes",
shall read in their entirety as follows:
"Borrowing" shall mean a borrowing hereunder consisting of
Loans which have the same Interest Period and are made to the
applicable Borrower at the same time by the Lenders pursuant to
Section 2. A Borrowing may be a Base Rate Borrowing or a Eurodollar
---------
Borrowing.
"Commitment" shall mean, as to any Lender, its Revolving Loan
Commitment, its Term Loan Commitment, and its L/C Commitment.
"Commitments" as to all Lenders, shall mean the Revolving Loan
Commitments, the Term Loan Commitments and the L/C Commitments of all
Lenders.
"Loans" shall mean the Revolving Loans and the Term Loans.
"Loan" shall mean a Revolving Loan and a Term Loan.
"Notes" shall mean each of the Revolving Notes and the Term
Notes, together with any promissory note issued and accepted by any
Lender in replacement of or substitution thereof.
-2-
<PAGE>
1.3 Term Loan Margin. Section 1 of the Credit Agreement is amended by
---------------
adding the following at the end of the definitions of applicable margin:
"Notwithstanding any provision hereof to the contrary, the Applicable
Eurodollar Rate Margin for Term Loans shall be 1.00% per annum.
1.4 June 18, 1999 Commitment Increase. Section 2.3 of the Credit Agreement
---------------------------------
is conformed by substituting $100,000,000 for $80,000,000. (This is to reflect
the June 18, 1999 Commitment Increase). Section 2.4 of the Credit Agreement is
amended by adding the following Section 2.4.3:
2.4.3. The parties acknowledge that as of June 18, 1999 the
Aggregate Commitment was increased to $100,000,000 as a result of a
$20,000,000 increase in the Revolving Commitment of Bank of America,
N.A. Accordingly, pursuant to Section 2.4(c) and 2.4(f) there shall be
no further Commitment Increases under Section 2.4.
1.5 Term Loan Commitment. Section 2 of the Credit Agreement is amended by
--------------------
adding thereto Section 2.5 as follows:
SECTION 2.5 Term Loan Commitment. Each of the Lenders, severally
--------------------
and for itself alone, agrees to make loans (herein collectively called
"Term Loans" and individually called a "Term Loan") to NIS and/or
NOVA, in a single take-down, before November 30, 1999 in such Lender's
Applicable Percentage of such aggregate amounts as NIS or NOVA may
request from all Lenders. The aggregate principal amount of Term Loans
which any Lender shall be committed to have outstanding to NIS and/or
NOVA shall not at any one time exceed the amount set opposite such
Lender's name on Schedule 1.1A hereto under the heading "Term Loan
-------------
Commitment." Amounts borrowed as Term Loans which are repaid or
prepaid may not thereafter be reborrowed. The foregoing commitment of
each Lender is herein called its "Term Loan Commitment" and
collectively the "Term Loan Commitments."
1.6 Borrowing Request. Section 3.2 of the Credit Agreement is amended by
-----------------
adding the following immediately after the second sentence:
"Each Borrowing Request shall further specify whether the related
Borrowing is to be a Borrowing of Term Loans or of Revolving Loans."
1.7 Proration of Borrowings. Section 3.3 of the Credit Agreement is
-----------------------
amended so that the last sentence shall read as follows:
"All Borrowings shall be pro rata among the Lenders in accordance with
their respective Revolving Loan Commitments or Term Loan Commitments,
as the case may be."
-3-
<PAGE>
1.8 Repayment of Term Loans. Section 3.7 of the Credit Agreement is
-----------------------
amended by deleting "Revolving" from the section heading and by adding the
following paragraph at the end of such Section:
"The aggregate unpaid principal amount of the Term Loans shall be
payable (and the Borrower agrees to pay such aggregate unpaid
principal amount) on the Term Loan Maturity Date. The Term Loans of
each Lender shall be evidenced by a Term Note, respectively, payable
to the order of such Lender in the principal amount of the Term Loan
Commitment of such Lender (or, if less, in the aggregate unpaid
principal amount of all of such Lender's Term Loans hereunder
outstanding on the Term Loan Maturity Date)."
1.9 Interest Periods. Section 5.4 of the Credit Agreement is amended by
----------------
adding thereto the following at the end of such Section.
"Notwithstanding any provision herein to the contrary, in the case of
Eurodollar Rate Loans which are Term Loans, all Interest Periods shall
have a duration of not more than one month."
1.10 Payments. Section 6.5 of the Credit Agreement is amended to read in
--------
its entirety as follows:
SECTION 6.5 Making of Payments. Except as otherwise provided,
------------------
(a) all payments (including those made pursuant to Section 5.7,
-----------
Section 6.2 or Section 6.3) in respect of the Revolving Loans or the
----------- -----------
Letters of Credit or the LC Obligations shall be made by NIS or NOVA
to the Agent for the account of the Lenders pro rata according to the
respective unpaid principal amounts of the Revolving Loans or LC
Obligations held by them, and (b) all payments in respect of the Term
Loans shall be made by NIS or NOVA to the Agent for the account of the
Lenders pro rata according to the respective unpaid principal amounts
of the Term Loans held by them, provided, however, that (c) at any
-------- -------
time an Event of Default shall exist (as notified in writing to the
Agent by NIS, NOVA or any Lender) all payments shall be made by NIS or
NOVA to the Agent for the account of the Lenders prorata according to
the respective unpaid principal amount of all Revolving and Term Loans
held by them. All payments of fees pursuant to Section 5.7 shall be
-----------
made by the Borrower to the Agent for the account of the Lenders pro
rata according to their respective Applicable Percentages, as the case
may be. All such payments shall be made to the Agent in immediately
available funds at the address set forth on the signature pages hereof
for making of payments or at such other address within the United
States of America as the Agent may hereafter specify for such purpose,
not later than 12:30 P.M., San Francisco time, on the date due; and
funds received after that hour shall be deemed to have been received
by the Agent on the next following Business Day. The Agent shall
promptly remit to each Lender or other
-4-
<PAGE>
Holder of a Loan or LC Obligation its pro rata share (based on its
Applicable Percentage) of all such payments received in collected
funds by the Agent for the account of such Lender or Holder. All
payments under Sections 7.1 and 7.4 shall be made by the Borrower
------------ ---
directly to the Lender or Lenders entitled thereto. All payments under
Section 15.5 shall be made directly to, and for the sole account of,
------------
the Agent.
1.11 Share Repurchases. Section 11.5 of the Credit Agreement is amended by
-----------------
substituting "$150,000,000" for "$75,000,000" in the share repurchase limitation
provision of such section:
1.12 Loan References. Section 2.1 of the Credit Agreement is amended by
---------------
deleting "Loans or" in the second line and "Loan or" in the third line.
Sections 6.6, 9.14, 9.18, 11.12, and 13.2 (including 13.2.2, 13.2.3, 13.2.4 and
13.2.5) of the Credit Agreement are amended by substituting "Loan" or "Loans"
for "Revolving Loan" or "Revolving Loans".
1.13 Applicable Percentage. Sections 2.1, 2.2, 2.4.2, 3.3, 3.4, 4.3, 4.6,
---------------------
4.10, 4.11, 5.7(a), 5.7(d), 6.1, 6.4, 6.8 and 17.1 of the Credit Agreement are
amended by substituting "Applicable Percentage" for "Percentage" wherever such
term appears.
1.14 Confirmation of Parent Pledge. NOVA hereby reaffirms its Parent
-----------------------------
Guaranty as applied to all Liabilities (including the Term Loans). NOVA hereby
agrees that the Parent Pledge Agreement, as supplemented by the Pledge
Supplement dated as of April 30, 1999, hereby applies to and secures all
Liabilities (including all obligations of NIS and NOVA as Borrower, whether
before or after the date hereof and whether comprising Revolving Loans or Term
Loans or other Liabilities) and is hereby reaffirmed in all respects.
1.15 Schedule 1.1A. Schedule 1.1A to the Credit Agreement is amended to
-------------
read in its entirety as set forth in Schedule 1.1A attached hereto.
1.16 Borrowing Request. Exhibit B to the Credit Agreement (the Borrowing
-----------------
Request) is hereby amended by substituting ["Term/Revolving] Loan" for
"Revolving Loan" in the second paragraph.
1.17 Assignment Agreement. Exhibit K (Assignment Agreement) is amended by
--------------------
adding the following legend thereto.
"[Revise appropriately in the case of an assignment of Term Loan
Commitments or Term Loans]."
1.18 Term Note. Exhibit M (Term Note) in the form attached hereto is hereby
---------
added to the Credit Agreement and hereby becomes a part thereof.
1.19 Term Loan Fee. Concurrently with the execution and delivery of this
-------------
Amendment, NOVA hereby agrees to pay to the Agent for the account of the Lenders
-5-
<PAGE>
(prorata according to their respective Term Loan Commitments) a Term Loan fee
equal to 20 basis points times the aggregate amount of the Term Loan
Commitments.
1.20 Correction. Section 2.1 of the Credit Agreement is corrected by
----------
substituting "Schedule 1.1A" for "Schedule 1.1" and by substituting "Section
2.3" for "Section 2.1" in the third last line.
II. EFFECTIVENESS
-------------
This Amendment shall be deemed effective as of the Effective Date, upon
receipt by the Agent of the following, each dated a date satisfactory to the
Agent and in form and substance satisfactory to the Agent:
2.1 Amendment. From NIS, NOVA and each of the Lenders, a duly executed
---------
original (or, if elected by the Agent, an executed facsimile copy) of this
Amendment, together with a duly executed Guarantor Acknowledgement and Consent
in the form attached hereto;
2.2 New Notes. For each Lender, an appropriately completed Term Note of
---------
each of NIS and NOVA substantially in the form of Exhibit M, payable to the
order of such Lender in the maximum amount equal to the Term Loan Commitment of
such Lender;
2.3 NOVA Certificate. An officer's certificate of NOVA, signed by the
----------------
president or any vice-president of NOVA, and attested to by the secretary or any
assistant secretary, is to (i) resolutions of the Board of Directors of NOVA,
and (ii) the incumbency and signature of persons authorized to sign this
Amendment and the other documents furnished pursuant hereto;
2.4 NIS Certificate. an officer's certificate of NIS, signed by the
---------------
president or any vice-president of NIS, and attested to by the secretary or any
assistant secretary, as to (i) resolutions of the Board of Directors of NIS, and
(ii) the incumbency and signature of persons authorized to sign this Amendment
and the other documents furnished pursuant hereto;
2.5 Subsidiary Authorization. Evidence that the Guarantor Acknowledgement
------------------------
and Consents have been duly authorized;
2.6 Opinion. A favorable opinion of Long, Aldridge & Norman (and/or other
-------
counsel), counsel to NOVA, NIS and the other Subsidiaries, covering the
execution and delivery by NOVA, NIS and the other Subsidiaries, as applicable,
of this Amendment and the other documents furnished pursuant hereto, and
addressing such other legal matters as the Agent may require;
2.7 Fees and Expenses. Evidence of the payment of (i) the amendment fee
-----------------
provided for in Section 1.19 hereof, (ii) the Agent's legal fees and expenses
theretofore billed pursuant to Section 17.3 of the Credit Agreement, and (iii)
the arrangement fee
-6-
<PAGE>
payable to the Agent in connection herewith pursuant to a separate letter
agreement between NOVA and the Agent; and
2.8 Other. Such other supporting documents as the Agent may require;
-----
III. REPRESENTATIONS AND WARRANTIES
------------------------------
Each of NOVA and NIS hereby represents and warrants to the Agent and the
Lenders as follows:
3.1 No Default. No Default or Event of Default has occurred and is
----------
continuing.
3.2 Authorization. The execution, delivery and performance by each of
-------------
NOVA, NIS and the guarantor Subsidiaries of this Amendment and the Related
Documents (to which it is a party) have been duly authorized by all necessary
corporate and other action and do not and will not require any registration
with, consent or approval of, notice to or action by, any Person in order to
be effective and enforceable. The Credit Agreement as modified by this
Amendment constitutes the legal, valid and binding obligations of each of
NOVA, NIS and the guarantor Subsidiaries, enforceable against each of them in
accordance with its terms.
3.3 Credit Agreement Representations. All representations and warranties
--------------------------------
of NOVA and NIS contained in Section 9 of the Credit Agreement are true and
correct in all material respects as of the date hereof as though made on the
date hereof (it being understood that Schedule 9.10 is deemed revised so as
to list the Subsidiaries comprising the PMT and Post Merger Acquisitions
referred to in the Waiver dated as of March 31, 1999).
3.4 Subsidiaries. The certification as to charters, certificates of
------------
incorporation, bylaws, and incumbency and signatures of officers previously
furnished by the Subsidiaries pursuant to the Waiver dated as of March 31, 1999
remain true and correct as of the date hereof as though made on the date hereof.
3.5 Significant Subsidiaries. NOVA has no Significant Subsidiaries other
------------------------
than the Subsidiaries which are signatories to the Guarantor Acknowledgment and
Consent executed and delivered in connection with the Commitment Increase
effective as of June 18, 1999.
-7-
<PAGE>
IV. MISCELLANEOUS
-------------
4.1 Miscellaneous. Except as herein expressly amended, all terms, covenants
-------------
and provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein to such Credit Agreement shall henceforth
refer to the Credit Agreement as amended by this Amendment. This Amendment shall
be deemed incorporated into, and a part of, the Credit Agreement.
4.2 Successors and Assigns. This Amendment shall be binding upon and inure
----------------------
to the benefit of the parties and thereto and their respective successors and
assigns. No third party beneficiaries are intended in connection with this
Amendment.
4.3 Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the Law of the State of New York.
4.4 Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each of
the parties hereto understands and agrees that this document (and any other
document required herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Agent of a facsimile transmitted document purportedly
bearing the signature of a Lender or NOVA or NIS shall bind such Lender, NOVA or
NIS, respectively, with the same force and effect as the delivery of a hard copy
original. Any failure by the Agent to receive the hard copy executed original
of such document shall not diminish the binding effect of receipt of the
facsimile transmitted executed original of such document of the party whose hard
copy page was not received by the Agent.
4.5 Entire Agreement. This Amendment, together with the Credit Agreement,
----------------
contains the entire and exclusive agreement of the parties hereto with reference
to the matters discussed herein and therein. This Amendment supercedes all
prior drafts and communications with respect thereto. This Amendment may not be
amended except in accordance with the provisions of Section 17.1 of the Credit
Agreement.
4.6 Severability. If any term or provision of this Amendment shall be
------------
deemed prohibited by or invalid under any applicable law, such provision shall
be invalidated without affecting the remaining provisions of this Amendment or
the Credit Agreement, respectively.
4.7 Legal Expenses. NOVA agrees to pay to or reimburse the Agent, upon
--------------
demand, for all costs and expenses (including allocated costs of in-house
counsel) of the Agent in connection with the development, preparation,
negotiation, execution and delivery of this Amendment.
(Signatures begin on the following page)
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
NOVA INFORMATION SYSTEMS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
NOVA CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
BANK OF AMERICA, N.A. (f/k/a BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION), as Agent
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
BANK OF AMERICA, N.A., as a Lender
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
FIRST UNION NATIONAL BANK, as a Lender
and as Documentation Agent
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
SUNTRUST BANK ATLANTA, as a Lender
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
GUARANTOR ACKNOWLEDGMENT AND CONSENT
The undersigned, each a guarantor with respect to the Borrower's obligations
to the Agent and the Lenders under the Credit Agreement, do hereby (i)
acknowledge and consent to the execution, delivery and performance by NOVA
Corporation ("NOVA" or "Parent") and NOVA Information Systems, Inc. ("NIS") of
the foregoing Third Amendment to Credit Agreement ("Amendment"), (ii) jointly
and severally reaffirm the guaranty of all of the obligations of NIS and/or NOVA
as Borrower under the Credit Agreement, (iii) reaffirm and agree that such
guaranty applies both to the obligations of NIS and/or NOVA as Borrower under
the Credit Agreement as so increased pursuant to the foregoing Third Amendment
(including all Revolving Loans and all Term Loans), and (iv) reaffirm and agree
that such guaranty and all documents and agreements executed and delivered by
the undersigned to the Agent and the Lenders in connection with the Credit
Agreement, are in full force and effect without defense, offset or counterclaim
(capitalized terms used herein have the meanings specified in the Third
Amendment).
Dated as of August 25, 1999
[Signature pages begin on the following page]
-10-
<PAGE>
[Signature pages for Guarantor Acknowledgment and Consent]
NOVA CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
NOVA INFORMATION SYSTEMS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
[Signature pages for Guarantor Acknowledgment and Consent]
BOULDER BANKCARD PROCESSING, INC.
PINNACLE FINANCIAL TECHNOLOGIES, INC.
CENTRAL BANCSERVICE CORP.
NOVA ASSET MANAGEMENT COMPANY
NOVA LICENSING COMPANY
NOVA INFORMATION SERVICES COMPANY
PMT SERVICES, INC.
PMT ENTERPRISES, INC.
PMT RESOURCES, INC.
DATA TRANSFER ASSOCIATES, INC.
ERIK KRUEGER, INCORPORATED
FAIRWAY MARKETING GROUP, INC.
FERRANTE FINANCIAL SERVICES, INC.
IMA PAYMENT SYSTEMS, INC.
MBN NATIONAL, INC.
MONEY TRANSFER SYSTEMS, INC.
RETAIL PAYMENT SERVICES, INC.
RETAIL SYSTEMS CONSULTING, INC.
SUPERIOR BANKCARD SERVICE, INC.
SUPERIOR EQUIPMENT AND SALES, INC.
CVE CORPORATION
COMPUTER CHEQUE OF DES MOINES, INC.
COMPUTER CHEQUE OF OKLAHOMA CITY, INC.
NOR-JEN AVIATION CORP.
COMPUTER CHEQUE CORP.
COMPUTER CHEQUE OF KANSAS CITY, INC.
COMPUTER CHEQUE OF DALLAS, INC.
COMPUTER CHEQUE OF DENVER, INC.
CREDIT CHEQUE CORPORATION
CR PROFESSIONAL CORP.
COMPUTER CHEQUE OF MINNESOTA, INC.
BANCARD, INC.
LADCO FINANCIAL GROUP
LADCO FINANCE CORP. IV
LADCO FUNDING CORP. V
LADCO RECEIVABLES CORP.
NOVA GA. COMMAND, INC.
NOVA TN. COMMAND, INC.
NOVA GA. SERVICES, L.P.
By:
------------------------------
John Fasano
Vice President, Finance
<PAGE>
SCHEDULE 1.1A
REVOLVING LOAN COMMITMENTS
--------------------------
<TABLE>
<CAPTION>
Revolving Loan Lender's
Lender Commitment Applicable Percentage
- ------ ---------- ---------------------
<S> <C> <C>
Bank of America, N.A. $ 55,000,000 55.00%
First Union National Bank $ 30,000,000 30.00%
SunTrust Bank $ 15,000,000 15.00%
------------ ------
$100,000,000 100%
</TABLE>
TERM LOAN COMMITMENTS
---------------------
<TABLE>
<CAPTION>
Term Loan Lender's
Lender Commitment Applicable Percentage
- ------ ---------- ---------------------
<S> <C> <C>
Bank of America, N.A. $20,000,000 28.5%
First Union National Bank $20,000,000 28.6%
SunTrust Bank $30,000,000 42.9%
----------- -----
$70,000,000 100%
</TABLE>
-13-
<PAGE>
EXHIBIT M
---------
TERM NOTE
$__,000,000 August 25, 1999
The undersigned, FOR VALUE RECEIVED, promises to pay to the order of _________
(the "Lender") at the principal office of Bank of America, N.A. (the "Agent") in
San Francisco, California, ______________ MILLION DOLLARS ($__,000,000) or, if
less, the aggregate unpaid principal amount of all Term Loans (as defined in the
Credit Agreement, hereinafter referred to) made by the Lender to the undersigned
pursuant to the Credit Agreement, payable on the Term Loan Maturity Date (as
defined in the Credit Agreement).
The undersigned also promises to pay interest on the unpaid principal amount
hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Credit Agreement.
--- -----
Payments of both principal and interest are to be made in lawful money of the
United States of America in same day or immediately available funds.
This Note is a Term Note described in, and is subject to the terms and
provisions of, a Credit Agreement, dated as of October 27, 1997 as amended or
modified (as the same may at any time be further amended or modified and in
effect, the "Credit Agreement"), among NOVA CORPORATION, NOVA INFORMATION
SYSTEMS, INC., the lenders party thereto (including the Lender), the Issuing
Lender (as defined therein) and the Agent, and payment of this Note is secured
by certain of the Related Documents (as defined in the Credit Agreement).
Reference is hereby made to the Credit Agreement for a statement of the
prepayment rights and obligations of the undersigned, a description of the
properties mortgaged and assigned, the nature and extent of the collateral
security and the rights of the parties to the Related Documents in respect of
such collateral security, and for a statement of the terms and conditions under
which the due date of this Note may be accelerated. Upon the occurrence of any
Event of Default as specified in the Credit Agreement, the principal balance
hereof and the interest accrued hereon may be declared to be forthwith due and
payable, and any indebtedness of the holder hereof to the undersigned may be
appropriated and applied hereon.
In addition to and not in limitation of the foregoing and the provisions of
the Credit Agreement, the undersigned further agrees, subject only to any
limitation imposed by applicable law, to pay all reasonable expenses, including
attorneys' fees and legal expenses, incurred by the holder of this Note in
endeavoring to collect any amounts payable hereunder which are not paid when
due, whether by acceleration or otherwise.
-14-
<PAGE>
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, demand, protest and notice of dishonor.
THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF NEW YORK.
NOVA INFORMATION SYSTEMS, INC.*
NOVA CORPORATION
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
- ------------------------
* Insert as applicable.
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 44,105
<SECURITIES> 0
<RECEIVABLES> 135,184
<ALLOWANCES> 16,715
<INVENTORY> 12,268
<CURRENT-ASSETS> 223,820
<PP&E> 113,783
<DEPRECIATION> 38,975
<TOTAL-ASSETS> 668,009
<CURRENT-LIABILITIES> 131,533
<BONDS> 0
0
0
<COMMON> 736
<OTHER-SE> 656,488
<TOTAL-LIABILITY-AND-EQUITY> 668,009
<SALES> 0
<TOTAL-REVENUES> 1,078,580
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,848
<INCOME-PRETAX> 93,168
<INCOME-TAX> 34,828
<INCOME-CONTINUING> 58,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,340
<EPS-BASIC> 81
<EPS-DILUTED> 79
</TABLE>
