<PAGE>
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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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14342
------------------
NOVA CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 58-2209575
------- ----------
(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)
(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 10, 2000
----- ------------------------------------------
Common Stock, $.01 par value 65,313,607 shares
================================================================================
<PAGE>
NOVA CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999................................. 3
Condensed Consolidated Statements of Operations (unaudited)
Three months and nine months ended September 30, 2000 and 1999....................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2000 and 1999........................................ 5
Notes to Condensed Consolidated Financial Statements (unaudited).......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................................ 17
Signatures.................................................................................. 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
NOVA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 36,162 $ 32,574
Trade receivables, less allowances of $24,455
at September 30, 2000 and $28,919 at December 31, 1999 115,756 119,288
Current portion of investment in finance leases 9,661 15,611
Inventory 1,958 11,255
Deferred income taxes 25,149 20,114
Income tax receivable 26,834 -
Other current assets 8,111 8,935
--------- ---------
Total current assets 223,631 207,777
Merchant and customer contracts 270,336 331,933
Long-term portion of investment in finance leases 24,729 42,145
Property and equipment, net 86,117 76,963
Excess cost of businesses acquired 13,754 14,033
Long-term note receivable 13,445 13,618
Deferred income taxes 17,159 -
Other non-current assets 11,169 29,814
--------- ---------
$ 660,340 $ 716,283
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 19,242 $ 22,039
Accrued liabilities 52,947 19,635
Accrued merger and consolidation charges 5,909 8,813
Long-term debt obligations due within one year 9,393 16,066
--------- ---------
Total current liabilities 87,491 66,553
Deferred income taxes - 11,928
Long-term debt 238,643 238,253
Minority interest in subsidiaries 8,486 8,680
Shareholders' Equity
Common stock, $.01 par value, 200,000,000 shares
authorized, 73,710,755 shares issued at September 30,
2000 and December 31, 1999 737 737
Additional paid in capital 431,759 435,345
Retained earnings 63,573 100,116
Unearned compensation related to restricted stock (3,112) -
Treasury shares, at cost, 8,397,148 shares at
September 30, 2000, and 5,432,619 shares at
December 30, 1999 (167,237) (145,329)
--------- ---------
Total shareholders' equity 325,720 390,869
--------- ---------
$ 660,340 $ 716,283
========= =========
</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,
--------------------- -------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $407,024 $387,471 $1,182,866 $1,078,580
Operating expenses:
Cost of service 310,879 294,764 956,549 824,501
Conversion costs 3,253 6,419 10,976 22,071
Selling, general and administrative 30,726 26,939 90,192 83,097
Depreciation and amortization 15,718 14,362 51,316 42,071
Asset impairment charge - - 84,571 -
-------- -------- ---------- ----------
Total operating expenses 360,576 342,484 1,193,604 971,740
-------- -------- ---------- ----------
Operating income (loss) from continuing operations 46,448 44,987 (10,738) 106,840
Other income (expense):
Interest income 765 850 1,773 2,395
Interest expense (4,642) (2,346) (13,506) (3,848)
Minority interest in income of
consolidated subsidiaries (4,999) (5,445) (14,116) (12,219)
-------- -------- ---------- ----------
Total other income (expense) (8,876) (6,941) (25,849) (13,672)
-------- -------- ---------- ----------
Income (loss) from continuing operations before
income taxes 37,572 38,046 (36,587) 93,168
Provision (benefit) for income taxes 14,258 14,248 (11,000) 34,828
-------- -------- ---------- ----------
Income (loss) from continuing operations 23,314 23,798 (25,587) 58,340
Loss from discontinued Econex operations, net
of tax (505) - (1,998) -
Loss on disposal of discontinued Econex
operations, net of tax (8,958) - (8,958) -
-------- -------- ---------- ----------
Net income (loss) $ 13,851 $ 23,798 $ (36,543) $ 58,340
======== ======== ========== ==========
Basic earnings per share:
Income (loss) from continuing operations $ 0.34 $ 0.34 $ (0.37) $ 0.81
Loss from discontinued operations $ (0.14) $ - $ (0.16) $ -
-------- -------- ---------- ----------
Net income (loss) $ 0.20 $ 0.34 $ (0.53) $ 0.81
======== ======== ========== ==========
Diluted earnings per share:
Income (loss) from continuing operations $ 0.34 $ 0.33 $ (0.37) $ 0.79
Loss from discontinued operations $ (0.14) $ - $ (0.16) $ -
-------- -------- ---------- ----------
Net income (loss) $ 0.20 $ 0.33 $ (0.53) $ 0.79
======== ======== ========== ==========
Shares used in per share calculations:
Weighted average shares - basic 68,102 70,744 69,215 72,151
Weighted average shares - diluted 68,619 72,002 69,215 73,667
</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,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (36,543) $ 58,340
Subsidiary fiscal year conversion - 2,547
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on discontinued operations of Econex, net of tax 8,958 -
Depreciation and amortization 51,316 42,071
Deferred income taxes and income taxes receivable (60,956) 22,941
Minority interest 14,116 12,219
Amortization of restricted shares 283 -
Asset impairment charge 84,571 -
Changes in assets and liabilities, net of the effects of
business acquisitions:
Trade receivables 3,532 (23,017)
Inventory 9,297 (3,698)
Other assets 2,006 (7,553)
Accounts payable (2,797) (138)
Accrued liabilities 29,470 (22,167)
-------- ---------
Net cash provided by operating activities 103,253 81,545
-------- ---------
Cash flows from investing activities:
Purchase of merchant portfolios and customer contracts (27,483) (43,944)
Amounts released from (placed in) escrow related to business
purchase transactions 8,700 (8,700)
Purchase of property and equipment (24,905) (19,403)
Purchase of equipment for leasing (20,386) (24,104)
Amounts received on leases 14,089 14,114
-------- ---------
Net cash used in investing activities (49,985) (82,037)
-------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings and long-term debt, net 37,987 145,549
Payments on long-term debt and capital leases (13,495) (971)
Proceeds from stock options exercised 12,354 4,455
Distribution of interest to minority partners (14,310) (9,101)
Purchase of treasury stock (72,216) (146,466)
---------- -----------
Net cash used in financing activities (49,680) (6,534)
---------- -----------
Net increase (decrease) in cash and cash equivalents 3,588 (7,026)
---------- -----------
Cash and cash equivalents, beginning of period 32,574 51,131
---------- -----------
Cash and cash equivalents, end of period $ 36,162 $ 44,105
========== ===========
</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 condensed consolidated
financial statements reflect all adjustments 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. These interim
condensed consolidated financial statements should be read in conjunction with
NOVA's audited financial statements included in the Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Securities and Exchange
Commission.
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
estimates in the determination of interim results. Certain 1999 amounts have
been reclassified to conform to the 2000 presentation.
NOTE 2 - DISCONTINUED OPERATIONS
During August 2000, NOVA decided to fully divest and discontinue operations
for Econex, LLC ("Econex"). This decision was based upon a detailed review of
the historical operating performance of Econex from inception and the projection
of future operating results and cash resource requirements. Econex was engaged
in the business of providing virtual store building and web site hosting to
businesses that desire to conduct commerce electronically via the Internet.
Econex derived all of its revenues and related costs from the aforementioned
services. During the later half of the third quarter, NOVA decided to effect the
divestiture through a liquidation of Econex. The liquidation of Econex is
expected to be completed by December 31, 2000.
During February 2000, the Company exercised its option to acquire
additional units in Econex, that increased its equity ownership to more than 51%
from the initial 19.5%. During April 2000, Econex retired a member's interest
and accounted for the transaction similar to the treasury stock method. These
events had the effect of increasing NOVA's ownership percentage to approximately
72%. At the time of the transactions, Econex had a retained earnings deficit of
approximately $10.5 million.
The results of Econex have been reported separately as loss on discontinued
operations in the condensed consolidated statements of operations. The loss from
operations of Econex from the date NOVA decided to liquidate Econex to September
30, 2000 was approximately $0.1 million. Prior year condensed consolidated
financial statements have not been restated since NOVA's investment in Econex
was treated under the cost method of accounting. As of September 30, 2000, the
remaining assets consisted of trade receivables, trade payables, property and
equipment and accruals for future costs associated with the liquidation of
Econex.
During the three months and nine months ended September 30, 2000, NOVA
recognized after tax losses of $9.4 million and $11.0 million respectively, in
connection with the discontinued operations of Econex.
6
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 3 - SIGNIFICANT BUSINESS ACQUISITIONS
Effective April 1, 2000, EuroConex Technologies Limited ("EuroConex")
was formed by NOVA and The Governor and Company of the Bank of Ireland ("BOI")
to provide transaction processing for credit/debit cards and related electronic
commerce processing and services primarily to retailers and financial
institutions in a defined European territory. NOVA and BOI each own a 50%
interest in EuroConex, and there is equal Board of Directors representation. The
operating results of the joint venture from the date of inception are presented
in the accompanying condensed consolidated financial statements under the equity
method of accounting. NOVA's capital contribution to EuroConex consisted of a
perpetual exclusive license, subject to certain exceptions, for the use of
NOVA's technology platform in a defined European territory. BOI's capital
contribution to EuroConex consisted of the transfer/outsourcing of its existing
transaction processing business, certain related assets and employees. NOVA has
agreed to make available to EuroConex up to $5.0 million in the form of either a
loan or a cash equity contribution, as approved and directed by the EuroConex
Board of Directors and subject to an equivalent contribution by BOI. The primary
purpose of these funds is to facilitate the build-out of facilities and
modifications to NOVA's technology platforms to accommodate the Euro and multi-
currency functionality necessary to service merchants located in the European
market.
On February 1, 2000, NOVA acquired the assets of First Savings Bank
Merchant Division, Inc. ("FSB"). The acquisition was accounted for under the
purchase method of accounting and the net assets and results of operations are
included in the condensed consolidated financial statements from the date of
acquisition. Total consideration at the time of the transaction was the
issuance of 1,082,969 common shares valued at $27.8 million. Of the total
purchase price, $27.4 million was allocated to "Merchant and customer
contracts", with the remainder representing the fair value of the net assets
purchased. Additional consideration of up to an aggregate $4.0 million may be
required during 2001 and 2002 based upon future performance thresholds set
forth in the purchase agreement.
NOTE 4 - ASSET IMPAIRMENT CHARGE
The Company periodically evaluates its long-lived assets, primarily
intangibles, for indications of impairment based on the operating results of the
related business or merchant portfolio purchased. During the quarter ended June
30, 2000, the Company determined that it had experienced increased attrition in
the merchants it had acquired in connection with the acquisition of PMT
Services, Inc. ("PMT"). The Company assessed the impact of the increased
attrition on the assets, including merchant portfolios, goodwill, and non-
compete agreements. This evaluation indicated that the assets will not be fully
recoverable. The impairment was recognized based on the estimated
recoverability of the net carrying value as determined by the discounted cash
flows over the projected remaining life of the underlying assets.
As a result, the carrying value of the remaining PMT assets was adjusted to
reflect the fair value as well as the estimated remaining life of the related
assets. The asset impairment charge of $84.6 million was reflected in "Asset
Impairment Charge" in the accompanying condensed consolidated statements of
operations for the nine months ended September 30, 2000.
In connection with the asset impairment charge, the Company recorded an
unusual charge of $57.9 million for establishing reserves and write-downs to
reflect the merchant receivables and other related assets and liabilities
associated with the former PMT portfolios, at their net realizable value. This
charge was included as a component of "Cost of Service" in the accompanying
consolidated statements of operations for the nine months ended September 30,
2000.
7
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 5 - 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,
---------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
BASIC:
Income (loss) from continuing operations $23,314 $23,798 $(25,587) $58,340
Loss from discontinued operations (9,463) - (10,956) -
------- ------- -------- -------
Net income (loss) applicable to common shareholders $13,851 $23,798 $(36,543) $58,340
======= ======= ======== =======
Weighted average shares outstanding 68,102 70,744 69,215 72,151
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.34 $ 0.34 $ (0.37) $ 0.81
Loss from discontinued operations (0.14) - (0.16) -
------- ------- -------- -------
Earnings per share $ 0.20 $ 0.34 $ (0.53) $ 0.81
======= ======= ======== =======
DILUTED:
Income (loss) from continuing operations $23,314 $23,798 $(25,587) $58,340
Loss from discontinued operations (9,463) - (10,956) -
------- ------- -------- -------
Net income (loss) applicable to common shareholders $13,851 $23,798 $(36,543) $58,340
======= ======= ======== =======
Weighted average shares outstanding 68,102 70,744 69,215 72,151
Effect of dilutive securities: Stock options 517 1,258 - 1,516
------- ------- -------- -------
Diluted weighted average shares outstanding 68,619 72,002 69,215 73,667
======= ======= ======== =======
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.34 $ 0.33 $ (0.37) $ 0.79
Loss from discontinued operations (0.14) - (0.16) -
------- ------- -------- -------
Earnings per share $ 0.20 $ 0.33 $ (0.53) $ 0.79
======= ======= ======== =======
</TABLE>
NOTE 6 - MERGER AND CONSOLIDATION EXPENSES
As a result of NOVA's merger with PMT and other mergers completed 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. Beginning in 1998 and continuing throughout 1999,
management executed substantially all parts of the plan for PMT's integration
and consolidation, making refinements to the plan as additional facts and
circumstances became available. During 1999, revisions to the plan resulted in
the reversal of approximately $6.5 million in charges accrued in 1998 that were
not needed under the revised plan and additional costs of approximately $6.7
million were recognized for executing revised elements of the plan.
8
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
The following is a summary of the activity recorded relating to merger and
consolidation charges (in thousands):
<TABLE>
<CAPTION>
Cash/ 1998 1998 Balance 1999 Balance 2000 Balance
Description Non-cash Charge Activity at 12/31/98 Activity at 12/31/99 Activity at 9/30/00
---------------------------- -------- ------- --------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <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 (8,855) 3,791 (957) 2,834
Lease abandonment Cash 4,658 - 4,658 364 5,022 (1,947) 3,075
Contract termination charges Cash 35,506 (13,689) 21,817 (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 (2,500) - -
------- -------- ------- -------- ------ ------- ------
TOTAL $90,720 $(44,996) $45,724 $(36,911) $8,813 $(2,904) $5,909
======= ======== ======= ======== ====== ======= ======
</TABLE>
The primary costs associated with the consolidation and closure of
facilities included 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 were
a result of the elimination of overlapping functions, primarily customer
service, accounting, and administrative areas.
During 1998, management developed and began implementing plans to close
PMT's corporate headquarters, as well as downsize certain of PMT's operating
subsidiaries. As of December 31, 1998, the only significant employee group
notified of such plans was corporate headquarters employees and certain
executives. Accordingly, the costs associated with these terminations were the
only severance costs included in the 1998 charge. 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 in this group were terminated
during the first quarter of 1999, with all severance benefits paid at that time.
During 1999, management was able to settle termination related benefits
associated with certain executives at amounts less than originally agreed,
accounting for substantially all of the reversal in this merger charge category.
During 1999, decisions were made to close or downsize additional facilities
to further streamline the operating and administrative functions. These actions
resulted in the termination of approximately 183 employees, of which 179
received severance packages totaling approximately $1.4 million as of December
31, 1999. The remaining four individuals, with total severance payments of
approximately $160,000, were notified of their termination during 1999, but
received their severance payment in January 2000. The remaining severance
reserve balance relates to executives whose terminations were effective and
accrued for during 1998 and whose severance will be fully paid by mid-2001.
The Company began the process of moving PMT's operations from Nashville,
Tennessee to other locations in December 1998, and completed this process in the
first quarter of 1999, at which time the premises in Nashville were completely
vacated. The 1998 charge included the estimated unrecoverable future lease
obligations primarily for PMT's Nashville headquarters. By December 1999 the
facility was fully subleased, facilitating an accurate assessment of future
unrecoverable lease obligations. Based on the assessment, approximately
$280,000 of the original merger and consolidation charge was reversed. During
1999, plans were made to close or downsize additional facilities. These
decisions resulted in additional accruals during 1999 of approximately $3.0
million covering ten locations, eight of which were closed or downsized during
1999, and the remaining two facilities were closed during 2000. Obligations
under leases included in the reserve balance will not be fully paid out until
October 2007.
9
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 7 - SUBSEQUENT EVENTS
On November 2, 2000, the Board of Directors authorized a $250.0 million
increase to the share repurchase program authorized in June 1999, for an
aggregate authorization of $500.0 million. This program is designed to purchase
shares of the Company's stock 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, 2000, the Company had
acquired 10,825,072 shares at an aggregate cost of $231.4 million. The purchase
of the shares was funded primarily through the draw down of funds from the
existing credit facility.
In November 2000, the Company communicated a plan to reduce operating
expenses through activities that include restructuring, consolidating,
integrating operating locations, reduction in force and eliminating specific
expenses to improve overall business efficiency and effectiveness. The plan will
eliminate approximately 220 positions by December 31, 2000. The restructuring
costs will consist primarily of cash payments for severance and related employee
benefits, facilities and other related costs. The Company is currently
evaluating the appropriate treatment for the cost reduction plan, and the
financial impact of this plan will be recorded in the fourth quarter of 2000.
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 "will," "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.
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, 1999, 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 the percentage of
revenues represented by certain line items in the Company'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, September 30,
------------------- Increase/ ----------------- Increase/
2000 1999 (Decrease) 2000 1999 (Decrease)
-------- -------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 5.0 % 100.0 % 100.0 % 9.7 %
Cost of service 76.4 76.1 5.5 80.9 76.5 16.0
Conversion costs 0.8 1.7 (49.3) 0.9 2.0 (50.3)
Selling, general and administrative 7.5 6.9 14.1 7.6 7.7 8.5
Depreciation and amortization 3.9 3.7 9.4 4.3 3.9 22.0
Asset impairment charge - - - 7.2 - 100.0
----- ----- ----- -----
Total operating expenses 88.6 88.4 5.3 100.9 90.1 22.8
----- ----- ----- -----
Operating income (loss) from continuing operations 11.4 11.6 3.2 (0.9) 9.9 (110.1)
Interest income 0.2 0.2 (10.0) 0.1 0.2 (26.0)
Interest expense (1.1) (0.6) 97.9 (1.1) (0.4) 251.0
Minority interest in income of consolidated subsidiaries (1.3) (1.4) (8.2) (1.2) (1.1) 15.5
----- ----- ----- -----
Income (loss) from continuing operations before income taxes 9.2 9.8 (1.2) (3.1) 8.6 (139.3)
Provision (benefit) for income taxes 3.5 3.7 (0.1) (0.9) 3.2 (131.6)
----- ----- ----- -----
Income (loss) from continuing operations 5.7 6.1 (2.0) (2.2) 5.4 (143.9)
Loss on disposal and discontinued Econex operations, net of tax 2.3 - 100.0 (0.9) - 100.0
----- ----- ----- -----
Net income (loss) 3.4 % 6.1 % (41.8)% (3.1)% 5.4 % (162.6)%
===== ===== ===== =====
</TABLE>
The following table presents the percentage of revenues represented by
certain line items in the Company's condensed consolidated statements of
operations, excluding the effect of unusual charges, as identified in the
decrease in cost of service, asset impairment charge and discontinued
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, September 30,
------------------- Increase/ ----------------- Increase/
2000 1999 (Decrease) 2000 1999 Decrease
-------- -------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 5.0 % 100.0 % 100.0 % 9.7 %
Cost of service 76.4 76.1 5.5 76.0 76.5 9.0
Conversion costs 0.8 1.7 (49.3) 0.9 2.0 (50.3)
Selling, general and administrative 7.5 6.9 14.1 7.7 7.7 8.5
Depreciation and amortization 3.9 3.7 9.4 4.3 3.9 22.0
----- ----- ----- -----
Total operating expenses 88.6 88.4 5.3 88.9 90.1 8.2
----- ----- ----- -----
Operating income 11.4 11.6 3.2 11.1 9.9 23.3
Interest income 0.2 0.2 10.0) 0.1 0.2 (26.0)
Interest expense (1.1) (0.6) 97.9 (1.1) (0.4) 251.0
Minority interest in consolidated subsidiaries (1.2) (1.4) (8.2) (1.2) (1.1) 15.5
----- ----- ----- -----
Income before provision for income taxes 9.2 9.8 (1.2) 9.0 8.6 13.7
Provision for income taxes 3.5 3.7 (0.1) 3.4 3.2 (15.3)
----- ----- ----- -----
Net income 5.7 % 6.1 % (2.0) % 5.6 % 5.4 % 12.7 %
===== ===== ===== =====
</TABLE>
GENERAL - NOVA is a leading provider of integrated transaction processing
services, related software application products, and value-added services to
more than 500,000 merchant locations. 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 5.0% to $407.0 million for the three
months ended September 30, 2000, compared to $387.5 million for the same period
in 1999. The increase resulted primarily from an 8.0% increase in merchant
sales volume processed. The principal contributors to the revenue increase are
internal growth in merchant processing volume of approximately 20.0%, and a
corresponding revenue increase of approximately 18.0%, excluding the effect of
the attriting PMT portfolios. Volume and revenue generated from merchant
processing activities relative to the PMT portfolios declined approximately
30.0%. The decline in the PMT portfolios was directly related to the increased
attrition of the acquired merchant base. For the nine months ended September 30,
2000,
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
revenues increased $104.3 million to $1,182.9 million from $1,078.6 million for
the same period in 1999. The revenue increase corresponds primarily to a 7.4%
increase in merchant sales volume processed for the nine months ended September
30, 2000, compared to the same period in 1999. In addition to the internal
growth of merchant processing volume, the pass-through of higher interchange
rates from the credit card associations, effective April 10, 1999, contributed
to the additional incremental increase.
COST OF SERVICE - Cost of service increased 5.5% to $310.9 million for the
three months ended September 30, 2000, compared to $294.8 million for the same
period in 1999. The increase in cost of service, mainly driven by interchange
costs, was related to the increased processing volume of 8.0%, offset by a
lesser increase in other merchant related costs of service. Gross operating
margin decreased to 23.6% in the third quarter over last year's 23.9%. This
decline was primarily related to the impact of pricing pressures mainly directed
at certain acquired PMT merchants with higher margins. For the nine months ended
September 30, 2000, excluding the unusual charge of $57.9 million, cost of
service increased 9.0% to $898.6 million from $824.5 million during the same
period in 1999. The cost of service increase was driven primarily by increased
processing volume and the aforementioned interchange pass through charges. For
the nine months ended September 30, 2000, including the unusual charge, cost of
service was $956.5 million. Gross operating margin, excluding the unusual
charge, increased to 24.0% for the nine months ended September 30, 2000,
compared to 23.6% for the nine months ended September 30, 1999. This increase
was due to the Company's leveraging of the NOVA Network costs over increased
processing volume, offset during the third quarter by pressure on pricing to
merchants, particularly associated with retention of acquired PMT merchants.
CONVERSION COSTS - Conversion costs decreased to $3.3 million for the three
months ended September 30, 2000, compared to $6.4 million for the same period in
1999. The decrease relates to substantial conversion completion of the PMT and
the CoreStates merchants. For the nine months ended September 30, 2000,
conversion costs decreased to $11.0 million, or 50.2%, from $22.1 million during
the same period in 1999, as a result of the aforementioned activities.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
("SG&A") expenses increased 14.1% to $30.7 million for the three months ended
September 30, 2000, compared to $26.9 million for the same period in 1999. The
increase was attributable to the business acquisitions completed in the first
quarter of 2000 and the opening of a new operations center in Atlanta, Georgia
in February 2000. As a percentage of revenues, SG&A expenses for the three
months ended September 30, 2000 increased 0.6% to 7.5% compared to 6.9% in the
same period in 1999. The increase was due primarily to duplicate operating costs
associated with the integration of the PMT operations. SG&A expenses for the
nine months ended September 30, 2000 were $90.2 million, an increase of 8.5%
from the $83.1 million reported for the nine months ended September 30, 1999.
The cost increases are a result of the aforementioned items.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased
9.4% to $15.7 million for the three months ended September 30, 2000, compared to
$14.4 million for the same period in 1999. The increase was due to portfolio
purchases made during 1999 and the first quarter of 2000. Additionally, fixed
assets held as of September 30, 2000 increased compared to September 30, 1999,
mainly related to the investment in facilities and technology infrastructures.
Depreciation and amortization expense for the nine months ended September 30,
2000, of $51.3 million increased 21.9% from $42.1 million during the same period
in 1999, for the aforementioned reasons.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
ASSET IMPAIRMENT CHARGE - During the quarter ended June 30, 2000, NOVA
determined that it had experienced increased attrition in the merchant
portfolios acquired in connection with the acquisition of PMT. This
determination resulted from the completion of the PMT integration and the
availability of two full quarters of complete processing history, with the
majority of the PMT business on the NOVA platforms. The Company assessed the
impact of the increased attrition on the assets, including merchant portfolios,
goodwill, and non-compete agreements. This evaluation indicated that the assets
would not be fully recoverable. An asset impairment charge of $84.6 million was
recognized based on the estimated recoverability of the net carrying value as
determined by the discounted cash flows over the projected remaining life of the
assets. The value of the assets and their remaining life were adjusted to
reflect their fair value.
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS - For the foregoing
reasons, operating income from continuing operations for the three months ended
September 30, 2000, increased $1.4 million or 3.2%, to $46.4 million from $45.0
million for the three months ended September 30, 1999. Operating income from
continuing operations, excluding the unusual charges previously referred to, for
the nine months ended September 30, 2000 of $131.8 million increased $25.0
million, or 23.3%, from the same period in 1999. Operating income margin
improved to 11.4% of revenue for the nine months ended September 30, 2000,
compared to 9.9% for the same period in 1999. Including the unusual charges,
operating income for the nine months ended September 30, 2000 decreased $117.5
million to an operating loss of $10.7 million compared to operating income of
$106.8 million for the nine months ended September 30, 1999. EBITDA (defined as
earnings before interest, taxes, depreciation, amortization, and unusual
changes) increased to $57.2 million from $53.9 million for the three months
ended September 30, 2000 and 1999, respectively. EBITDA increased to $169.0
million or 23.6%, for the nine months ended September 30, 2000 compared to
$136.7 million for the nine months ended September 30, 1999.
INTEREST INCOME - Interest income decreased approximately $0.1 million, or
10.0%, to $0.8 million for the three months ended September 30, 2000, compared
to $0.9 million for the three months ended September 30, 1999. For the nine
months ended September 30, 2000, interest income declined 26.0% to $1.8 million
from $2.4 million during the same period in 1999. The decline was directly
related to decreased earnings on interest-bearing investments. NOVA utilized
a substantial amount of cash in 2000 to fund portfolio purchases, purchase
property and equipment, share repurchases, and to pay down outstanding credit
facility borrowings. Accordingly, such balances were unavailable for investment
purposes.
INTEREST EXPENSE - Interest expense increased $2.3 million for the three
months ended September 30, 2000, to $4.6 million, compared to the $2.3 million
for the three months ended September 30, 1999. The primary component of this
increase was higher average debt obligations outstanding, to support the share
repurchase program, portfolio purchases, and capital expenditures. Interest
expense for the nine months ended September 30, 2000, increased $9.7 million to
$13.5 million compared to $3.8 million for the same period in 1999 for the
aforementioned reasons.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES - Minority interest in
income of consolidated subsidiaries decreased $0.5 million to $5.0 million for
the three months ended September 30, 2000 compared to the $5.5 million reported
for the three months ended September 30, 1999. The decrease in the minority
interest was a result of competitive pricing pressures in the Company's two
joint ventures. Minority interest for the nine months ended September 30, 2000,
increased $1.9 million to $14.1 million compared to the $12.2 million reported
for the nine months ended September 30, 1999. This increase was due to the
incremental inclusion of processing volume from merchant portfolios acquired
through Elan Merchant Services, LLC, and Key Merchant Services, LLC in the nine
months ended September 30, 2000, compared to the nine months ended September 30,
1999.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
INCOME TAXES - Income tax expense was $14.2 million for the three months
ended September 30, 2000, and 1999. The effective tax rate on continuing
operations of 37.9% in the three months ended September 30, 2000 increased from
37.4% for the same period in 1999. This increase was due to more non-deductible
goodwill associated with the acquisition of FSB. For the nine months ended
September 30, 2000, adjusted for the tax benefit effect of the unusual charges,
income tax expense of $40.2 million increased $5.3 million, or 15.3%, from the
$34.8 million for the same period in 1999. The effective tax rate of 37.9% for
the nine months ended September 30, 2000 from continuing operations compared to
37.4% for the same period of 1999. This increase was attributable to the
aforementioned reasons.
INCOME (LOSS) FROM CONTINUING OPERATIONS - Income from continuing
operations decreased 2.1% to $23.3 million, for the three months ended September
30, 2000, compared to $23.8 million for the three months ended September 30,
1999. The decrease is primarily related to increased interest expense associated
with the share repurchase program. Excluding the effect of unusual charges,
income from continuing operations increased 12.7% for the nine months ended
September 30, 2000 to $65.8 million from $58.3 million during the first nine
months of 1999.
LOSS ON DISCONTINUED OPERATIONS - Econex was engaged in the business of
providing web store building and hosting services to businesses that desire to
conduct commerce electronically via the Internet. The services primarily
consisted of the creation and design of an internet web site and integrated
products that enable e-commerce. Econex derived all its revenues and related
costs from the aforementioned services. The effect of the discontinued operation
was an after tax loss of $9.4 million for the three months ended September 30,
2000, and an after tax loss of $11.0 million for the nine months ended September
30, 2000.
NET INCOME (LOSS) - For the three months ended September 30, 2000, net
income decreased $9.9 million or 41.8% to $13.9 million, including the effect of
the $9.4 million loss, net of taxes, on discontinued operations of Econex, as
compared to $23.8 million for the same period in 1999. For the nine months ended
September 30, 2000, including the effect of the unusual charges and discontinued
operations, net income decreased $94.9 million to a net loss of $36.5 million,
compared to net income of $58.3 million for the nine months ended September 30,
1999.
EARNINGS PER SHARE - The following table presents a summary of the
earnings per share including the effect of the unusual charges and the loss on
discontinued operations for the three months and nine months ended September 30,
2000 compared to the three months and nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
------------------- --------------------
<S> <C> <C> <C> <C>
Earnings Per Share:
Earnings per share, excluding unusual charges
and loss from discontinued operations $ 0.34 $0.33 $ 0.94 $0.79
Loss per share from discontinued operations $(0.14) $ - $(0.16) $ -
-------------------- --------------------
Earnings per share, excluding unusual charges $ 0.20 $0.33 $ 0.78 $0.79
Loss from unusual charges $ - $ - $(1.32) $ -
-------------------- --------------------
Earnings per share $ 0.20 $0.33 $(0.53) $0.79
==================== ====================
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Excluding the unusual charges, diluted earnings per share from continuing
operations for the three months and nine months ended September 30, 2000, were
$0.34 and $0.94 respectively. This represents a per share increase for the three
months ended September 30, 2000 of $0.01 from the $0.33 reported in the three
months ended September 30, 1999. Excluding the unusual charges and the loss
from discontinued operations, diluted earnings per share for the nine months
ended September 30, 2000, increased $0.15 or 19.0% to $0.94, from the $0.79
reported for the nine months ended September 30, 1999. Excluding the effect of
the unusual charges, diluted earnings per share for the three months and nine
months ended September 30, 2000 were $0.20 and $0.78, respectively. Including
the effect of the unusual charges, there was a net loss per share of $0.53 for
the nine months ended September 30, 2000, compared to net income per diluted
share of $0.79 for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES - The Company's primary uses of its capital
resources includes the purchase of merchant portfolios and customer contracts,
investment in joint ventures, capital expenditures, debt reduction, share
repurchases and working capital requirements. NOVA's cash flows from operating
activities amounted to $103.3 million for the nine months ended September 30,
2000 compared to $81.5 million for the nine months ended September 30, 1999.
Cash flows were primarily generated from operating earnings net of depreciation,
and amortization. The increase in cash flows from operating activities was
associated with an increase in cash operating earnings, the management of
working capital, and a reduction in the payment of merger obligations in the
nine months ended September 30, 2000, as compared to same period previous year.
Net cash used in investing activities was $50.0 million for the nine months
ended September 30, 2000, compared to $82.0 million for the nine months ended
September 30, 1999. This decrease was attributed to a lower cash requirement
for the purchase of merchant portfolios and customer contracts. Capital
equipment purchases increased $5.5 million to $24.9 million during the nine
months ended September 30, 2000, compared to $19.4 million in the same period in
1999. The increase was related to the continued investment in technology
platforms to accommodate the increases in transactions processed through the
Company's platform and the build-out of a new operations facility in Atlanta,
Georgia.
Net cash flow used in financing activities during the nine months ended
September 30, 2000 was $49.7 million, compared to $6.5 million for the same
period in 1999. Proceeds from credit borrowings and stock option exercises,
combined with cash from operations, were used principally to fund the repurchase
of common shares.
NOVA had available revolving credit facilities of $275.0 million, as of
September 30, 2000. In September 2000, the Company obtained a short-term
revolving bridge facility of $25.0 million. In addition to the $250.0 million
revolving credit facility, the bridge may be used to support working capital
requirements, purchase merchant portfolios, fund equipment purchases, fund share
repurchases and other business needs. At September 30, 2000, $236.5 million in
borrowings were outstanding under the $275.0 million revolving credit
agreements.
The Company typically has relatively low working capital requirements
because 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 acquired
portfolios former processors. Because of the seasonality of NOVA's business,
capital requirements may be greater in certain months than others.
At September 30, 2000, the Company had cash and cash equivalents of $36.2
million. NOVA believes its existing cash and cash equivalents, cash generated
from operations, and available credit
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
facilities are sufficient to fund merchant portfolio purchases, capital asset
investments, share repurchases, EuroConex funding obligations, and to meet
working capital requirements for the foreseeable future.
SUBSEQUENT EVENTS - On November 2, 2000 the Board of Directors authorized
an increase of $250.0 million to the share repurchase program authorized in June
1999, for an aggregate of $500.0 million to purchase shares from time to time on
the open market or through privately negotiated transactions, at price levels
the Company deems attractive. The Company has funded the shares repurchased
through operating cash flows and funds from available credit facilities. As of
September 30, 2000, NOVA has repurchased approximately 10.8 million shares under
this program at an aggregate cost of $231.4 million. The Company continues to
evaluate the opportunities available for future purchases.
In November 2000, the Company communicated a plan to reduce operating
expenses through activities that include restructuring, consolidating,
integrating operating locations, reducing the workforce and eliminating specific
expenses to improve overall business efficiency and effectiveness. The plan will
eliminate approximately 220 positions. The restructuring costs will consist
primarily of cash payments for severance and related employee benefits,
facilities and other related costs. The Company is currently evaluating the
appropriate treatment for the cost reduction plan, and the financial impact of
this plan will be recorded in the fourth quarter of 2000.
16
<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
------- -----------------------------------------------------------------
4.9 First Amendment to Rights Agreement dated as of July 9, 1999
between the Registrant and First Union National Bank, as Rights
Agent, dated August 3, 2000
10.57 * First Amendment to Rights Agreement dated as of July 9, 1999
between the Registrant and First Union National Bank, as
Rights Agent, dated August 3, 2000 (incorporated by reference to
Exhibit 4.9)
10.58 * NOVA Corporation 1996 Employees Stock Incentive Plan, Amended and
Restated as of August 3, 2000
10.59 * NOVA Corporation 2000 Employees Stock Incentive Plan, Amended and
Restated as of August 3, 2000
10.60 * First Amendment to NOVA Corporation Deferred Compensation Plan
effective November 10, 1999, effective as of August 14, 2000
10.61 * Separation Agreement and General Release dated September 7, 2000,
effective August 25, 2000, between the Registrant and Nicholas H.
Logan
10.62 * Revolving Credit Facility, dated as of September 8, 2000, among
NOVA Corporation and NOVA Information Systems, Inc., as Borrowers
and Guarantors, certain Subsidiaries of the Borrowers as
Guarantors, and Bank of America, N.A. as Lender
27 * Financial Data Schedule
----------
* Filed herewith
(b) Reports on Form 8-K
The Company did not file any Current Report (s) on Form 8-K during the
quarter ended September 30, 2000.
17
<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)
Date: November 14, 2000 By: /S/ Stephen M. Scheppmann
--------------------------------
Stephen M. Scheppmann
Chief Financial Officer
(Principal Accounting Officer)
18
