<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 June 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 August 10, 2000
----- ----------------------------------------
Common Stock, $.01 par value 73,710,755 shares
================================================================================
1
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FORM 10-Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999............... 3
Condensed Consolidated Statements of Operations (unaudited)
Three months and six months ended June 30, 2000, and 1999..... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2000, and 1999...................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............... 20
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures........................................................ 21
2
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PART I. FINANCIAL INFORMATION
NOVA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
-------- ---------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 47,304 $ 32,574
Trade receivables, less allowance for doubtful accounts and reserves
for credit and fraud losses of $30,420 at June 30, 2000 and $28,919
at December 31, 1999 102,656 119,288
Current portion of net investment in finance leases 11,974 15,611
Inventory 2,900 11,255
Deferred income taxes 20,366 20,114
Income tax receivable 20,091 -
Other current assets 6,196 8,935
-------- --------
Total current assets 211,487 207,777
Merchant and customer contracts 273,568 331,933
Long-term portion of investment in finance leases 34,288 42,145
Property and equipment, net 88,478 76,963
Excess cost of businesses acquired 21,447 14,033
Long-term note receivable 13,480 13,618
Deferred income taxes 17,299 -
Other non-current assets 9,929 29,814
-------- ---------
$669,976 $ 716,283
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 19,063 $ 22,039
Accrued liabilities 36,096 19,635
Accrued merger and consolidation charges 7,346 8,813
Long-term debt obligations due within one year 23,762 16,066
-------- ---------
Total current liabilities 86,267 66,553
Deferred income taxes - 11,928
Long-term debt 188,798 238,253
Minority interest in subsidiaries 11,820 8,680
Shareholders' Equity
Common stock, $.01 par value, 200,000,000 shares authorized,
73,710,755 shares outstanding at June 30, 2000 and
December 31, 1999 737 737
Additional paid in capital 432,418 435,345
Accumulated retained earnings 49,649 100,116
Unearned compensation related to restricted stock (3,395) -
Treasury shares, at cost, 3,592,912 shares at June 30, 2000
and 5,432,619 shares at December 31, 1999 (96,318) (145,329)
-------- ---------
Total shareholders' equity 383,091 390,869
-------- ---------
$669,976 $ 716,283
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------------------------------
2000 1999 2000 1999
---------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 405,831 $379,344 $775,841 $691,109
Operating expenses:
Cost of service 365,691 291,295 645,669 529,737
Conversion costs 3,722 8,131 7,723 15,652
Selling, general and administrative 32,008 28,410 61,976 56,158
Depreciation and amortization 17,292 14,660 34,625 27,709
Asset impairment charge 84,571 - 84,571 -
--------- -------- -------- --------
Total operating expenses 503,284 342,496 834,564 629,256
--------- -------- -------- --------
Operating income (loss) (97,453) 36,848 (58,723) 61,853
Other income (expense):
Interest income 491 1,007 1,007 1,545
Interest expense (4,531) (510) (9,129) (1,502)
Minority interest in income of
consolidated subsidiaries (5,351) (4,498) (9,897) (6,774)
--------- -------- -------- --------
Total other income (expenses) (9,391) (4,001) (18,019) (6,731)
--------- -------- -------- --------
Income (loss) before provision for income taxes (106,844) 32,847 (76,742) 55,122
Provision (benefit) for income taxes (37,564) 12,323 (26,275) 20,580
--------- -------- -------- --------
Net income (loss) $ (69,280) $ 20,524 $(50,467) $ 34,542
========= ======== ======== ========
Per share amounts:
Basic earnings per share.......................... $ (0.99) $ 0.28 $ (0.73) $ 0.47
Diluted earnings per share........................ $ (0.99) $ 0.28 $ (0.73) $ 0.46
Shares used in per share calculations:
Weighted average shares - basic................... 69,904 72,995 69,419 72,870
Weighted average shares - diluted................. 69,904 74,397 69,419 74,441
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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NOVA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-------------------
2000 1999
-------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(50,467) $ 34,542
Subsidiary fiscal year conversion - 2,547
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 34,625 27,709
Deferred income taxes (29,479) 13,735
Minority interest 3,140 2,520
Asset impairment charge 84,571 -
Interest on debt obligations - 1,178
Changes in assets and liabilities, net of the effects of business acquisitions:
Trade receivables 16,632 (12,950)
Other receivables (20,091) -
Inventory 8,355 (3,656)
Other assets 1,988 (5,730)
Accounts payable (2,976) 5,367
Accrued liabilities 14,994 (22,953)
-------- --------
Net cash provided by operating activities 61,292 42,309
-------- --------
Cash flows from investing activities:
Purchase of merchant portfolios and customer contracts (17,026) (35,523)
Amounts placed in escrow related to business purchase
transactions 8,700 (8,700)
Purchase of property and equipment (20,448) (14,161)
Purchase of equipment for leasing (14,500) (14,680)
Amounts received on leases 9,921 9,015
-------- --------
Net cash used in investing activities (33,353) (64,049)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings and long-term debt, net - 35,785
Proceeds from long-term borrowings on securitized revolving facility 6,972 -
Payments on long-term debt and capital leases, net (32,718) (329)
Proceeds from stock options exercised 12,537 6,344
Purchase of treasury stock - (15,862)
-------- --------
Net cash (used in) provided by financing activities (13,209) 25,938
-------- --------
Net increase in cash and cash equivalents 14,730 4,198
-------- --------
Cash and cash equivalents, beginning of period 32,574 51,131
-------- --------
Cash and cash equivalents, end of period $ 47,304 $ 55,329
======== ========
</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 (subject to normal recurring accruals and
other unusual accruals as further described in Note 3, "Asset Impairment
Charge" in the accompanying Notes to Condensed Consolidated Financial
Statements) 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 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
estimations in the determination of interim results. Certain 1999 amounts have
been reclassified to conform to the 2000 presentation.
NOTE 2 - SIGNIFICANT BUSINESS TRANSACTIONS
Effective April 1, 2000, EuroConex Technologies Limited ("EuroConex") was
formed by NOVA and 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. NOVA and BOI each own a 50%
interest in EuroConex, and there is equal Board of Directors participation. The
operating results from the joint venture from the date of inception are
presented in the accompanying 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
Irish processing business and
6
<PAGE>
certain related assets and employees. NOVA has agreed to make available to
EuroConex up to $5.0 million in the form of a 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 $4.0 million, payable in the form
of NOVA common stock, may be required during fiscal 2001 and 2002 based upon
future performance thresholds set forth in the purchase agreement.
NOTE 3 - 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 an increased attrition
in the merchants it had acquired in connection with the acquisition of PMT
Services, Inc. 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 assets was adjusted to
reflect fair value and the related amortization period was adjusted to reflect
the remaining life of the related assets. The asset
7
<PAGE>
impairment charge of $ 84.6 million was reflected in "Asset Impairment Charge"
on the accompanying Consolidated Statement of Operations for the second quarter
and six months ended June 30, 2000.
In connection with the asset impairment charge, NOVA recorded an unusual
charge of $57.9 million for establishing reserves and the write-down to reflect
the merchant receivables and other related assets associated with the former PMT
portfolio at their net realizable value. This charge is included as a component
of "Cost of Service" on the accompanying Consolidated Statement of Operations
for the second quarter and six months ended June 30, 2000.
NOTE 4 - 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 six months
ended June 30, ended June 30,
------------------ --------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net earnings per share
available to common shareholders....................... $(69,280) $20,524 $(50,467) $34,542
Denominator:
Denominator for basic net earnings per share-
weighted-average shares................................. 69,904 72,995 69,419 72,870
Effect of diluted securities:
Stock options............................................. - 1,402 - 1,571
-------- ------- -------- -------
Dilutive potential common shares:
Denominator for diluted net earnings per share-adjusted
weighted-average shares and assumed conversions........... 69,904 74,397 69,419 74,441
======== ======= ======== =======
Basic earnings per share.......................... $ (0.99) $ 0.28 $ (0.73) $ 0.47
======== ======= ======== =======
Diluted earnings per share........................ $ (0.99) $ 0.28 $ (0.73) $ 0.46
======== ======= ======== =======
</TABLE>
NOTE 5 - 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 to recognize the costs of executing revised elements of the plan.
8
<PAGE>
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 6/30
----------- -------- ------- -------- ----------- -------- ----------- -------- -------
<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 (364) 3,427
Lease abandonment...................... Cash 4,658 - 4,658 364 5,022 (1,103) 3,919
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 $(1,467) $7,346
======= ======== ======== ========= ======== ======= ======
</TABLE>
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.
Severance Packages - 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 at the corporate
headquarters 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
accrued in the June 30, 2000, merger reserve balance related to executives whose
terminations were effective and accrued for during 1998 and whose severance will
be fully paid by mid-2001.
Lease Abandonment - 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 for primarily 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. The remaining two facilities will be closed or
downsized during mid-2000. Obligations under leases included in the reserve
balance will not be fully paid out until October 2007.
9
<PAGE>
NOTE 6 - SUBSEQUENT EVENT
In February 2000, NOVA exercised its option to acquire additional units
in Econex, LLC ("Econex") that increased its equity ownership to 51% from 19.5%.
During April 2000, Econex retired a member's interest through acquiring the
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 $10.0 million. Accordingly, NOVA has
included in its operating results the operating losses of Econex on a
consolidated basis.
In August 2000, NOVA decided to integrate Econex into its core operations.
NOVA's loans to Econex are secured by a security interest in all of the assets
of Econex. Accordingly, NOVA expects that it will be able to integrate fully the
assets and operations of Econex, subject to satisfaction of certain obligations
to third parties incurred by Econex prior to NOVA's decision to integrate the
Econex operations. A third quarter charge of approximately $13.0 million is
expected as a result of the decision. The charge is comprised primarily of the
write-down of assets to their net realizable value, severance, lease
continuation costs and other direct costs associated with the Econex
integration.
10
<PAGE>
NOVA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, 1999, filed
with the Securities and Exchange Commission.
11
<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 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 Six Months Ended
June 30, June 30,
---------------- Increase/ -------------- Increase/
2000 1999 Decrease 2000 1999 Decrease
----- ----- -------- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................100.0 100.0 % 7.0% 100.0% 100.0% 12.3%
Cost of service......................... 90.1 76.8 25.5 83.2 76.7 21.9
Conversion costs........................ 0.9 2.1 (54.2) 1.0 2.3 (50.7)
Selling, general and
administrative......................... 7.9 7.5 12.7 8.0 8.1 10.4
Depreciation and
amortization........................... 4.3 3.9 18.0 4.5 4.0 25.0
Asset impairment charge................. 20.8 0.0 100.0 10.9 0.0 100.0
Operating expenses......................124.0 90.3 46.9 107.6 91.1 32.6
Operating income (loss).................(24.0) 9.7 (364.5) (7.6) 8.9 (194.9)
Interest income......................... 0.1 0.3 (51.2) 0.1 0.2 (34.8)
Interest expense........................ (1.1) (0.1) 788.4 (1.2) (0.2) 507.8
Minority interest in
consolidated subsidiaries.............. (1.3) (1.2) 19.0 (1.3) (0.9) 46.1
----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes.............(26.3) 8.7 (425.3) (9.9) 8.0 (239.2)
Provision (benefit) for
income taxes........................... (9.3) 3.3 (404.8) (3.4) 3.0 (222.7)
----- ----- ----- -----
Net income (loss).......................(17.1) 5.4 % (437.6) (6.5) 5.0 (246.1)
===== ===== ===== ===== ===== =====
</TABLE>
The following table presents the percentage of revenues represented by certain
line items in NOVA's condensed consolidated statements of operations, excluding
the effect of unusual charges, as identified in the decrease in cost of
service and asset impairment charge, as well as the percentage
increase/(decrease) of such items from period to period:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- Increase/ ---------------- Increase/
2000 1999 Decrease 2000 1999 Decrease
------- ------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................ 100.0% 100.0% 7.0% 100.0% 100.0% 12.3%
Cost of service................................. 75.8 76.8 5.7 75.8 76.7 11.0
Conversion costs................................ 0.9 2.1 (54.2) 0.9 2.3 (50.7)
Selling, general and
administrative................................. 7.9 7.5 12.7 8.0 8.1 10.4
Depreciation and
amortization................................... 4.3 3.9 17.9 4.5 4.0 25.0
Operating expenses.............................. 88.9 90.3 5.3 89.2 91.1 10.0
Operating income................................ 11.1 9.7 22.2 10.8 8.9 35.4
Interest income................................. 0.1 0.3 (51.2) 0.1 0.2 (34.8)
Interest expense................................ (1.1) (0.1) 788.4 (1.2) (0.2) 507.8
Minority interest in
consolidated subsidiaries...................... (1.3) (1.2) 19.0 (1.3) (0.9) 46.1
----- ----- ----- -----
Income before provision for income taxes........ 8.8 8.7 8.5 8.5 8.0 19.3
Provision for income taxes...................... 3.4 3.3 10.3 3.2 3.0 20.9
----- ----- ----- -----
Net income...................................... 5.4% 5.4% 7.5% 5.3% 5.0% 18.3%
===== ===== ===== ===== ===== =====
</TABLE>
GENERAL. NOVA is a provider of integrated 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 7.0% to $405.8 million for the second
quarter ended June 30, 2000, compared to $379.3 million for the quarter ended
June 30, 1999. The increase resulted primarily from a 5.6% increase in merchant
sales volume processed. The principal contributors to the revenue increase are
internal growth in merchant processing volume of approximately 18.0% from the
bank
12
<PAGE>
and trade associations sales relationship channels for a revenue increase of
20.1%. Volume generated from merchant processing activities relative to NOVA's
1998 PMT Services, Inc. ("PMT") acquisition declined approximately 11.7% for a
revenue decrease of 12.2%. The decline in the former PMT portfolio was directly
related to the increased attrition of the merchant base early in the second
quarter. For the six months ended June 30, 2000, revenues increased $84.7
million to $775.8 million from $691.1 million for the same period in 1999. The
revenue increase primarily corresponds to a 6.9% increase in merchant sales
volume processed for the six months ended June 30, 2000 compared to the same
period in 1999. The pass-through of higher interchange rates from the credit
card associations, effective April 10, 1999, accounted for the additional
incremental increase.
COST OF SERVICE. Cost of service expenses reported for the second quarter
include an unusual charge of $57.9 million in connection with the recognition of
reserves established and write-down taken for merchant receivables and other
related assets associated with the former PMT merchant portfolio. Excluding this
charge, costs increased 5.7% to $307.7 million for the quarter ended June 30,
2000, compared to $291.3 million for the quarter ended June 30, 1999. The
increase in expenses is directly incremental to the increased processing volume.
Gross operating margin, excluding the charge, increased 1.0% to 24.2% in the
second quarter over last year's 23.2%. This improvement is related to the
benefit of the economies of scale gained as a result of increased processing
volume. Including the impact of the unusual charge, cost of service increased
$74.4 million to $365.7 million for the three months ended June 30, 2000,
compared to $291.3 million for the three months ended June 30, 1999. For the six
months ended June 30, 2000, excluding the unusual charge, cost of service
increased 11.0% to $587.8 million from $529.7 million during the same period in
1999. The increase resulted from the increase in processing volume and the
interchange pass through charges that are included in the six months ending June
30, 2000. Gross operating margin, excluding the unusual charge, increased to
24.2% for the six months ended June 30, 2000, compared to 23.3% for the six
months ended June 30, 1999. This increase was due to the aforementioned reasons.
Including the impact of the unusual charge, cost of service increased $115.9
million to $645.7 million for the six months ended June 30, 2000, compared to
$587.8 million for the six months ended June 30, 1999.
CONVERSION COSTS. Conversion costs decreased to $3.7 million for the quarter
ended June 30, 2000, compared to $8.1 million for the quarter ended June 30,
1999. The decrease relates to the completion of the substantial conversion
efforts of the PMT merchants and for the CoreStates merchant portfolio purchased
in the fourth quarter of 1998. For the six months ended June 30, 2000,
conversion
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costs decreased to $7.7 million, or 50.6%, from $15.7 million during the same
period in 1999, as a result of the aforementioned activities.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 12.7% to $32.0 million for the quarter ended June 30, 2000,
compared to $28.4 million for the same period in 1999. These increases are
attributable to the business acquisitions completed in the first quarter of 2000
and the opening of a major new operations center in Atlanta, Georgia in February
2000. The Atlanta operations center enables the Company to complete the
consolidation of operations from the former PMT subsidiaries, as well as absorb
operating needs of the more recent acquisitions. Additionally, included in this
increase are $1.5 million, or 41.6% of the year over year increase, related to
the consolidation of 100% of the Econex operating results. As a percentage of
revenues, selling, general and administrative expenses are flat with those from
the second quarter of 1999, excluding the impact of the Econex consolidation.
Selling, general and administrative expenses for the six months ended June 30,
2000 were $62.0 million, an increase of 10.4% from the $56.2 million reported
from the six months ended June 30,1999. The cost increases are a result of the
aforementioned items. Included in the six months results are $2.2 million of
administrative expenses related to Econex. Excluding the impact of Econex,
expenses as a percentage of revenues decreased to 7.7% from 8.1% in 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
17.9% to $17.3 million for the quarter ended June 30, 2000, compared to $14.7
million for the same quarter ended June 30, 1999. This is due primarily to
amortization expense associated with the portfolio purchases made during 1999
and the first quarter of 2000. Additional depreciation expense increases are
attributable to the increase in fixed assets held as of June 30, 2000 compared
to June 30, 1999, mainly for facilities and technology infrastructures.
Depreciation and amortization expense for the six months ended June 30, 2000, of
$34.6 million increased 250% from the $27.7 million during the first half of
1999, for the aforementioned reasons.
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ASSET IMPAIRMENT CHARGE. During the quarter ended June 30, 2000, NOVA
determined that it had experienced an increased attrition in the merchants it
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 will 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 was adjusted to reflect fair value and the amortization period was
adjusted to reflect the remaining life of the related assets.
OPERATING INCOME. For the foregoing reasons, operating income, excluding
the effect of the asset impairment charge and the unusual charge for the quarter
ended June 30, 2000, increased $8.2 million, or 22.2%, to $45.0 million from the
second quarter of 1999 results of $36.8 million. Operating margins of 11.1% for
the three months ended June 30, 2000, improved from 9.7% reported for the three
months ended June 30, 1999, primarily due to the increased processing volume,
economies of scale from the technology platforms and the decrease in conversion
expenses. Including the unusual charges, operating income for the three months
ended June 30, 2000 decreased $134.3 million to an operating loss of $97.5
million compared to operating income of $36.8 million for the three months ended
June 30, 1999. Operating income, excluding the unusual charges referred to
above, for the six months ended June 30, 2000, of $83.8 million increased $21.9
million, or 35.4%, from the same period in 1999. Operating margins improved to
10.8% for the six months ended June 30, 2000, compared to 8.9% from the same
period in 1999. Including the unusual charges, operating income for the six
months ended June 30, 2000 decreased $120.6 million to an operating loss of
$58.7 million compared to operating income of $61.8 million for the six months
ended June 30, 1999. EBITDA (defined as earnings before interest, taxes,
depreciation, amortization, and unusual items) increased to $57.5 million from
$46.6 million for the second quarter ended June 30, 2000 and 1999, respectively.
EBITDA increased for the six months ended June 30, 2000 and 1999, respectively,
by $25.7 million to $108.5 million from $82.8 million.
INTEREST INCOME. Interest income decreased approximately $.5 million, or
51.2%, to $.5 million for the three months ended June 30, 2000, compared to $1.0
million for the three months ended June 30, 1999. For the six months ended June
30, 2000, interest income declined 34.8% to $1.0 million from $1.5 million
during the same period in 1999. The most significant factor contributing to the
decline relates to the income earned during 1999 from the interest-bearing
investment securities. NOVA utilized available cash in 2000 to fund
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portfolio purchases, purchases of property and equipment, and the pay down of
outstanding credit facility borrowings. Accordingly, such balances were
unavailable for investment purposes.
INTEREST EXPENSE. Interest expense increased $4.0 million for the quarter
ended June 30, 2000, to $4.5 million, compared to the $.5 million in the three
months ended June 30, 1999. The primary component of this increase was the
higher average debt obligations outstanding to support the stock repurchase
program implemented in the later part of 1999 and capital expenditures.
Interest expense for the six months ended June 30, 2000, increased $7.6 million
to $9.1 million compared to $1.5 million for the same period in 1999 for the
aforementioned reasons.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES. Minority interest in income
of consolidated subsidiaries increased $.8 million to $5.6 million for the three
months ended June 30, 2000 compared to the $4.5 million reported for the three
months ended June 30, 1999. This increase reflects the addition of merchant
processing volume for a portfolio acquired through Key Merchant Services, LLC.
Minority interest for the six months ended June 30, 2000, increased $3.1 million
to $9.9 million compared to the $6.8 million reported for the six months ended
June 30, 1999. This increase was due to the inclusion of the aforementioned
processing volume and the incremental inclusion of five months of processing
volume from a merchant portfolio acquired through Elan Merchant Services, LLC in
the six months ended June 30, 2000, compared to the six months ended June 30,
1999.
INCOME TAXES. Due to the combined effect of the charges recorded in the
second quarter, NOVA recognized a tax benefit $37.6 million. Adjusted for the
tax benefit effect of the unusual charges, income tax expense of $13.6 million
for the quarter ended June 30, 2000, increased 10.3%, or $1.3 million, compared
to $12.3 million for the same period in 1999. The effective tax rate of 38.1% in
the second quarter of 2000 increased from 37.5% for the second quarter of 1999.
This increase is due to the effect of higher taxable income and the increase in
non-deductible expenses, primarily associated with the intangible assets
acquired in connection with the FSB transaction. For the six months ended June
30, 2000, adjusted for the tax benefit effect of the unusual charges, income tax
expense of $24.9
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million increased $4.3 million, or 20.9%, from the $20.6 million for the same
period in 1999. The effective tax rate of 37.8% for the first half of 2000
compares to 37.3% for the first half of 1999. This increase is attributable to
the aforementioned reasons.
NET INCOME. Excluding the effect of the unusual charges discussed above,
net income rose 7.5% to $22.1 million, for the quarter ended June 30, 2000,
compared to $20.5 million for the quarter ended June 30, 1999. Net income
increased 18.3% in the six months ended June 30, 2000 to $40.9 million from
$34.5 million during the first six months of 1999. Net margins were improved
period over period. Including the effect of the unusual charges, there was a net
loss of $69.3 million for the quarter ended June 30, 2000, compared to net
income of $20.5 million for the quarter ended June 30, 1999. Including the
effect of the unusual charges, there was a net loss of $50.5 million for the six
months ended June 30, 2000, compared to net income of $34.5 million for the six
months ended June 30, 1999.
EARNINGS PER SHARE. Excluding the unusual charges discussed above,
diluted earnings per share for the second quarter and six months ended June 30,
2000 respectively, were $0.31 and $0.55. This represents a per share increase
for the second quarter 2000 of $0.03, or 14.3%, from the $0.28 reported in the
second quarter of 1999, and an increase of $0.09, or 19.6%, from the $0.46
reported in the first half of 1999. Including the effect of the unusual charges,
there was a net loss per share of $0.99 for the quarter ended June 30, 2000,
compared to net income per diluted share of $0.28 for the quarter ended June 30,
1999. Including the effect of the unusual charges, there was a net loss per
share of $0.73 for the six months ended June 30, 2000, compared to net income
per diluted share of $0.46 for the six months ended June 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES - The Company's primary uses of its capital
resources include the purchase of merchant portfolios and customer contracts,
investment in joint ventures, capital expenditures, debt reduction, purchase of
treasury shares and working capital requirements.
NOVA produces significant cash flow from operating activities, amounting to
$61.3 million for the six months ended June 30, 2000 compared to $42.3 million
for the six months ended June 30, 1999. Cash flow is primarily generated from
operating earnings ($40.8 million for the six months ended June 30, 2000
adjusted for the impact of the unusual charges previously described in "Cost of
Service" and "Asset Impairment Charge"), and depreciation and amortization. The
increase in cash flow from operating activities is primarily associated with an
increase in operating earnings, after adjustment for the unusual charges
discussed above, the management of working capital, and the payment of merger
obligations charges in the six months ended June 30, 1999 related to the charge
recognized in 1998.
Net cash used in investing activities was $33.4 million for the six months ended
June 30, 2000, as compared to $64.0 million for the six months ended June 30,
1999. This decrease is substantially attributed to a lower cash requirement for
the purchase of merchant portfolios and customer contracts. Capital equipment
purchases increased $6.3 million to $20.5 million during the six months ended
June 30, 2000, compared to the same period in 1999. The increase is 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 the
new operations facility in Atlanta, Georgia.
Net cash flow used during the six months ended June 30, 2000 from financing
activities was $13.2 million, compared to $25.9 million cash provided by
financing activities for the same period in 1999. Proceeds from credit
borrowings and stock option exercises, combined with cash from operations, were
used to pay down debt of $32.7 million.
NOVA has available a revolving credit facility of $250.0 million. At June
30, 2000, approximately $186.5 million in borrowings were outstanding under this
agreement.
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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. Nova has funded the share
repurchases through operating cash flows and funds from available credit
facilities. As of June 30, 2000, NOVA had repurchased approximately 6.0 million
shares under this program at a cash outlay of $159.1 million. The Company
continues to evaluate the opportunities available for future purchases.
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 former
processor. Because of the seasonality of NOVA's business, capital requirements
may be greater in certain months than others.
At June 30, 2000, the Company had cash and cash equivalents of $47.3
million. NOVA believes its existing cash and cash equivalents, cash generated
from operations, and available credit 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.
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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
The Company held its Annual Meeting of Shareholders on May 24, 2000. Two
matters were voted and approved at the meeting.
Proposal 1 Election of Directors
---------- ---------------------
The results of the voting were as follows:
For Withheld
---------- ---------
Charles T. Cannada 56,568,434 1,182,046
Gregory S. Daily 56,701,284 1,049,196
Edward Grzedzinski 56,597,834 1,152,646
David M. Ivey 56,701,284 1,049,196
Pamela A. Joseph 56,633,584 1,116,896
Stephen. D. Kane 56,853,434 897,046
Dr. Henry Kressell 56,853,434 897,046
Stephen E. Wall 56,853,434 897,046
Proposal 2 Ratification of the selection of Ernst & Young LLP as independent
auditors of the Company for 2000.
The results of the vote were as follows:
For - 57,471,759 Against - 261,089 Abstain - 17,632
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit
No. Description of Exhibit
----------------- -----------------------------
<S> <C>
*10.54 Split-Dollar Agreement, dated April 3, 2000, among the Registrant, Edward Grzedzinski and
Donald E. Hall, Trustee of the Edward Grzedzinski Trust U/A dated March 7, 2000
*10.55 Employment Agreement, dated May 24, 2000, between the Registrant and Steve M. Scheppmann
*10.56 Agreement Respecting a Joint Venture, dated June 23, 2000, among the Registrant, the governor and
Company of the Bank of Ireland and EuroConex Technologies Limited
*27 Financial Data Schedule
</TABLE>
------------------------------
* 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 June 30, 2000.
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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: August 14, 2000 By: /s/ Stephen M. Scheppmann
------------------------------
Stephen M. Scheppmann
Chief Financial Officer
(Principal Accounting Officer)
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