10-Q 1 d10q.txt FORM 10-Q ================================================================================ 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 March 31, 2001 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 No.) One Concourse Parkway, 30328 Suite 300, Atlanta, Georgia (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (770) 396-1456 -------------------- 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 May 10, 2001 ----- ------------------------------------- Common Stock, $.01 par value 65,650,136 shares ================================================================================ NOVA CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 2001 (unaudited) and December 31, 2000.............................. 3 Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2001 and 2000............. 4 Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2001 and 2000............. 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................................................. 14 Item 4. Submission of Matters to a Vote of Security Holders............... 14 Item 6. Exhibits and Reports on Form 8-K.................................. 14 Signatures........................................................ 15 2 PART I. FINANCIAL INFORMATION ITEM 1. NOVA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)

See accompanying notes to condensed consolidated financial statements. 3 NOVA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Three Months Ended March 31, -------------------- 2001 2000 -------- -------- Revenues $370,129 $370,010 Operating expenses: Cost of service 287,121 279,978 Conversion costs 1,688 4,001 Selling, general and administrative 25,477 29,968 Depreciation and amortization 17,802 17,333 -------- -------- Total operating expenses 332,088 331,280 -------- -------- Operating income 38,041 38,730 Other income (expense): Interest income 691 515 Interest expense (4,935) (4,598) Minority interest (4,387) (4,546) -------- -------- Total other expenses (8,631) (8,629) -------- -------- Income before income taxes 29,410 30,101 Provision for income taxes 11,176 11,288 -------- -------- Net income $ 18,234 $ 18,813 ======== ======== Income per share: Basic earnings per share $ 0.28 $ 0.27 Diluted earnings per share $ 0.28 $ 0.27 Shares used in per share calculations: Weighted average shares - Basic 65,267 68,929 Weighted average shares - Diluted 65,850 70,262 See accompanying notes to condensed consolidated financial statements. 4 NOVA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)

See accompanying notes to condensed consolidated financial statements. 5 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position and results of operations of NOVA Corporation ("NOVA" or "the Company") as of the end of and for the periods indicated. 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, 2000 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 prior year amounts have been reclassified to conform to the 2001 presentation. NOTE 2. 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": Three Months Ended March 31, ----------------- (In thousands, except per share amounts) 2001 2000 ---------------------------------------- ------- ------- Net income $18,234 $18,813 ======= ======= BASIC: Weighted average shares outstanding 65,267 68,929 ======= ======= Basic earnings per share $ 0.28 $ 0.27 ======= ======= DILUTED: Weighted average shares outstanding 65,267 68,929 Effect of dilutive securities: Stock options 583 1,333 ------- ------- Diluted weighted average shares outstanding 65,850 70,262 ======= ======= Diluted earnings per share $ 0.28 $ 0.27 ======= ======= 6 NOVA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) Continued NOTE 3. RESTRUCTURING, MERGER AND CONSOLIDATION CHARGES Restructuring Charge In the fourth quarter of 2000, NOVA recorded a $10.6 million pre-tax restructuring charge for severance and related termination benefits, lease abandonment costs, and the disposal and write-down of assets. This charge related to management's plan to improve overall business efficiencies and align the cost structure with the existing revenue base by closing two operations centers and eliminating duplicate operational functions. This action resulted in the elimination of approximately 270 positions, primarily management, administrative and operations staff positions. All termination benefits will be paid by the end of the third quarter of 2001. The Company began to vacate the two closed facilities during the fourth quarter of 2000 and completed this activity during the first quarter of 2001. The charge included the estimated unrecoverable future lease obligations for these two facilities and the disposal and write-down of equipment, furniture and fixtures and leasehold improvements that provided no future use or functionality to the Company. The components and utilization of the restructuring charge are detailed as follows:

Merger and Consolidation Charges As a result of NOVA's merger with PMT Services, Inc. ("PMT") in 1998, a $90.7 million charge was recorded. This charge was primarily related to direct merger transaction costs, charges associated with the consolidation and closure of PMT's business properties, contract termination costs related to unfavorable third-party processing contracts, and the decision to exit certain of PMT's sales distribution channels. The primary costs associated with the consolidation and closure of facilities include severance resulting from the elimination of overlapping functions (primarily customer service, accounting and administrative, and executive), abandonment losses on facility lease obligations, and the write-down of capital assets to their net realizable value. Beginning in 1998 and completed during the second quarter of 2000, management executed all parts of the integration and consolidation plan, making refinements as additional facts became available and circumstances changed. During 1999, revisions to the plan, which included decisions to close or downsize additional facilities to further streamline the operating and administrative functions, resulted in the reversal of approximately $6.5 million in charges not needed, and additional charges of approximately $6.7 million were recorded to recognize the costs of executing revised elements of the plan. The net additional charge of $0.2 million was reflected in the operating results for 1999. 7 NOVA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) Continued The following is a summary of the activity recorded relating to the merger and consolidation charges:

* For years 1998, 1999 and 2000 Severance During 1998, management developed and began implementing plans to close PMT's corporate headquarters, as well as downsize certain PMT operating subsidiaries. The total number of employees terminated under this plan was 275. Of these employees, certain executives' severance will be paid over two years. During 1999, management was able to settle termination-related benefits associated with certain executives at amounts less than originally recognized, accounting for substantially all of the $2.1 million reversed in this category. During 1999, plan revisions included the termination of approximately 183 employees, resulting in additional severance charges of $1.6 million. The remaining severance reserve balance at March 31, 2001 of approximately $2.6 million relates to the aforementioned executives whose severance will be fully paid by mid-2001. Lease Abandonment The Company completed the process of consolidating the PMT operations in Nashville, Tennessee and ten other locations during 1999 and 2000. The 1998 charge included the estimated unrecoverable future lease obligations primarily for PMT's Nashville headquarters. As of December 1999, the facility was substantially subleased, facilitating an accurate assessment of the future unrecoverable lease obligations. Based on the updated assessment, $0.3 million of the original charge was reversed. During 1999, plans were made to close or downsize additional PMT facilities. These decisions resulted in additional accruals of approximately $3.0 million covering ten locations. Eight of these were closed or downsized during 1999 and the remaining two facilities were closed or downsized during 2000. Obligations under leases included in the reserve balance will not be fully paid out until October 2007. NOTE 4. RECENT PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS 140). SFAS 140 requires a transfer of financial assets and surrender of control over those assets to be accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. In addition, SFAS 140 requires certain additional disclosures related to transferred assets. Certain provisions of the statement related to the recognition, reclassification and disclosure of collateral, as well as the disclosure of securitization transactions, became effective for the Company for 2000 year end reporting. Other provisions related to the transfer and servicing of financial assets and extinguishment of liabilities are effective for transactions occurring after March 31, 2001. The Company does not expect the adoption of this Statement to have a material effect on its financial position or results of operations. 8 NOVA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) Continued NOTE 5. RECENT DEVELOPMENTS On May 7, 2001, NOVA Corporation announced the execution of a definitive agreement whereby U.S. Bancorp will acquire NOVA in a merger transaction valued at approximately $2.0 billion, payable in a combination of cash and U.S. Bancorp common stock. Under the terms of the agreement, each NOVA shareholder will have the option to elect to receive 1.407 shares of U.S. Bancorp common stock, or $31.00 in cash in exchange for each outstanding share of NOVA common stock, subject to the requirement that 60% of the total outstanding shares of NOVA common stock are exchanged for U.S. Bancorp stock and 40% of the outstanding shares of NOVA common stock are exchanged for cash. The agreement is subject to regulatory and shareholder approval and customary conditions to closing. Management expects that the transaction will be completed during the third quarter 2001; however, there can be no assurances that regulatory or shareholder approval will be received or that conditions to closing will be met. 9 NOVA CORPORATION FORWARD-LOOKING STATEMENTS In addition to historical information, this Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act"), as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. 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. Such forward-looking statements include, but are not limited to statements about (i) competition within our chosen market segment; (ii) our ability to compete effectively in this particular market segment; (iii) projected future use of general purpose payment cards for consumer transactions; (iv) the advantage provided by our proprietary processing platform and related technology; (v) the impact of current developments and future advances in technology on the transaction processing industry; (vi) the impact of the Internet on the transaction processing industry; (vii) our ability to generate continued growth through our established distribution channels; (viii) the timeline for roll-out of our multi-currency platform through our European joint venture and future enhancements; (ix) our ability to compete in the European market; (x) our expectations regarding future earnings and recoverability of deferred tax assets and (xi) adequacy and availability of capital resources, including cash and cash equivalents and available credit facilities, to support business needs. Such forward-looking statements also include general statements concerning future financial operating results, plans, objective expectations and indications of intent not historical in nature and content. Such statements are based on management's current expectations, and actual results could differ materially. 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 the Company's control. Forward-looking statements may also be made in the Company's other reports filed under the Exchange Act, press releases, and other documents, as well as by the Company's management in oral statements. The Company undertakes no obligation to update or revise any forward-looking statement to reflect changed assumptions, the occurrence of unanticipated events, changes to future results over time or the impact of events or circumstances after the date on which such statement is made. Factors that could affect the Company's business include, but not limited to (i) the strength of the United States economy; (ii) the strength of the European economy; (iii) fluctuations in consumer spending and consumer confidence; (iv) changes in interest rates; (v) the success of our distribution channels in generating internal growth; (vi) the ability to identify and acquire additional merchant portfolios and operating businesses; (vii) the introduction of our multi-currency platform through our European joint venture; (viii) future availability of capital to support business needs; (ix) the outcome of pending or prospective litigation, and (x) the timing, terms, receipt of regulatory and shareholder approvals or satisfaction of conditions to closing of the proposed acquisition of the Company by U.S. Bancorp. New factors emerge from time to time, however, and it is not possible for the Company to predict all of such factors. Further, the Company cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward- looking statements. For a more complete discussion of these and other risk factors, please see the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2000. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General NOVA is a leading provider of integrated transaction processing services, related software application products, and value-added services to more than 560,000 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. Overview of Results of Operations The following table presents for the periods indicated the percentage of revenues represented by certain line items in NOVA's condensed consolidated statements of operations, as well as the percentage increase/(decrease) of such items from period to period:

Revenues NOVA's revenues of $370.1 million for the three months ended March 31, 2001 were unchanged compared to $370.0 million for the three months ended March 31, 2000. NOVA's core business distribution channels of banks, associations, and member service providers ("MSPs") signed during the later part of 2000 contributed processing volume growth of approximately 10.5%, and revenue growth of 8.0%. This growth was reduced by processing volume decreases of approximately 29.0% and associated revenue declines of 35.4% related to the portfolio acquired from PMT. The volume and revenue declines in the PMT portfolios was directly related to the large amount of attrition and the associated pricing compression experienced as a result of price adjustments necessary to retain merchant customers. The net volume increase of approximately 2.8% yielded flat revenues, as the pricing compression offset the volume increase. Cost of Service Cost of service increased 2.5% to $287.1 million for the quarter ended March 31, 2001 compared to $280.0 million for the quarter ended March 31, 2000. The increase was due to the rise in volume of $389.0 million or 2.8%, for the three months ended March 31, 2001. Gross margin of 22.4% for the three months ended March 31, 2001 decreased from 24.4% reported for the three months ended March 31, 2000. The decrease was primarily driven by the aforementioned pricing compression and the interchange component of cost of service directly tied to the increased transaction processing volume. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Conversion Costs Conversion costs decreased 57.5% to $1.7 million for the three months ended March 31, 2001 compared to $4.0 million for the three months ended March 31, 2000. During the first quarter 2000, the Company incurred substantial costs in connection with the conversion of the PMT portfolios. As this conversion was largely completed during 2000, the Company experienced a reduction in conversion costs during the first quarter of 2001 compared to the same quarter of the prior year. Selling, General and Administrative Expenses Selling, general and administrative expenses of $25.5 million for the three months ended March 31, 2001 decreased 15.0% compared to $30.0 million for the same period in 2000. As a percentage of revenue, selling, general and administrative expenses declined to 6.9% for the quarter ended March 31, 2001, compared to 8.1% for the same period last year. The reduction was related to (i) the completion of the revised 1999 merger and consolidation actions including workforce reductions and the closure of two PMT operations centers, and (ii) the restructuring actions taken during the fourth quarter of 2000, including the planned workforce reduction and closure of two additional operations centers. Depreciation and Amortization Depreciation and amortization increased 2.9% to $17.8 million for the three months ended March 31, 2001, compared to $17.3 million for the three months ended March 31, 2000. The expense increase was primarily related to technology platform enhancements placed in service in late 2000. Operating Income For the aforementioned reasons, operating income for the three months ended March 31, 2001 decreased slightly by $0.7 million, or 1.8%, to $38.0 million from prior year results of $38.7 million. Interest Income and Expense Interest income increased approximately $0.2 million to $0.7 million, for the three months ended March 31, 2001 compared to the same period in 2000. Interest expense increased approximately $0.3 million for the three months ended March 31, 2001 to $4.9 million, compared to $4.6 million in the three months ended March 31, 2000. The increase was driven by higher average outstanding debt of approximately $48.7 million directly related to the repurchase of approximately 4.9 million shares of NOVA common stock during the later part of 2000. Minority Interest Minority interest expense of $4.4 million for the three months ended March 31, 2001 was flat compared to the $4.5 million reported from the prior year. Income Taxes Income tax expense was $11.2 million (38.0% effective rate) for the three months ended March 31, 2001 compared to $11.3 million (37.5% effective rate) for the same period in 2000. The 0.5% increase in the effective rate was attributed to the increase in non-deductible expenses, primarily intangible assets. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Net Income Due to the factors discussed above, net income decreased to $18.2 million for the three months ended March 31, 2001 compared to $18.8 million for the three months ended March 31, 2000. Earnings per share of $0.28 for the three months ended March 31, 2001 compared to $0.27 for the three months ended March 31, 2000. The increase in earnings per share was driven by the reduction in weighted average shares outstanding as a result of the Company's share repurchases in late 2000 and the reduction in the dilutive effect of outstanding stock options. Liquidity and Capital Resources The Company's primary uses of its capital resources include purchases of merchant portfolios, investment in joint ventures, capital expenditures, share repurchases, purchases of equipment for leasing, and working capital requirements. Net cash provided by operating activities was $13.1 million for the three months ended March 31, 2001 compared to $35.8 million for the same period in the prior year. Cash flow was produced primarily from net income and the non-cash expenses of depreciation and amortization offset by increases in working capital. The increase in working capital amounts were primarily effected by the timing of trade receivable collections for the three months ended March 31, 2001 compared to the same period in 2000. Investing activities used a net $8.0 million for the three months ended March 31, 2001 as compared to $21.6 million for the three months ended March 31, 2000. The decrease was attributed to substantially lower cash requirements for merchant portfolio and customer contract purchases and capital expenditures. Financing activities used a net $31.4 million during the three months ended March 31, 2001, compared to $18.2 million for the same period in 2000. Reductions in outstanding debt were the primary uses of cash. As of March 31, 2001, NOVA had available a $250.0 million credit facility. At March 31, 2001, approximately $223.0 million in borrowings were outstanding under the credit facility. NOVA terminated a $50.0 million bridge facility on March 27, 2001. NOVA typically has relatively low working capital requirements because discount fees charged to merchants are collected in an average of forty-five days, while normal vendor payables are paid in an average of thirty days or longer. However, acquisition activity may cause variations in working capital due to duplicative operating costs during the conversion period and the timing of the payment of expenses and collection of receivables from the former processor during the transition period. Because of the seasonality of NOVA's business, capital requirements may fluctuate throughout the year. At March 31, 2001, the Company had cash and cash equivalents of $20.4 million. NOVA believes its existing cash and cash equivalents, cash generated from operations, and available credit facility are sufficient to fund future merchant and customer contract purchases and capital investments, and working capital requirements for at least the next twelve months. 13 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 effect 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 Number Description ------- ------------ *10.46 - Indenture dated as of June 1, 2000 by and among Ladco Financial Group, as Servicer, Ladco Funding Corp. VII, as Issuer, and Norwest Bank Minnesota, National Association, as Indenture Trustee and Back- up Servicer* 10.47 - Lease Acquisition Agreement dated as of June 1, 2000 by and between Ladco Financial Group and Ladco Funding Corp. VI 10.48 - Receivables Purchase Agreement dated as of June 1, 2000 by and between Ladco Funding Corp. VI and Ladco Funding Corp. VII 10.49 - Servicing Agreement dated as of June 1, 2000 by and among Ladco Financial Group, as Servicer, Ladco Funding Corp. VI, Ladco Funding Corp. VII, as Issuer, and Norwest Bank Minnesota, National Association, as Indenture Trustee and Back-up Servicer 10.50 - Employment Agreement, effective as of February 22, 2001, between the Registrant and Edward Grzedzinski 10.51 - Employment Agreement, effective as of February 22, 2001, between the Registrant and Pamela A. Joseph 10.52 - Employment Agreement, effective as of February 22, 2001, between the Registrant and Steve M. Scheppmann 10.53 - Employment Agreement, effective as of February 22, 2001, between the Registrant and Cherie M. Fuzzell __________ * Confidential treatment pursuant to 17 CFR Section 240.24b-2 has been requested regarding certain portions of the indicated Exhibit, which portions have been filed separately with the Commission. (b) Reports on Form 8-K The Company did not file any Current Report(s) on Form 8-K during the quarter ended March 31, 2001. (c) Exhibits All exhibits required by Item 601 of Regulation S-K are incorporated herein by reference or are filed herewith. 14 FORM 10-Q NOVA CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NOVA CORPORATION (Registrant) By: /s/ Stephen M. Scheppmann ----------------------------- Stephen M. Scheppman May 11, 2001 Chief Financial Officer (Principal Accounting Officer) 15

NOVA CORP \GA\ 10-Q