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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
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: 1-11905
NATIONAL PROCESSING, INC.
(Exact name of registrant as specified in its charter)
OHIO 61-1303983
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Oxmoor Place
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
(Address of principal executive offices) (Zip Code)
(502) 326-7000
(Registrant's telephone number, including area code)
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
--- ---
The number of share outstanding of the Registrant's Common Stock as of May 12,
1997 was 50,575,000.
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NATIONAL PROCESSING, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
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Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -- March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income -- Three
Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES
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NATIONAL PROCESSING, INC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(Unaudited)
March 31 December 31
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $19,594 $3,330
Securities available for sale 116,839 122,402
Accounts receivable-trade 70,800 91,239
Check inventory 5,657 6,423
Restricted deposits-client funds 60,224 50,029
Other current assets 5,231 2,477
-------- --------
Total current assets 278,345 275,900
Property and Equipment:
Furniture and equipment 83,653 80,702
Building and leasehold improvements 16,143 15,376
Software 14,318 12,455
Property leased from affiliate 4,173 4,173
Land and improvements 855 855
-------- --------
119,142 113,561
Accumulated depreciation and amortization 59,066 56,554
-------- --------
60,076 57,007
Other assets:
Goodwill, net of accumulated amortization of $8,082 in 1997
and $7,955 in 1996 76,561 70,631
Deferred contract costs,net 14,046 12,535
Other assets 1,254 1,231
-------- --------
Total other assets 91,861 84,397
-------- --------
Total assets $430,282 $417,304
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Restricted deposits-client funds $60,224 $50,029
Accounts payable-trade 3,543 8,089
Merchant payable- check services 5,932 6,466
Accrued bankcard assessments 14,203 17,218
Income tax payable to NCC 2,370 2,605
Other accrued liabilities 19,897 14,672
-------- --------
Total current liabilities 106,169 99,079
Obligation under property leased from affiliate 2,491 2,527
Long-term debt 4,000 -
Other long-term liabilities 1,554 -
-------- --------
Total liabilities 114,214 101,606
Shareholders' equity:
Preferred stock, without par value; 5,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, without par value; 95,000,0000 shares authorized;
50,575,000 shares issued and outstanding 1 1
Contributed capital 175,215 175,215
Retained earnings 140,852 140,482
-------- --------
Total shareholders' equity 316,068 315,698
-------- --------
Total liabilities and shareholders' equity $430,282 $417,304
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See notes to consolidated financial statements
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NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In Thousands, except per share amounts)
Three Months Ended
March 31
1997 1996
-------- --------
Revenues $88,420 $83,947
Operating expenses 48,091 45,332
Wages and benefits 17,651 14,204
General and administrative expenses:
Recurring 13,235 11,524
Restructuring charge 6,340 -
Depreciation and amortization 4,009 2,976
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OPERATING (LOSS) PROFIT (906) 9,911
Net interest income 1,084 294
------- -------
Income before income taxes 178 10,205
(Benefit from) provision for income taxes (192) 4,345
------- -------
NET INCOME $370 $5,860
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NET INCOME PER SHARE $0.01 $0.14
======= =======
Shares used in computation 50,575 43,100
See notes to consolidated financial statements
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NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
Three Months Ended
March 31
1997 1996
------- -------
OPERATING ACTIVITIES
Net income $370 $5,860
Items not requiring cash currently:
Depreciation and amortization 4,009 2,976
Restructuring charge 6,340 -
Change in current assets and liabilities:
Accounts receivable 21,031 20,595
Check inventory 766 104
Accounts payable-trade (5,015) (3,468)
Merchant payable-check services (534) 1,476
Accrued bankcard assessments (3,015) (4,404)
Income taxes payable (362) 2,955
Other current assets/liabilities (1,244) (9,207)
Other, net (2,378) 160
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Net cash provided by operating activities 19,968 17,047
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INVESTING ACTIVITIES
Capital expenditures (7,481) (3,513)
Purchases of securities available for sale (146,752) -
Proceeds from sales and maturities of securities
available for sale 152,315 -
Acquisitions, net of cash acquired (1,750) -
------- -------
Net cash (used) for investing activities (3,668) (3,513)
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FINANCING ACTIVITIES
Principal payments under property leased from affiliate (36) (36)
------- -------
Net cash (used) for financing activities (36) (36)
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Net increase in cash and cash equivalents 16,264 13,498
Cash and cash equivalents, beginning of period 3,330 22,618
------- -------
Cash and cash equivalents, end of period $19,594 $36,116
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SUPPLEMENTAL DISCLOSURES
Taxes paid ($280) ($900)
See notes to consolidated financial statements
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NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. ACCOUNTING POLICIES
The accompanying unaudited 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, although the balance sheet at December 31, 1996 has
been derived from the audited consolidated financial statements at that date,
the accompanying consolidated financial statements do not include all of the
information and footnotes required by generally accepted accounting principles.
These financial statements should be read in conjunction with National
Processing, Inc.'s (the "Company") audited consolidated financial statements for
the year ended December 31, 1996 which include full disclosure of relevant
financial policies and information.
In the opinion of management, the accompanying unaudited consolidated financial
statements have been prepared on a basis consistent with accounting principles
applied in the prior periods and include all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year or any other
interim period.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which is required to
be adopted on December 31, 1997. Under the new requirements, primary earnings
per share will be replaced by a more simply calculated basic earnings per share
which will not include the impact of any potentially dilutive securities. For
the periods ended March 31, 1997 and 1996, the Company's reported net income per
share is calculated using only weighted average shares outstanding due to the
immateriality of potentially dilutive securities. As a result, primary earnings
per share for the quarters presented here will not be impacted by the new
statement. The Company will however be required to report diluted earnings per
share under the new Statement which will include the assumed conversion of all
potentially dilutive securities.
3. RESTRUCTURING CHARGE
During the three month period ended March 31, 1997, the Company recorded
non-recurring expenses of $6,340,000 for severance pay and other costs related
to organizational restructuring. These charges decreased net income and earnings
per share by approximately $3,867,000 and $.08 respectively. At March 31, 1997,
other accrued liabilities and other long-term liabilities include $3.9 million
and $1.6 million, respectively, related to the restructuring charge.
4. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in litigation from
time to time. In the opinion of management, the ultimate liability, if any,
arising from this litigation is not expected to have a material adverse effect
on the Company's financial condition, results of operations, or liquidity.
5. RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
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6. ACQUISITION OF NTA, INC.
On February 4, 1997, the Company acquired all of the outstanding shares of NTA,
Inc., a freight payment processing company, for $1.0 million in cash and $4.0
million in notes payable. The notes, plus accrued interest at 5.125%, are due
and payable in February 1999. The notes payable plus accrued interest is subject
to increases if the market price of the Company's common stock exceeds $19 per
share and is subject to decreases if NTA's 1997 pre-tax income does not reach
certain targeted threshholds.
The results of NTA's operations are included in the Company's results of
operations for the months of February and March 1997. The proforma effect of
this transaction was not material to the previously reported periods.
Supplemental cash flow information related to the acquisition is as follows:
(Dollars in thousands)
- ------------------------------------------------------------
Net assets other than cash acquired ($18)
Purchase price in excess of net assets acquired (5,732)
Note issued at acquisition date 4,000
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Net cash used to acquire NTA, Inc. ($1,750)
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7. PROVISION FOR INCOME TAXES
The income tax benefit for the period ended March 31, 1997 results primarily
from approximately $1.3 million of interest income from municipal securities
which is not subject to federal income tax.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
National Processing, Inc. (The "Company") provides low-cost,
high-volume transaction processing services and customized processing solutions.
The Company deploys technology and applications software primarily to merchants
and other commercial businesses, corporations and providers of travel-related
services.
The Company is an Ohio corporation that was formerly a wholly owned
subsidiary of National City Corporation, an Ohio-headquartered bank holding
company. Following the Company's initial public offering in August 1996,
National City Corporation continued to own 85% of the Company's outstanding
common stock.
COMPONENTS OF REVENUE AND EXPENSES
Revenues. The Company's revenues are generated from a variety of
sources through the Company's wholly owned subsidiary National Processing
Company. Merchant Services revenues are primarily derived from fees paid by
merchants for the authorization, processing, and settlement of credit and debit
card transactions, exclusive of interchange fees, and for the acceptance of
checks. Merchant fees include assessment fees, which are amounts charged by
credit card associations for clearing services, advertising and other expenses.
Revenues from Corporate Services are derived from transaction fees for the
processing of remittances, accounts payable and freight bills, and for providing
integrated document solutions involving electronic imaging, archival, processing
and payment settlement. Revenues from Travel Services depend primarily on the
volume of ticket sales by travel agents on behalf of airlines. A small portion
of revenues are derived from earnings on cash balances which are maintained by
customers pursuant to contract terms. Revenues derived from services provided to
affiliates are immaterial.
Expenses. Operating expenses include all direct costs of providing
services to customers, excluding hourly labor. The most significant components
of operating expenses are assessment fees, authorization fees and data
processing expenses. Wages and benefits include wages and benefits for hourly
employees. General and administrative expenses include management salaries and
benefits, facilities maintenance and software applications programming.
Depreciation of property and equipment and software amortization are recognized
on a straight-line basis over the estimated useful life of the related asset.
Amortization of goodwill associated with acquisitions is recognized over forty
years. Amortization of other costs associated with the purchase of contracts or
other business assets is recognized over varying periods from three to fifteen
years based upon the contract period and projected revenue stream.
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of revenues for the periods indicated:
Three Months
Ended
March 31
-------------------------------------
1997 1996
------------------ -----------------
Revenues 100.0% 100.0%
Operating expenses 54.4 54.0
Wages & benefits 19.9 16.9
General & administrative expenses:
Recurring 15.0 13.7
Non-recurring 7.2 -
Depreciation & amortization 4.5 3.6
------------------ -----------------
Income from operations (1.0) 11.8
Net interest income 1.2 .4
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Income before taxes .2 12.2
(Benefit from) provision for income taxes (.2) 5.2
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Net income .4% 7.0%
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THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenues. Consolidated revenue increased $4.5 million, or 5.3%, to
$88.4 million for the period ended March 31, 1997, from $83.9 million for the
comparable 1996 period. The increase was primarily due to revenue gains in
Corporate Services and Merchant Services offset by reduced revenue in Travel
Services. Corporate Services revenue growth of $5.1 million or 23.0% was
attributable to increased volumes at the Company's remittance, electronic
imaging solutions, and payables operations. Merchant Services revenues
increased $1.8 million or 3.7% in 1997, compared to 1996, due to increased
transaction volume. The Company processed 633 million transactions during the
1997 period, representing a 10.8 % transaction volume increase over the
prior period.
The composition of the Company's revenues for these periods is as
follows:
For the Three Months Ended
March 31
-------------------------------------
1997 1996
-------------------------------------
Merchant Services 56.1% 56.9%
Corporate Services 31.0 26.6
Travel Services 12.9 16.5
Costs and Expenses. Consolidated costs and expenses increased $15.3
million, or 20.7%, to $89.3 million for the period ended March 31, 1997 from
$74.0 million during the comparable 1996 period. The largest item included in
this increase was $6.3 million of non-recurring general and administrative
expense for severance pay and other costs related to organizational
restructuring. The expense increases unrelated to the restructuring of
approximately $9.0 million are primarily the result of volume from new business
as further described in the paragraphs below.
Operating expenses increased $2.8 million, or 6.2% to $48.1 million
for the period ended March 31, 1997 from $45.3 in 1996. The increase was
primarily due to higher uncollectible check expense as a result of increases in
guarantee volume and guarantee mix changes, and increases in purchased services
at Merchant Services and Corporate Services resulting from increased volumes.
These increases were offset by lower operating expenses at Travel Services due
to lower volume.
Wages and benefits increased $3.4 million, or 24.3%, to $17.7 million
for the period ended March 31, 1997, from $14.2 million in 1996, primarily due
to higher wages and benefit in Corporate Services as a result of new
business volume.
General and administrative expenses increased $8.1 million, or 69.9%,
to $19.6 million for the period ended March 31, 1997 from $11.5 million in 1996.
The increase was primarily due to non-recurring general and administrative
expenses of $6.3 million for severance pay and other costs related to
organizational restructuring. In addition, recurring general and administrative
expenses increased approximately $1.7 million as a result of increased marketing
efforts and additional overhead expenses associated with operating as a public
company.
Depreciation and amortization for the period ended March 31, 1997 was
$4.0 million, up from $3.0 million for the same period in 1996. This increase
was primarily due to greater expenditures on fixed assets relating to technology
improvements and initiatives.
Net interest income. Net interest income increased to $1.1 million for
the first quarter of 1997 from $.3 million last year. The increase is the result
of interest income generated from the initial public offering proceeds
received in August 1996.
Tax Provision. Income taxes for the period ended March 31, 1997 were a
$.2 million benefit compared to a $4.3 million expense in 1996. The decrease
results from the reduction of pre-tax income by $10.0 million to $.2 million for
the period ended March 31, 1997, from $10.2 in 1996, and from non-taxable
interest income of $1.3 million in the 1997 period.
SEASONALITY
The Company experiences seasonality in its businesses, particularly in
its Merchant Services and Travel Services business. The Company typically
realizes higher revenues in the third and fourth calendar quarters and lower
revenues in the first calendar quarter, reflecting increased transaction volumes
and travel in the summer and holiday months and a decrease in transaction volume
during the quarter immediately following the holiday season.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of capital resources include acquisitions,
capital expenditures and working capital. Future business acquisitions may be
funded through current liquidity, borrowed funds, and/or issuances of common
stock.
The Company's capital expenditures include amounts for computer systems
hardware and software as well as scanning and other document processing
equipment. During the period ended March 31, 1997, the Company's capital
expenditures totaled $7.5 million. Such expenditures were principally financed
from operating cash flow, which totaled approximately $20.0 million. Operating
cash flow during the period ended March 31, 1996 totaled $17.0 million and
capital expenditures were $3.5 million. The Company expects capital expenditures
for the remainder of 1997 to be approximately $16.0 million principally to
enhance processing capabilities in its Merchant Services and Corporate Services
operations. It is anticipated that these expenditures will be funded with
operating cash flows.
As the Company does not carry significant amounts of inventory and
historically has experienced short collection periods for its accounts
receivable, it does not require substantial working capital to support its
revenue growth. Working capital requirements will vary depending upon future
acquisition activity. Increases in working capital needs are expected to be
financed through operating cash flow and current cash and investment balances.
The Company maintains cash balances held on behalf of clients pending
distribution to vendors which are shown on the balance sheet as assets and
equivalent, offsetting liabilities. These cash balances totaled approximately
$60.2 million and $50.0 million as of March 31, 1997 and December 31, 1996,
respectively.
OUTLOOK AND RECENT DEVELOPMENTS
The Company's financial results are to a large extent dependent on the
performance of its merchant card services business. Revenue from this business
is a function of competitive pricing conditions in the merchant card services
market and volume of transactions processed. The ability to successfully renew
merchant contracts is significant to preserving and growing marginal profit.
Revenue growth and margins will suffer in the near term if current competitive
prices persist in the merchant card services market. To offset some of the
effects of margin pressure, the Company is implementing overhead reductions at
the corporate and business line levels.
The Company's Travel Services business derives a substantial portion of
its revenues from an exclusive long-term contract with the Airlines Reporting
Corporation ("ARC"). The Company is compensated on a "cost plus" basis under its
contract with the ARC, which expires in December 2001. The Company expects that
revenues received under the ARC contract will decline as the ARC offers an
electronic settlement system designed to displace the labor costs of processing
paper transactions. Pursuant to the contract, the Company has also completed
certain projects for which it has earned revenue and profit bonuses in the past
three years that are no longer available. As a result of these developments,
the Company's revenues and net income associated with the ARC contract
decreased approximately $2.4 million and $.2 million respectively for the
period ended March 31, 1997 from the comparable 1996 period. The Company
expects that the effect of the loss of these bonuses and the reduction in labor
costs will be to reduce net income associated with the ARC contract by
approximately an additional $1.8 million in the remainder of 1997 and that
additional cost reductions will reduce net income associated with the ARC
contract by an additional $500,000 in each subsequent year through the end of
the current contract term.
The Company's gross margin is a sensitive function of the product mix
sold, transaction volume and pricing, the ability to purchase third-party
services at reasonable prices, and the implementation of new technology
solutions which drive labor costs down.
On March 19, 1997, the company filed a report on Form 8-K announcing
that full year 1997 earnings could be as much as a third below First Call
analyst consenus estimates of $.73 per share.
The Company separately announced the appointment of Robert E.
Showalter as president and CEO of National Processing, Inc. He succeeds Tony G.
Holcombe, CEO of the Company since 1994, who resigned to pursue other
interests. Earlier in the month of March 1997, the Company announced the
resignation of two senior executives, Richard A. Alston and Kurt S. Knipp. Mr.
Alston had been Executive Vice President, Finance and Corporate Development,
and Mr. Knipp had been Executive Vice President, Merchant Card Services.
Certain matters discussed in this report on Form 10-Q are
forward-looking statements involving risks and uncertainties that could cause
actual results to differ materially from such statements, including the
Company's ability to attract and retain profitable customer accounts; its
ability to execute its growth strategy by consummating mergers and acquisitions,
as well as its ability to integrate and manage new businesses; competitive
factors generally, in particular price competition; and other risks detailed
from time to time in the Registrant's SEC reports, including its Registration
Statement on Form S-1, filed on August 7, 1996.
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PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
3.1 (i) Amended Articles of Incorporation of the Company. (A)
3.1 (ii) Code of Regulations of the Company. (A)
10.1 Employment Agreement and Undertaking of Confidentiality between the
Company and Robert E. Showalter dated March 11, 1997.
10.2 Stock Options Agreement between the Company and Robert E. Showalter
dated March 11, 1997.
27.1 Financial Data Schedule.
B. REPORTS ON FORM 8-K
March 5, 1997: On March 5, 1997, National Processing, Inc.
announced that two of its senior executives, Richard A.
Alston, and Kurt S. Knipp, were resigning to pursue other
interests, effective immediately. Mr. Alston had been
Executive Vice President, Finance and Development, and Mr.
Knipp had been Executive Vice President, Merchant Card
Services.
March 24, 1997: On March 12, 1997, National Processing, Inc.
announced that, effective immediately, Robert E. Showalter had
been named president and chief executive officer, succeeding
Tony G. Holcombe, who resigned.
National Processing, Inc. also announced that first quarter
1997 earnings were expected to fall below the consensus
estimate of $.12 per share as of February 28, 1997 and that
full year 1997 earnings could fall below the consensus
estimate of $.73 per share by as much as a third if certain
identified trends continue.
(A) Exhibit is incorporated herein by reference to the applicable exhibit
in the Company's Registration Statement on Form S-1 (Registration No.
333-05507) filed on June 7, 1996.
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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.
NATIONAL PROCESSING, INC.
Date: May 12, 1997 By:
Jim W. Cate
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
By:
Danny L. McDaniel
Vice President and Controller
(Principal Accounting Officer)
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