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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 June 30, 1997
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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
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The number of shares outstanding of the Registrant's Common Stock as of August
12, 1997 was 50,575,000.
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NATIONAL PROCESSING, INC.
INDEX
PART I. Financial Information
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Page No.
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Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 3
Consolidated Statements of Income - Three
and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 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
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Item 4. Submission of Matters to Shareholders
On May 13, 1997, at the Annual Meeting of
Shareholders of the Registrant, shareholders
took the following actions:
1. Elected as directors all nominees designated in the
proxy statement of March 31, 1997, as follows:
Number of Votes
For Withheld
James R. Bell, III 48,503,018 95,980
Aureliano Gonzalez-Baz 48,495,193 103,805
Preston B. Heller, Jr. 48,498,118 100,880
Robert G. Siefers 48,498,318 100,860
2. Approved the selection of Ernst & Young LLP,
independent accountants, as auditors for the year 1997:
48,566,580 votes cast for, 23,995 votes cast against,
8,423 votes withheld.
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURESpf 14
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National Processing, Inc
Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 30 December 31
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 26,362 $ 3,330
Securities available for sale 101,907 122,402
Accounts receivable-trade 67,218 91,239
Check inventory 5,033 6,423
Restricted deposits-client funds 102,257 50,029
Other current assets 6,245 2,477
-------- --------
Total current assets 309,022 275,900
Property and Equipment:
Furniture and equipment 86,972 80,702
Building and leasehold improvements 16,666 15,376
Software 16,171 12,455
Property leased from affiliate 4,173 4,173
Land and improvements 855 855
-------- --------
124,837 113,561
Accumulated depreciation and amortization 62,305 56,554
-------- --------
62,532 57,007
Other assets:
Goodwill, net of accumulated amortization of $9,006 in 1997
and $7,955 in 1996 88,418 70,631
Deferred contract costs, net 14,036 12,535
Other assets 1,277 1,231
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Total other assets 103,731 84,397
-------- --------
Total assets $475,285 $417,304
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Restricted deposits-client funds $102,257 $ 50,029
Accounts payable-trade 2,745 8,089
Merchant payable-check services 5,862 6,466
Accrued bankcard assessments 16,005 17,218
Income tax payable to NCC 1,336 2,605
Other accrued liabilities 16,100 14,672
-------- --------
Total current liabilities 144,305 99,079
Obligation under property leased from affiliate 2,455 2,527
Long-term debt 4,000 --
Other long-term liabilities 1,300 --
-------- --------
Total liabilities 152,060 101,606
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 148,009 140,482
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Total shareholders' equity 323,225 315,698
-------- --------
Total liabilities and shareholders' equity $475,285 $417,304
======== ========
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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
-------- -------- -------- --------
Revenues $ 94,969 $ 91,757 $183,389 $175,704
Operating expenses 51,262 49,293 99,353 94,625
Wages and benefits 17,547 15,531 35,198 29,735
General and administrative expenses:
Recurring 12,534 10,879 25,769 22,403
Restructuring charge -- -- 6,340 --
Depreciation and amortization 3,968 3,392 7,977 6,368
-------- -------- -------- --------
OPERATING PROFIT 9,658 12,662 8,752 22,573
Net interest income 1,229 259 2,313 553
-------- -------- -------- --------
Income before income taxes 10,887 12,921 11,065 23,126
Provision for income taxes 3,730 5,569 3,538 9,915
NET INCOME $ 7,157 $ 7,352 $ 7,527 $ 13,211
======== ======== ======== ========
NET INCOME PER SHARE $ 0.14 $ 0.17 $ 0.15 $ 0.31
======== ======== ======== ========
Shares used in computation 50,575 43,100 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)
Six Months Ended
June 30
1997 1996
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OPERATING ACTIVITIES
Net income $ 7,527 $ 13,211
Items not requiring cash currently:
Depreciation and amortization 7,977 6,368
Restructuring charge 4,871 --
Change in current assets and liabilities:
Accounts receivable 24,866 15,962
Check inventory 1,390 770
Accounts payable-trade (6,080) (4,726)
Merchant payable-check services (604) (1,457)
Accrued bankcard assessments (1,213) (1,564)
Income taxes payable (1,396) 768
Other current assets/liabilities (3,432) (8,974)
Other, net (3,315) (43)
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Net cash provided by operating activities 30,591 20,315
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INVESTING ACTIVITIES
Capital expenditures (13,327) (8,885)
Purchases of securities available for sale (307,045) --
Proceeds from sales and maturities of securities
available for sale 327,575 --
Acquisitions, net of cash acquired (14,690) --
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Net cash (used) for investing activities (7,487) (8,885)
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FINANCING ACTIVITIES
Principal payments under property leased from affiliate (72) (72)
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Net cash (used) for financing activities (72) (72)
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Net increase in cash and cash equivalents 23,032 11,358
Cash and cash equivalents, beginning of period 3,330 22,618
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Cash and cash equivalents, end of period $ 26,362 $ 33,976
========= =========
SUPPLEMENTAL DISCLOSURES
Taxes paid $ 6,544 $ 8,318
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 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 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
Reporting Comprehensive Income: In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income. This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of stockholders' equity and bypass net income. The provisions of this
statement are effective beginning with 1998 interim reporting. These disclosure
requirements will have no impact on financial position or results of operations.
Disclosures about Segments of an Enterprise and Related Information: In June
1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The provisions of this
statement require disclosure of financial and descriptive information about an
enterprise's operating segments in annual and interim financial reports issued
to shareholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for fiscal years beginning after December
15, 1997, however, it is not required to be applied for interim reporting in the
initial year of application. The Company is currently evaluating the impact of
this statement on the disclosures included in its annual and interim period
financial statements.
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 June 30, 1997,
other accrued liabilities and other long-term liabilities include $2.4 million
and $1.3 million, respectively, related to the restructuring charge.
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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.
6. ACQUISITIONS
On February 4, 1997, the Company acquired all of the outstanding shares of NTA,
Inc., a freight payment processing company. On June 18, 1997, the Company
acquired the operating assets and liabilities of Intracon, Inc., a freight
payment processing company. On June 20, 1997 the Company acquired the operating
assets and liabilities of MRS Jamaica, Inc., a healthcare form processing
company. The combined purchase price of these acquisitions was $13.8 million in
cash and $4.0 million in notes payable. The notes, plus accrued interest at
5.125% which are due and payable in February 1999, are subject to increases
based upon the market price of the Company's common stock and decreases based
upon the acquired company's pre-tax income. The MRS Jamaica, Inc. purchase
price is subject to increase by as much as $3.25 million based upon the
earnings of the acquired company during its initial twelve months of
operations. The acquisitions increased the Company's goodwill by $18.2 million
which is being amortized over 40 years.
The combined pro forma effect of these transactions was not material to
previously reported periods.
Supplemental cash flow information related to the acquisitions is as follows:
(Dollars in thousands)
- ----------------------------------------------------- -------------
Net assets other than cash acquired ($461)
Purchase price in excess of net assets acquired (18,229)
Notes issued 4,000
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Net cash used for acquisitions ($14,690)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
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GENERAL STATEMENT
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. In May 1997, National City Corporation purchased 1,265,000 shares
of the Company's common stock in the open market and currently owns
approximately 88% 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:
Three Months Ended Six Months Ended
June 30 June 30
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1997 1996 1997 1996
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses 54.0 53.7 54.2 53.9
Wages & benefits 18.4 16.9 19.2 16.9
General & administrative expenses:
Recurring 13.2 11.9 14.0 12.8
Non-recurring -- -- 3.5 --
Depreciation & amortization 4.2 3.7 4.3 3.6
----- ----- ----- -----
Operating profit 10.2 13.8 4.8 12.8
Net interest income 1.3 .3 1.2 .3
----- ----- ----- -----
Income before income taxes 11.5 14.1 6.0 13.1
Provision for income taxes 4.0 6.1 1.9 5.6
----- ----- ----- -----
Net income 7.5% 8.0% 4.1% 7.5%
===== ===== ===== =====
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THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues. Consolidated revenue increased $3.2 million, or 3.5%, to
$95.0 million for the period ended June 30, 1997, from $91.8 million for the
comparable 1996 period. The increase was primarily due to revenue gains in
Corporate Services and Merchant Services offset by revenue reductions in Travel
Services. Corporate Services revenue growth of $3.9 million or 16.2% was
attributable to increased volumes at the Company's remittance, payables,
electronic imaging solutions, and freight operations. Merchant Services revenues
increased $2.1 million or 3.8% in 1997, compared to 1996, resulting from a small
increase in revenue per transaction in merchant card, due to a shift in mix
toward smaller volume customers, and increased volumes in merchant check. The
Company processed 680 million transactions during the 1997 period, representing
a 2.4% transaction volume increase over the 1996 period.
Costs and Expenses. Consolidated costs and expenses increased $6.2
million, or 7.9%, to $85.3 million for the period ended June 30, 1997 from $79.1
million during the comparable 1996 period.
Operating expenses increased $2.0 million, or 4.0%, to $51.3 million
for the period ended June 30, 1997 from $49.3 in 1996. The increase was
primarily due to higher Merchant Services 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 volume. These increases were offset by lower operating expenses at
Travel Services.
Wages and benefits increased $2.0 million, or 13.0%, to $17.5 million
for the period ended June 30, 1997, from $15.5 million in 1996, primarily due to
higher wages and benefits in Corporate Services as a result of new business
volume.
General and administrative expenses increased $1.7 million , or 15.2%,
to $12.5 million for the period ended June 30, 1997 from $10.9 million in 1996.
The increase was primarily due to increased support functions associated with
increased volume and additional overhead expenses associated with operating as a
public company.
Depreciation and amortization for the period ended June 30, 1997 was
$4.0 million, up from $3.4 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 $1.2 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 tax expense for the period ended June 30, 1997
was $3.7 million compared to $5.6 million in 1996. The decrease results from the
reduction of pre-tax income, non-taxable interest income of $1.2 million in the
1997 period and a lower state tax burden.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Consolidated revenue increased $7.7 million, or 4.4%, to
$183.4 million for the period ended June 30, 1997 from $175.7 million for the
comparable 1996 period. The increase was primarily due to gains in Corporate
Services and Merchant Services offset by reductions in Travel Services.
Corporate Services revenue growth of $9.0 million or 19.5% was attributable to
increased volumes. Merchant Services revenues increased $3.8 million or 3.8% in
1997, compared to 1996, resulting from small increases in revenue per
transaction in Merchant Card, due to a shift in mix toward smaller volume
customers, and increased revenues in Merchant Check. The Company processed 1.3
billion transactions during the 1997 period, representing a 5.6% increase over
the 1996 period.
Costs and Expenses. Consolidated costs and expenses increased $21.5
million, or 14.0%, to $174.6 million for the period ended June 30, 1997 from
$153.1 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 recorded during the first quarter of 1997. The expense increases
unrelated to the restructuring of approximately $15.3 million, are primarily the
result of volume from new business as further described in the paragraphs below.
Operating expenses increased $4.7 million, or 5.0%, to $99.4 million
for the period ended June 30, 1997 from $94.6 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.
Wages and benefits increased $5.5 million, or 18.4% to $35.2 million
for the period ended June 30, 1997 from $29.7 million in 1996, primarily due to
higher wages and benefits in Corporate Services as a result of new business
volume.
General and administrative expenses increased $9.7 million, or 43.3%,
to $32.1 million for the period ended June 30, 1997 from $22.4 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 $3.4 million as a result of increases in
support functions resulting from revenue increases, increased marketing efforts,
and additional overhead expenses associated with operating as a public company.
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Depreciation and amortization for the period ended June 30, 1997 was
$8.0 million, up from $6.4 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 $2.3 million for
the first half of 1997 from $.6 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 tax expense for the period ended June 30, 1997
was $3.5 million compared to $9.9 million in 1996. The decrease results from the
reduction of pre-tax income by $5.7 million to $7.5 million for the period ended
June 30, 1997, from $13.2 million in 1996, non-taxable interest income of $2.5
million in the 1997 period, and a lower state tax burden.
LINE OF BUSINESS REVIEW
The composition of the Company's statements of income by line of
business follows:
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Merchant Corporate Travel
Services Services Services Corporate Consolidated
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THREE MONTHS ENDED JUNE 30
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(In thousands) 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
Revenues $55,826 $53,772 $27,827 $23,949 $11,316 $14,036 -- -- $94,969 $91,757
Costs and expenses 48,344 44,939 23,310 19,195 8,440 10,420 18 -- 80,112 74,554
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating profit before
indirect expenses 7,482 8,833 4,517 4,754 2,876 3,616 (18) -- 14,857 17,203
Indirect general &
administrative expenses 2,419 2,134 1,831 1,419 949 988 -- -- 5,199 4,541
------- ------- ------- ------- ------- ------- ------- ---- ------- -------
Operating profit 5,063 6,699 2,686 3,335 1,927 2,628 (18) -- 9,658 12,662
Net interest income 33 131 14 50 16 78 1,166 -- 1,229 259
Provision (benefit)for
income taxes 1,974 2,988 914 1,460 700 1,121 142 -- 3,730 5,569
------- ------- ------- ------- ------- ------- ------- ---- ------- -------
Net income $ 3,122 $ 3,842 $ 1,786 $ 1,925 $ 1,243 $ 1,585 $ 1,006 -- $ 7,157 $ 7,352
---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
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(In thousands) 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $105,394 $101,563 $ 55,311 $ 46,296 $ 22,684 $ 27,845 -- -- $183,389 $175,704
Costs and expenses 93,715 86,817 46,526 37,124 16,895 20,811 57 -- 157,193 144,752
-------- -------- -------- -------- -------- -------- ------- -------- --------
Operating profit before
indirect expenses 11,679 14,746 8,785 9,172 5,789 7,034 (57) -- 26,196 30,952
Indirect general &
administrative expenses 5,166 3,887 3,908 2,572 2,030 1,920 6,340 -- 17,444 8,379
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating profit 6,513 10,859 4,877 6,600 3,759 5,114 (6,397) -- 8,752 22,573
Net interest income 78 281 26 107 39 165 2,170 -- 2,313 553
Provision (benefit) for --
income taxes 2,824 4,908 1,792 2,834 1,475 2,173 (2,553) -- 3,538 9,915
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income $ 3,767 $ 6,232 $ 3,111 $ 3,873 $ 2,323 $ 3,106 ($ 1,674) -- $ 7,527 $ 13,211
---------------------------------------------------------------------------------------------------
Indirect general and administrative expenses are allocated to the lines
of business based upon various methods determined by the nature of the expenses.
The Corporate entity reflects interest income and related expenses from the
proceeds of the Company's August 1996 initial public offering, a $6.3 million
non-recurring charge during the first quarter of 1997 for severance pay and
other costs related to organizational restructuring, and the related income tax
expenses.
The following is an analysis of the Company's income as derived from
its three lines of business, Merchant Services, Corporate Services and Travel
Services.
Merchant Services.
Merchant Services authorizes, processes and settles credit and debit
card transactions and authorizes and collects checks for a variety of merchants.
Historically, the Company has derived a substantial portion of its merchant card
revenues from larger merchants. In this competitive pricing environment, the
Company is contiually negotiating customer contracts during which it encounters
both client gains and losses. The ability to successfully renew and obtain
merchant contracts is significant to preserving and growing marginal profit.
Net income was $3.1 million and $3.8 million for the second quarter and first
six months of 1997, respectively, compared to $3.8 million and $6.2 million for
the comparable 1996 periods. The decreases in net income resulted primarily from
higher uncollectable check expenses due to changes in guarantee mix, increases
in costs associated with technology enhancements, and increases in purchased
services resulting from increased volume. These decreases in pre-tax income
were partially offset by reductions in income tax expense resulting from lower
taxable income and lower state tax burdens.
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Corporate Services.
Corporate Services processes remittances, accounts payable and freight
bills and provides integrated document solutions involving electronic imaging,
archival, processing and payment settlement. Net income was $1.8 million and
$3.1 million for the second quarter and first six months of 1997, respectively,
compared to $1.9 million and $3.9 million for the comparable 1996 periods. The
decreases in net income resulted primarily from a one-time vendor settlement
which increased pre-tax income by approximately $1.1 million in the second
quarter of 1996 and start-up costs in 1997 related to the Company's new imaging
technologies. These decreases in pre-tax income in the 1997 periods were
partially offset by decreases in income tax expense resulting from lower taxable
income and decreases in state tax burdens.
Travel Services.
Travel Services principally settles airline ticket purchases made
through travel agents on behalf of airlines and thus 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 this contract which expires in December 2001. Net income was $1.2
million and $2.3 million for the second quarter and first six months of 1997,
respectively, compared to $1.6 million and $3.1 million for the comparable 1996
periods. The decreases resulted principally from certain projects, pursuant to
the ARC contract, for which the Company earned revenues and profit bonuses in
the past three years that are no longer available. These developments decreased
net income approximately $.2 million and $.4 million for the second quarter and
first six months of 1997, respectively, from the comparable 1996 periods. The
Company expects that the loss of these bonuses and the reduction in labor costs
will reduce net income associated with the ARC contract by approximately an
additional $1.6 million in the remainder of 1997 and that additional cost
reductions will reduce net income associated with the ARC contract by an
additional $.5 million in each subsequent year through the end of the current
contract term. Start-up costs associated with the Company's new Commission
Express product also contributed to the decrease in net income for both the
second quarter and first six months of 1997. These decreases in pre-tax income
were partially offset by decreases in income tax expense resulting from lower
taxable income and decreases in state tax burdens.
SEASONALITY
The Company experiences seasonality in its businesses, particularly in
its Merchant Services and Travel Services businesses. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of capital resources includes 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 six month period ended June 30, 1997, the Company's
capital expenditures totaled $13.3 million. Such expenditures were principally
financed from operating cash flow, which totaled approximately $30.6 million.
Operating cash flow during the six month period June 30, 1996 totaled $20.3
million and capital expenditures were $8.9 million. The Company expects capital
expenditures for the remainder of 1997 to be approximately $12.8 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 restricted 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 $102.3 million and $50.0 million as of June 30, 1997 and
December 31, 1996, respectively.
RECENT DEVELOPMENTS AND OTHER
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 consensus estimates of $.73 per share.
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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
11 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule.
b. REPORTS ON FORM 8-K:
May 19, 1997: On May 13, 1997, National Processing, Inc. announced that
shareholders at the annual meeting elected four directors to two-year
terms and approved the selection of Ernst & Young as its independent
auditors.
Subsequent to the annual meeting, National Processing, Inc.'s board of
directors elected Robert G. Siefers, a director since 1996, as its
chairman. Mr. Siefers is executive vice president and chief financial
officer of National City Corporation, a Cleveland, Ohio-based financial
services company that is National Processing's majority shareholder.
May 19, 1997: On May 2, 1997, National City Corporation announced
its intent to acquire up to two million shares of the common stock of
National Processing, Inc. Completion of the share purchases, would
increase National City's ownership of National Processing. Inc.
from 85% to 89%.
On May 1, 1997 National Processing, Inc. announced it was awarded a
new five-year contract with Dayton Hudson Corporation for credit card
processing.
April 21, 1997: On April 14, 1997, National Processing, Inc. announced that net
income for the three months ended March 31, 1997 was $370,000 or $.01
per share. Included in the net income were non-recurring after-tax
charges of $3,867,000 or $.08 per share, for severance and associated
costs related to organizational restructuring actions. Exclusive of
these charges, net income would have been $4,237,000 or $.09 per
share, which compares to first quarter 1996 results of $5,860,000 or
$.14 per share.
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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: August 13, 1997 By:
Jim W. Cate
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By:
Danny L. McDaniel
Vice President and Controller
(Principal Accounting Officer)
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