1
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 September 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 ______________
COMMISSION FILE NUMBER: 1-11905
NATIONAL PROCESSING, INC.
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of 61-1303983
incorporation or organization) (I.R.S. Employer Identification No.)
One Oxmoor Place
101 Bullitt Lane, Suite 450 40222
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
(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 shares outstanding of the Registrant's Common Stock as of
November 13, 1997 was 50,575,000.
2
NATIONAL PROCESSING, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements (unaudited).
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Consolidated Statements of Income - Three
and Nine Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows - Nine 5
Months Ended Septmber 30, 1997 and 1996
Notes to Condensed 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 13
SIGNATURES 14
2
3
NATIONAL PROCESSING, INC
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30 December 31
1997 1996
------------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $18,737 $3,330
Securities available for sale 109,408 122,402
Accounts receivable-trade 68,739 91,239
Check inventory 5,101 6,423
Restricted deposits-client funds 113,338 50,029
Other current assets 7,243 2,477
------------------- --------------
Total current assets 322,566 275,900
Property and Equipment:
Furniture and equipment 92,783 80,702
Building and leasehold improvements 15,655 15,376
Software 17,265 12,455
Property leased from affiliate 4,173 4,173
Land and improvements 855 855
------------------- --------------
130,731 113,561
Accumulated depreciation and amortization 65,638 56,554
------------------- --------------
65,093 57,007
Other assets:
Goodwill, net of accumulated amortization of $9,624 in 1997
and $7,955 in 1996 97,144 70,631
Deferred contract costs, net 14,186 12,535
Other assets 3,887 1,231
------------------- --------------
Total other assets 115,217 84,397
------------------- --------------
Total assets $502,876 $417,304
=================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Restricted deposits-client funds $113,338 $50,029
Accounts payable-trade 3,825 8,089
Merchant payable- check services 4,939 6,466
Accrued bankcard assessments 16,889 17,218
Income tax payable to NCC 3,951 2,605
Other accrued liabilities 21,931 14,672
------------------- --------------
Total current liabilities 164,873 99,079
Obligation under property leased from affiliate 2,421 2,527
Long-term debt 4,000 -
Other long-term liabilities 720 -
------------------- --------------
Total liabilities 172,014 101,606
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 155,646 140,482
------------------- --------------
Total shareholders' equity 330,862 315,698
------------------- --------------
Total liabilities and shareholders' equity $502,876 $417,304
=================== ==============
See notes to condensed consolidated financial statements
3
4
NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
-------------- -------------- ------------- ------------
Revenues $100,780 $97,069 $284,169 $272,773
Operating expenses 47,929 46,491 136,543 131,966
Wages and other personnel expenses 24,702 21,763 70,639 60,648
General and administrative expenses:
Recurring 12,856 13,726 38,625 36,129
Restructuring charge - - 6,340 -
Depreciation and amortization 4,194 3,079 12,171 9,447
-------------- -------------- ------------- ------------
OPERATING PROFIT 11,099 12,010 19,851 34,583
Net interest income 1,214 908 3,527 1,461
-------------- -------------- ------------- ------------
Income before income taxes 12,313 12,918 23,378 36,044
Provision for income taxes 4,676 5,314 8,214 15,229
-------------- -------------- ------------- ------------
NET INCOME $7,637 $7,604 $15,164 $20,815
============== ============== ============= ============
NET INCOME PER SHARE $0.15 $0.16 $0.30 $0.47
============== ============== ============= ============
Shares used in computation 50,575 47,597 50,575 44,610
See notes to condensed consolidated financial statements
4
5
NATIONAL PROCESSING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Nine Months Ended
September 30
1997 1996
------------ ------------
Net cash provided by operating activities 50,600 34,224
------------ ------------
INVESTING ACTIVITIES
Capital expenditures (17,773) (21,264)
Purchases of securities available for sale (423,958) (37,900)
Proceeds from sales and maturities of securities
available for sale 436,987 -
Acquisitions, net of cash acquired (30,343) -
------------ ------------
Net cash (used) for investing activities (35,087) (59,164)
------------ ------------
FINANCING ACTIVITIES
Principal payments under property leased from affiliate (106) (108)
Net cash proceeds from initial public offering of common stock - 111,316
------------ ------------
Net cash provided (used) by financing activities (106) 111,208
------------ ------------
Net increase in cash and cash equivalents 15,407 86,268
Cash and cash equivalents, beginning of period 3,330 22,618
------------ ------------
Cash and cash equivalents, end of period $18,737 $108,886
============ ============
See notes to condensed consolidated financial statements
5
6
NATIONAL PROCESSING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim 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 condensed 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 condensed
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. 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
September 30, 1997, other accrued liabilities and other long-term liabilities
include $2.3 million and $.7 million, respectively, related to the restructuring
charge.
3. RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
6
7
4. 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. On September 30, 1997, the Company acquired all of the
outstanding shares of Caribbean Data Services, Ltd., a data processing company.
The combined purchase price of these acquisitions was $29.5 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 $27.6 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 ($6,769)
Purchase price in excess of net assets acquired (27,574)
Notes issued 4,000
---------------
Net cash used for acquisitions ($30,343)
===============
5. SUBSEQUENT EVENTS
On October 24, 1997, the Company acquired 80% of the outstanding
common stock of FA Holdings, Inc., the sole owner of Financial Alliance
Processing Services, Inc. ("Financial Alliance"), for $67.2 million. Financial
Alliance is an independent sales organization specializing in selling credit and
debit card processing services to smaller merchants. Under the purchase
agreement, the Company will acquire, subject to certain conditions, the
remaining 20% of the common stock for $26.8 million in January 1998. The
acquisition will be accounted for as a purchase.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
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 authorization
and collection of checks accepted at merchant locations. 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 Nine Months Ended
September 30 September 30
------------- ----------- ------------- -------------
1997 1996 1997 1996
------------- ----------- ------------- -------------
Revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses 47.5 47.9 48.0 48.4
Wages & other personnel expenses 24.5 22.4 24.9 22.2
General & administrative expenses:
Recurring 12.8 14.1 13.6 13.2
Restructure charge - - 2.2 -
Depreciation & amortization 4.2 3.2 4.3 3.4
------------- ----------- ------------- -------------
Operating profit 11.0 12.4 7.0 12.7
Net interest income 1.2 .9 1.2 .5
------------- ----------- ------------- -------------
Income before income taxes 12.2 13.3 8.2 13.2
Provision for income taxes 4.6 5.5 2.9 5.6
------------- ----------- ------------- -------------
Net income 7.6% 7.8% 5.3% 7.6%
============= =========== ============= =============
8
9
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Consolidated revenue increased $3.7 million, or 3.8%, to
$100.8 million for the quarter ended September 30, 1997, from $97.1 million for
the comparable 1996 period. The increase was primarily due to revenue gains in
Corporate Services offset by revenue reductions in Travel Services. Corporate
Services revenue growth of $6.4 million or 25.2% was attributable to increased
volumes at the Company's payables, electronic imaging solutions, and freight
operations. Revenue increases at payables and imaging solutions operations
resulted principally from volume increases in their core operations while
increases at the freight operations resulted principally from acquisitions.
Costs and Expenses. Consolidated costs and expenses increased $4.6
million, or 5.4%, to $89.7 million for the quarter ended September 30, 1997 from
$85.1 million during the comparable 1996 period.
Operating expenses increased $1.4 million, or 3.1%, to $47.9 million
for the quarter ended September 30, 1997 from $46.5 in 1996. The increase was
primarily due to increases in costs associated with technology enhancements and
purchased services at Merchant Services and Corporate Services. These increases
were partially offset by lower operating expenses at Travel Services and lower
uncollectible check expense at Merchant Services.
Wages and other personnel expenses increased $2.9 million, or 13.5%,
to $24.7 million for the quarter ended September 30, 1997, from $21.8 million
in 1996, primarily due to higher costs in Corporate Services as a result of
1997 acquisitions.
General and administrative expenses decreased $.9 million, or 6.3%,
to $12.9 million for the quarter ended September 30, 1997 from $13.7 million in
1996. The decrease was primarily due to decreases in support functions resulting
from the Company's first quarter 1997 restructuring.
Depreciation and amortization for the quarter ended September 30,
1997 was $4.2 million, up from $3.1 million for the same period in 1996. This
increase was primarily due to 1997 acquisitions and greater expenditures on
fixed assets relating to technology improvements and initiatives.
Net Interest Income. Net interest income increased to $1.2 million
for the third quarter of 1997 from $.9 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 quarter ended September 30,
1997 was $4.7 million compared to $5.3 million in 1996. The decrease results
from the reduction of pre-tax income, non-taxable interest income of $.8 million
in the 1997 period and a lower state tax burden.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Consolidated revenue increased $11.4 million, or 4.2%, to
$284.2 million for the nine month period ended September 30, 1997 from $272.8
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 $15.4 million or 21.5% was
attributable to increases at the Company's remittance, payables, electronic
imaging and freight operations. Revenue increases at remittance and payables
operations resulted from volume increases at their core operations, increases
at the freight operations resulted principally from acquisitions and increases
at electronic imaging solutions resulted from volume increases and an
acquisition. Merchant Services revenues increased $3.6 million or 2.3% 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.
Costs and Expenses. Consolidated costs and expenses increased $26.1
million, or 11.0%, to $264.3 million for the nine month period ended September
30, 1997 from $238.2 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 $19.8
million, are primarily the result of volume from new business and 1997
acquisitions as further described in the paragraphs below.
Operating expenses increased $4.6 million, or 3.5%, to $136.5 million
for the nine month period ended September 30, 1997 from $132.0 million in 1996.
The increase was primarily due to increases in purchased services and software
development expenses at Merchant Services and Corporate Services and higher
uncollectible check expense as a result of guarantee volume and guarantee mix
changes. These increases were partially offset by lower operating expenses at
Travel Services.
Wages and other personnel expenses increased $10.0 million, or 16.5%
to $70.6 million for the nine month period ended September 30, 1997 from $60.6
million in 1996, primarily due to higher costs in Corporate Services as a
result of new business volume and 1997 acquisitions.
9
10
General and administrative expenses increased $8.8 million, or 24.5%,
to $45.0 million for the nine month period ended September 30, 1997 from $36.1
million in 1996. The increase was primarily due to non-recurring general and
administrative expenses of $6.3 million recorded in the first quarter 1997 for
severance pay and other costs related to organizational restructuring. In
addition, recurring general and administrative expenses increased approximately
$2.5 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.
Depreciation and amortization for the nine month period ended
September 30, 1997 was $12.2 million, up from $9.5 million for the same period
in 1996. This increase was primarily due to 1997 acquisitions and greater
expenditures on fixed assets relating to technology improvements and
initiatives.
Net Interest Income. Net interest income increased to $3.5 million
for the first nine months of 1997 from $1.5 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 nine month period ended
September 30, 1997 was $8.2 million compared to $15.2 million in 1996. The
decrease results from the reduction of pre-tax income by $12.7 million to $23.4
million for the period ended September 30, 1997, from $36.0 million in 1996,
non-taxable interest income of $3.3 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:
---------------------------------------------------------------------------------------------------------
Merchant Corporate Travel
Services Services Services Corporate
---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $57,210 $57,381 $31,984 $25,550 $11,586 $14,138 - -
Costs and expenses 49,436 48,355 26,490 21,419 8,568 10,602 - -
--------- -------- --------- -------- -------- -------- --------- --------
Operating profit before
indirect expenses 7,774 9,026 5,494 4,131 3,018 3,536 - -
Indirect general &
administrative expenses 2,283 2,122 1,939 1,603 965 958 - -
--------- -------- --------- -------- -------- -------- --------- --------
Operating profit 5,491 6,904 3,555 2,528 2,053 2,578 - -
Net interest income 76 120 32 43 34 73 1,072 672
Provision for
income taxes 2,349 3,052 1,367 1,095 823 1,093 137 74
--------- -------- --------- -------- -------- -------- --------- --------
Net income $3,218 $3,972 $2,220 $1,476 $1,264 $1,558 $ 935 $598
--------- -------- --------- -------- -------- -------- --------- --------
-----------------------------------------------------
Consolidated
-----------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Revenues $100,780 $97,069
Costs and expenses 84,494 80,376
------------- --------
Operating profit before
indirect expenses 16,286 16,693
Indirect general &
administrative expense 5,187 4,683
------------- --------
Operating profit 11,099 12,010
Net interest income 1,214 908
Provision for
income taxes 4,676 5,314
------------- --------
Net income $7,637 $7,604
------------- --------
NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $162,605 $158,944 $87,294 $71,845 $34,270 $41,984 - -
Costs and expenses 143,152 135,172 73,017 58,542 25,462 31,414 57 -
------------ ----------- ----------- ----------- --------- ---------- ----------- ---------
Operating profit before
indirect expenses 19,453 23,772 14,277 13,303 8,808 10,569 (57) -
Indirect general &
administrative expenses 7,448 6,009 5,846 4,175 2,996 2,878 6,340 -
------------- ----------- ----------- ----------- --------- ---------- ----------- ---------
Operating profit 12,005 17,762 8,431 9,128 5,812 7,692 (6,397) -
Net interest income 153 401 57 150 73 238 3,244 672
Provision (benefit) for
income taxes 5,173 7,959 3,158 3,930 2,298 3,266 (2,415) 74
------------- ----------- ----------- ----------- --------- ---------- ----------- ---------
Net income $ 6,985 $10,205 $5,330 $5,348 $3,587 $4,664 ($ 738) $598
------------ ----------- ----------- ----------- --------- ---------- ----------- ---------
NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------
Consolidated
------------------------------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------
Revenues $284,169 $272,773
Costs and expenses 241,688 225,128
------------------ ------------------
Operating profit before
indirect expenses 42,481 47,644
Indirect general &
administrative expenses 22,630 13,062
------------------ ------------------
Operating profit 19,851 34,582
Net interest income 3,527 1,461
Provision (benefit) for
income taxes 8,214 15,229
------------------ ------------------
Net income $15,164 $20,815
------------------ ------------------
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.
10
11
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 continually 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 $3.2 million and $7.0 million for the third quarter and first nine
months of 1997, respectively, compared to $4.0 million and $10.2 million for the
comparable 1996 periods. The decreases in net income resulted primarily from
increases in costs associated with technology enhancements, higher uncollectable
check expenses due to changes in guarantee mix, and increases in purchased
services. 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.
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 $2.2
million and $5.3 million for the third quarter and first nine months of 1997,
respectively, compared to $1.5 million and $5.3 million for the comparable 1996
periods. The increases in net income resulted primarily from 1997 acquisitions
in the Company's freight and electronic imaging operations. These increases were
partially offset by 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. Net income in the
1997 periods was also increased by decreases in income tax expense resulting
from 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 $1.3 million
and $3.6 million for the third quarter and first nine months of 1997,
respectively, compared to $1.6 million and $4.7 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 $.1 million and $.7 million for the third quarter and
first nine 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 $.6 million for 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
third quarter and first nine 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 nine month period ended September 30, 1997, the Company's
capital expenditures totaled $17.8 million. Such expenditures were principally
financed from operating cash flow, which totaled approximately $50.6 million.
Operating cash flow during the nine month period ended September 30, 1996
totaled $34.2 million and capital expenditures were $21.3 million. The Company
expects capital expenditures for the remainder of 1997 to be approximately $9.5
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.
11
12
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 $113.3 million and $50.0 million as of September 30, 1997 and
December 31, 1996, respectively.
RECENT DEVLOPMENTS AND OTHER
On October 24, 1997, the Company acquired 80% of the outstanding
common stock of FA Holdings, Inc., the sole owner of Financial Alliance
Processing Services, Inc. ("Financial Alliance"), for $67.2 million.
Financial Alliance is an independent sales organization that specializes in
selling credit and debit card processing services to smaller merchants.
Under the purchase agreement, the Company will acquire, subject to certain
conditions, the additional 20% of the common stock for $26.8 million in
January, 1998.
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 of Form S-1, filed on August 7, 1996.
12
13
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K:
a. EXHIBITS
2.1 Stock Purchase Agreement By and Among All of the Shareholders
of FA Holdings Inc., FA Holdings, Inc. and National
Processing, Inc.
11 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule.
b. REPORTS ON FORM 8-K
August 26, 1997: On August 19, 1997, National Processing,
Inc. announced that it had reached a definitive agreement to purchase one
hundred percent of the outstanding capital stock of FA Holdings, Inc.
National Processing, Inc. will, subject to certain conditions, purchase
approximately eighty percent of the stock in late 1997 and the remaining
shares of FA Holdings in early 1998.
FA Holdings, Inc. is the sole owner of Financial Alliance
Processing Services Inc., an independent sales organization that specializes
in selling credit and debit card processing services to smaller merchants.
November 10, 1997: On October 24, 1997, National Processing,
Inc. completed the initial stage of its acquisition of FA Holdings, Inc. (FA).
The initial stage involved the acquisition of 68.3% of the then issued and
outstanding common stock of FA for $37,219,244 and the purchase of 60,001 newly
issued shares of common stock directly from FA for $30,000,000. As a result,
National Processing, Inc. owns 79.6% of the total shares of common stock of FA.
The financial statements of the business acquired and related
pro forma financial information will be provided by amendment to Form 8-K no
later than January 9, 1998.
FA Holdings, Inc. is the sole owner of Financial Alliance
Processing Services, Inc. an independent sales organization that specializes in
selling credit and debit card processing services to smaller merchants.
13
14
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: November 14, 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)