<PAGE> 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 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.
<PAGE> 2
NATIONAL PROCESSING, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
PAGE NO.
-------
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
</TABLE>
2
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<TABLE>
NATIONAL PROCESSING, INC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
(Unaudited)
March 31 December 31
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
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
======== ========
</TABLE>
See notes to consolidated financial statements
3
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<TABLE>
NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In Thousands, except per share amounts)
<CAPTION>
Three Months Ended
March 31
1997 1996
-------- --------
<S> <C> <C>
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
------- -------
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
======= =======
NET INCOME PER SHARE $0.01 $0.14
======= =======
Shares used in computation 50,575 43,100
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
<TABLE>
NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
<CAPTION>
Three Months Ended
March 31
1997 1996
------- -------
<S> <C> <C>
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
------- -------
Net cash provided by operating activities 19,968 17,047
------- -------
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)
------- -------
FINANCING ACTIVITIES
Principal payments under property leased from affiliate (36) (36)
------- -------
Net cash (used) for financing activities (36) (36)
------- -------
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
======= =======
SUPPLEMENTAL DISCLOSURES
Taxes paid ($280) ($900)
</TABLE>
See notes to consolidated financial statements
5
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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.
6
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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:
<TABLE>
(Dollars in thousands)
- ------------------------------------------------------------
<S> <C>
Net assets other than cash acquired ($18)
Purchase price in excess of net assets acquired (5,732)
Note issued at acquisition date 4,000
-------
Net cash used to acquire NTA, Inc. ($1,750)
=======
</TABLE>
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.
7
<PAGE> 8
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:
<TABLE>
<CAPTION>
Three Months
Ended
March 31
-------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
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
------------------ -----------------
Income before taxes .2 12.2
(Benefit from) provision for income taxes (.2) 5.2
------------------ -----------------
Net income .4% 7.0%
------------------ -----------------
</TABLE>
8
<PAGE> 9
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:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
-------------------------------------
1997 1996
-------------------------------------
<S> <C> <C>
Merchant Services 56.1% 56.9%
Corporate Services 31.0 26.6
Travel Services 12.9 16.5
</TABLE>
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.
9
<PAGE> 10
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.
10
<PAGE> 11
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.
11
<PAGE> 12
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)
12
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT AND
UNDERTAKING OF CONFIDENTIALITY
------------------------------
In consideration of their mutual promises and agreements and subject to the
terms and conditions set forth below in this Employment Agreement and
Undertaking of Confidentiality ("Agreement"), National Processing, Inc., an Ohio
corporation ("NPI"), and Robert E. Showalter ("Employee") hereby agree as
follows:
1. NPI agrees to employ Employee in the position of President and CEO and
at an annual salary of at least $300,000 that will be paid by NPI or one of its
affiliates for the term of this Agreement, and to make available to Employee
those benefits provided by NPI to employees with similar responsibilities, all
as amended from time to time, upon the terms and conditions set forth below.
2. Employee agrees to use his best efforts to perform the duties assigned
to him/her by NPI.
3. Employee acknowledges and agrees that in the performance of his duties
of employment he may be brought into frequent contact with clients and potential
clients of NPI and its affiliates either in person, through the mails, by
telephone or by other electronic means. Employee also acknowledges and agrees
that trade secrets and confidential information of NPI and its affiliates, more
fully described in paragraph 12 of this Agreement, gained by Employee during his
employment with NPI, have been developed by NPI and/or it affiliates through
substantial expenditures of time, effort and financial resources and constitute
valuable and unique property of NPI. Employee further understands, acknowledges
and agrees that the foregoing makes it necessary for the protection of the
businesses of NPI and its affiliates ("NPI's Business") that Employee not
compete with NPI or its affiliates during the term of this Agreement and for a
reasonable period thereafter. For purposes of this Agreement, NPI's Business
shall include, but not be limited to, the following whether conducted by NPI or
one of its affiliates:
Bankcard Services: the acquisition and processing of credit and debit
card transactions accepted by merchants at the point of sale.
Check Services: the guarantee, authorization, and collection of checks
accepted at the point of sale.
Corporate Payable: corporate accounts payable, processing and payment,
and related data processing.
Travel Services: the receipt, processing, and collection of Travel
Agent payments being made to the Airlines as the result of tickets
issued by the Agents, the processing of airline documents for the
airlines, and the financial settlement operations between
transportation industry providers (e.g., hotels, car rentals, airlines,
travel agents, event suppliers).
1
<PAGE> 2
Retail Lockbox Services: the receipt, processing, and collection of
consumer payments being made to corporations for services rendered.
Freight Services: the processing of freight accounts payable, audit,
and payment, and related data processing.
Electronic Information Services: customized outsourcing solutions,
including call center operations, data capture, and data management
services utilizing labor and/or image processing.
4. Employee agrees that he will not, during the term of this Agreement,
compete with NPI or its affiliates within the continental United States.
Employee agrees that, in accordance with this restriction, but without limiting
its terms, he will not during the term of this Agreement:
(i) enter into or engage in any business that competes with NPI's
Business; or
(ii) solicit any customers, clients, business, patronage or orders
for, or sell any services in competition with, or for any
business that competes with NPI's Business; or
(iii) divert, entice, or take away any customers, clients, business,
patronage or orders of NPI, or attempt to do so; or
(iv) promote or assist, financially or otherwise, any person, firm,
association or corporation engaged in any business that
competes with NPI's Business.
5. Employee agrees that, within the continental United States, he will
not, for a period of one (1) year following the term of this Agreement, enter
into or engage in any business that competes with NPI's Business.
6. Employee agrees that, within the continental United States, he will not,
for a period of one (1) year following the term of this Agreement, solicit
customers, clients, business, patronage, or orders for, or sell any services in
competition with NPI's Business.
7. Employee agrees that, within the continental United States, he will not,
for a period of one (1) year following the term of this Agreement, divert,
entice, or otherwise take away any customers, clients, business or orders of NPI
or attempt to do so.
8. Employee agrees that, within the continental United States, he will not,
for a period of one (1) year following the term of this Agreement, promote or
assist financially or otherwise, any person, firm, association, partnership,
corporation, or other entity engaged in any business that competes with NPI's
Business.
9. For the purposes of paragraphs 4 through 8, inclusive, Employee
understands and agrees that he will be competing if he engages in any or all of
the activities set forth therein directly as an individual on his own account,
or indirectly as a partner, joint venturer, employee, agent, salesman,
consultant, officer and/or director of any firm or corporation, or as a
stockholder of any corporation in which Employee or Employee's spouse, child or
parent owns, directly or indirectly, individually or in the aggregate, more than
ten percent (10%) of the outstanding stock.
2
<PAGE> 3
10. If it shall be judicially determined that Employee has violated any
of his obligations under paragraphs 4 through 8, inclusive, then the period
applicable to the obligation which Employee shall have been determined to have
violated shall automatically be extended by a period of time equal in length to
the period during which said violation(s) occurred.
11. During the term of this Agreement and for one (1) year thereafter,
Employee agrees that he will not, directly or indirectly, solicit or induce or
attempt to solicit or induce any employee of NPI or any of its affiliates to
terminate his/her employment, representation or other association with NPI or
any of its affiliates.
12. Employee will keep in strict confidence, and will not, directly or
indirectly, at any time during or after his employment, disclose, furnish,
disseminate, make available or use (except in the course of performing his
duties of employment hereunder) any trade secrets or confidential business and
technical information of NPI or any of its affiliates or its customers or
clients, without limitation as to when or how Employee may have acquired such
information. Such confidential information shall include, the whole or any
portion or phase of any scientific or technical information, design, process,
procedure, formula, pattern, compilation, program, device, method, technique or
improvement, or any business information or plans, financial information, or
listing of names, addresses or telephone numbers, including without limitation,
information relating to any of NPI's or its affiliates' customers or
prospective customers, NPI's or its affiliates' customer lists, contract
information including terms, pricing and services provided, information
received as a result of customer contacts, NPI's or its affiliates' products
and processing capabilities, methods of operation, business plans, financials
or strategy, and agreements to which NPI or any of its affiliates may be a
party. Employee specifically acknowledges that such information, whether
reduced to writing or maintained in the mind or memory of Employee and whether
compiled by NPI or any of its affiliates and/or Employee, derive independent
economic value from not being readily known to or ascertainable by proper means
by others who can obtain economic value from its disclosure or use, that
reasonable efforts have been put forth by NPI to maintain the secrecy of such
information, that such information is the sole property of NPI and that any
retention and use of such information during or after his employment with NPI
(except in the course of performing his duties of employment hereunder) shall
constitute a misappropriation of NPI's or its affiliates' trade secrets.
Employee further agrees that, at the time of termination of his employment, he
will return to NPI, in good condition, all property of NPI and its affiliates,
including, without limitation, the information identified above. In the event
that said items are not so returned, NPI shall have the right to charge
Employee for all reasonable damages, costs, attorney's fees and other expenses
incurred in searching for, taking, removing, and/or recovering such
property.
13. During the term of this Agreement and for one (1) year thereafter,
Employee agrees to Communicate the contents of this Agreement to any person,
firm, association, or corporation that he intends to be employed by, associated
with, or represent, that is engaged in a business that is potentially
competitive to NPI's Business.
14. Employee acknowledges and agrees that the remedy at law available to
NPI for breach of any of Employee's obligations under this Agreement would be
inadequate, and agrees and consents that in addition to any other rights or
remedies that NPI may have at law or in equity, temporary and permanent
injunctive relief may be granted in any proceeding that may be
3
<PAGE> 4
brought to enforce any provision contained in paragraphs 4 through 8, inclusive,
of this Agreement, without the necessity of proof of actual damage.
15. Employee acknowledges that his obligations under this Agreement are
reasonable in the context of the nature of NPI's business and the competitive
injuries likely to be sustained by NPI and/or its affiliates if Employee
violated such obligations. Employee further acknowledges that this Agreement is
made in consideration of, and is adequately supported by the obligations
undertaken by NPI in paragraph 1 above, which Employee acknowledges constitutes
new and/or good, valuable and sufficient consideration. Employee acknowledges
that his employment relationship with NPI is and following the execution of this
Agreement shall continue to be "at will," and may be terminated at any time and
for any reason, or for no reason, by NPI or by Employee. However, if NPI
terminates Employee's employment for reasons other than cause and/or violation
of this Agreement prior to the end of the term of this Agreement, then NPI shall
(i) pay Employee an amount equal Employee's monthly base salary at the time of
termination each month from the date of termination through the end of the term
of this Agreement, (ii) pay to Employee an annual bonus on each successive March
1 through the end of the term of this Agreement with such bonus being in an
amount equal to the total of the target awards of all bonus plans (NPI's and any
affiliate's) in which the Employee is a participant at the time of termination,
and (iii) provide him with benefits similar to those in place at the time of
termination through the end of the term of this Agreement, so long as Employee
does not violate any part of this Agreement. For the purposes of this Agreement,
"Cause" is defined as fraud, misconduct and/or violation of NPI's employment
policies. The payments and benefits referred to in this section 15 shall cease
to be paid and provided prior to the end of the term of this Agreement at such
time as the Employee receives payment underthat certain Severance Agreement
dated December 19, 1994 by and between Employee and National City Corporation,
as such agreement is amended from time to time, or any successor or similar
agreement.
16. The term of this Agreement shall commence on March 11, 1997 and
continue through March 31, 2000.
17. The failure of NPI to enforce any provision of this Agreement shall not
be construed to be a waiver of such provision or of the right of NPI thereafter
to enforce each and every provision.
18. This Agreement supersedes all previous agreements, written or oral,
between Employee and NPI. No modification, waiver, amendment or addition to any
of the terms of this Agreement shall be effective except as set forth in a
writing signed by Employee and NPI.
19. All provisions, terms, conditions, paragraphs, agreements and covenants
("Provisions") contained in this Agreement are severable and, in the event any
one of them shall be held to be invalid by any competent court, this Agreement
shall be interpreted as if such Provision was not contained herein, and such
determination shall not otherwise affect the validity of any other Provision.
The within Provisions shall be applicable irrespective of whether such
termination shall be by NPI or by the Employee, whether voluntary or
involuntary, whether for cause or without cause, and whether by reason of the
expiration of this or any other written or oral agreement or arrangement (or any
extensions thereof) with NPI.
4
<PAGE> 5
20. While the restrictions set forth herein are considered by the parties
to be reasonable in all circumstances, it is recognized that restrictions of
this nature may fail for reasons unforeseen, and accordingly it is hereby
agreed and declared that if any of such restrictions shall be adjudged to be
void as going beyond what is reasonable in all the circumstances, but would be
valid if the geographical area or temporal extent were reduced in part, or the
range of activities or area dealt with thereby reduced in scope, the said
restriction shall apply with such modification as may be necessary to make it
valid and effective.
21. NPI shall have the right to sell, assign or transfer this Agreement
with all its rights, title and interest and any assignee will acquire all of
the rights and assume all of the obligations of NPI under this Agreement. This
Agreement and all conditions imposed herein shall be binding upon and inure to
the benefit of Employee and NPI.
22. This Agreement shall be governed by, and construed in accordance with,
the internal, substantive laws of the Commonwealth of Kentucky. Employee agrees
that the state and federal courts located in the Commonwealth of Kentucky,
shall have jurisdiction in any action, suit or proceeding against Employee
based on or arising out of this Agreement and Employee hereby: (i) submits to
the personal jurisdiction of such courts; (ii) consents to service of process
in connection with any action, suit or proceeding against Employee; and
(iii) waives any other requirement (whether imposed by statute, rule of court or
otherwise) with respect to personal jurisdiction, venue or service of process.
Employee represents that, prior to signing this Agreement, he has read,
fully understands and voluntarily agrees to the terms and conditions as stated
above, that he was not coerced to sign this Agreement, that he was not under
duress at the time he signed this Agreement and that, prior to signing this
Agreement, he had adequate time to consider entering into this Agreement,
including without limitation, the opportunity to discuss the terms and
conditions of this Agreement, as well as its legal consequences, with an
attorney of his choice.
IN WITNESS WHEREOF, the Employee, having read and fully understood each of
the foregoing provisions, has executed this Agreement as of this 11th day of
March, 1997.
ROBERT E. SHOWALTER ("EMPLOYEE")
/s/ Robert E. Showalter
---------------------------------
(Signature)
NATIONAL PROCESSING, INC. ("NPI")
By: /s/ William R. Robertson
------------------------------
William R. Robertson
Chairman
5
<PAGE> 1
EXHIBIT 10.2
NCI STOCK OPTION AGREEMENT
Non-Incentive Stock Option 1996 Plan
NATIONAL PROCESSING, INC.
Stock Option Agreement - Non-Incentive Stock Option
1996 Plan
WHEREAS, Robert E, Showalter ("Optionee") is an officer and key employee of
National Processing, Inc., an Ohio corporation (the "Corporation"), or of a
Subsidiary; and
WHEREAS, the execution of a stock option agreement in the form hereof (the
"Stock Option Agreement") has been duly authorized by a resolution of the
Compensation and Organization Committee (the "Committee") of the Board of
Directors of the Corporation (hereinafter called the "Board") duly adopted on
March 11, 1997 ("Grant Date"),
NOW, THEREFORE, the Corporation hereby grants to the Optionee, pursuant to
the National Processing Company 1996 Stock Option Plan (the "Plan"), (i) an
Option (the "Option") to purchase 200,000 shares of its common stock, without
par value ("Common Stock") ("Option Rights Granted") at the per share exercise
price of $10.50 "Option Price" and (ii) Additional Options (the "Additional
Options") to purchase the number of shares of Common Stock equal to the number
of shares of already owned Common Stock delivered by the Optionee as payment of
the exercise price upon exercise of the Option or portion thereof and/or the
number of shares of Common Stock tendered or relinquished as payment of the
amount to be withheld under applicable federal, state and local tax laws (at
withholding rates not to exceed Optionee's applicable marginal tax rates) in
connection with the exercise of the Option or portion thereof at a per share
exercise price ("Additional Option Price") equal to the Market Value per Share
on the date the Optionee transfers shares of Common Stock to the Corporation to
exercise the Option or portion thereof or transfers or forfeits shares of
Common Stock in payment of income tax withholding on the exercise of the Option
or portion thereof, and agrees to cause certificates for any shares purchased
hereunder to be delivered to the Optionee upon receipt of payment of the Option
Price, all subject, however, to the terms and conditions hereafter set
forth.
1. The Option (until terminated as hereinafter provided) shall be
exercisable only as to one-third of the shares of Common Stock subject to the
Option after the Option shall have been in
Page 1
<PAGE> 2
NCI STOCK OPTION AGREEMENT
Non-Incentive Stock Option 1996 Plan
the continuous employ of the Corporation or any affiliate of the Corporation for
one full year from the Grant Date, a second one-third of the Shares Granted
after the Optionee shall have been in continuous employ of the Corporation or
any affiliate for two full years from the Grant Date and shall be fully
exercisable after the Optionee shall have been in the continuous employ of the
Corporation or any affiliate for three full years from the Grant Date;
provided, however, that the Option (until terminated as hereinafter provided)
shall become immediately fully exercisable upon the occurrence of any of the
following:
(a) in the event of a Change in Control as defined in Section
11 of this Stock Option Agreement;
(b) the Optionee ceases to be an employee of the Corporation
or any affiliate of the Corporation at or after Optionee attains the
age of 63; or
(c) the Committee may in its discretion accelerate the time
or times at which the Option or any portion hereof will become
exercisable.
To the extent exercisable, the Option may be exercised in whole or in part from
time to time.
2. The Option shall terminate on the earliest of the following dates:
(a) three years after the death of the Optionee;
(b) ten years from the Grant Date, if the Option is
exercisable under any of the provisions of Section 1 hereof and if the Optionee
becomes disabled or ceases to be an employee of the Corporation or any affiliate
after the third anniversary of the Stock Option Agreement;
(c) immediately, upon the termination of employment of the
Optionee with the Corporation or any Subsidiary prior to the third anniversary
of the Stock Option Agreement for any reason other than as set forth in
Paragraph 2(a) or 2(b), if such termination arises prior to a Change in Control;
(d) ten years from the Grant Date; or
(e) in the event the Optionee shall intentionally commit an
act materially inimical to the interests of the Corporation or any affiliate,
and the Committee shall so find, the Option shall terminate at the time of such
act, notwithstanding any other provision of this Agreement.
Page 2
<PAGE> 3
NCI STOCK OPTION AGREEMENT
Non-Incentive Stock Option 1996 Plan
3. Each Additional Option (until terminated as hereinafter provided) shall
be first exercisable six months following the exercise of the underlying Option
or portion thereof, provided, however, that each Additional Option (until
terminated as hereinafter provided) shall become immediately fully exercisable
upon the Optionee's death. To the extent exercisable, the Additional Option may
be exercised in whole or in part from time to time. The Corporation shall not,
however, be required to issue any fractional shares.
4. Each Additional Option or portion thereof shall terminate on the
earliest applicable termination date of the Option as set forth in Section 2
hereof.
5. No Additional Option or portion of an Additional Option shall be issued
on the exercise of an Option when such exercise occurs after the Optionee is no
longer employed by the Corporation or any affiliate of the Corporation.
6. Nothing contained in this Agreement shall limit whatever right the
Corporation or any affiliate of the Corporation might otherwise have to
terminate the employment of the Optionee.
7. Neither the Option nor the Additional Option is transferable by the
Optionee otherwise than by will or the laws of descent and distribution, and is
exercisable during the lifetime of the Optionee only by the Optionee or by the
Optionee's guardian or legal representative.
8. (a) In connection with each exercise of the Option or the Additional
Option arrangements satisfactory to the Corporation shall be made by the
Optionee for the payment of any withholdings required by federal, state or local
income tax laws.
(b) Subject to the restrictions set forth below, the Optionee is hereby
granted the right to elect to satisfy, in whole or in part, the Optionee's
withholding obligations as required by federal, state or local income tax laws
by (i) having the Corporation withhold shares of Common Stock subject to the
Option or the Additional Option having a value equal to or less than the amount
required to be withheld and/or (ii) delivering to the Corporation shares of
Common Stock owned by the Optionee having a value equal to or less than the
amount required to be withheld (the "Election"). For purposes of this
subsection 8(b), the value of shares of Common Stock to be withheld or delivered
by the Optionee shall be based upon the Market Value per Share on the date that
the
Page 3
<PAGE> 4
NCI STOCK OPTION AGREEMENT
Non-Incentive Stock Option 1996 Plan
amount of the tax or taxes to be withheld is determined. Shares of Common Stock
withheld pursuant to clause 8(b)(i) will not thereafter be available for
exercise under the Option.
(c) To exercise the Election, the Optionee (i) must make the
Election to have shares withheld or to deliver already owned shares on or prior
to the date that the Optionee exercises the Option or the Additional Option and
(ii) must make the Election in writing on a form provided by the Corporation.
The Election is irrevocable by the Optionee and is subject to the disapproval by
the Committee.
9. The option price shall be payable:
(a) in cash or by check acceptable to the Corporation;
(b) tendering or relinquishing the number of already owned
shares of Common Stock that when multiplied by the Market Value per share on
the date of exercise, will have an equivalent value to the total Option Price or
Additional Option Price for the portion of the Option exercised; or
(c) by a combination of (a) and (b).
10. The Committee may make such adjustments in the number and kind of
shares subject to the Option or the Additional Option and the price per share as
the Committee in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the rights of the
Optionee that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital structure
of the Corporation, merger, consolidation, spin-off, reorganization, partial or
complete liquidation, issuance of rights or warrants to purchase securities, or
any other corporate transaction or event having an effect similar to any of the
foregoing. No adjustment provided for in this Section shall require the
Corporation or any Subsidiary to sell a fractional share.
11. "Change in Control" shall mean the occurrence of any of the
following events:
(a) National City Corporation ("NCC"), a successor of NCC (direct
or indirect, by purchase, merger, consolidation, reorganization or otherwise)
("Successor") or an affiliate of NCC or
Page 4
<PAGE> 5
NCI STOCK OPTION AGREEMENT
Non-Incentive Stock Option 1996 Plan
of Successor sells or transfers Common Stock to an unaffiliated third party and
as a result of such sale or transfer NCC, Successor, and affiliates of NCC and
Successor own or control less than fifty percent of the combined voting power of
the then-outstanding securities of the Corporation immediately after such
transaction;
(b) The Corporation is merged, consolidated or reorganized into
or with another corporation or other legal person other than NCC, a Successor or
an affiliate of NCC or of Successor, and as a result of such merger,
consolidation or reorganization less than fifty percent of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held by NCC, Successor or an affiliate
of NCC or Successor; or
(c) The Corporation sells or otherwise transfers all or
substantially all of its assets or the Corporation causes or permits the sale or
transfer of all or substantially all of the assets of any Corporation subsidiary
that has assets equal to or greater than eighty percent of the total assets of
the Corporation, as reported on a consolidated basis to another corporation or
other legal person, and as a result of such sale or transfer less than fifty
percent of the combined voting power of the then-outstanding securities of such
corporation or person immediately after such sale or transfer is held by NCC, a
Successor or an affiliate of NCC or Successor, provided, however, that the
change in control of NCC determined by the standards set forth herein or
otherwise shall not constitute a change in control of the Corporation;
12. For purposes of this Agreement, the continuous employ of the
Optionee with the Corporation or any affiliate shall not be deemed interrupted,
and the Optionee shall not be deemed to have ceased to be an employee of the
Corporation or any affiliate by reason of the transfer of his employment among
the Corporation and the affiliates. Also a leave of absence approved by the
Committee for illness, military or governmental service or other cause shall be
considered as employment.
13. Delivery by the Corporation or any Subsidiary of a certificate or
certificates for shares of Common Stock may be deferred for such reasonable time
after payment for such shares as shall be
Page 5
<PAGE> 6
NCI STOCK OPTION AGREEMENT
Non-Incentive Stock Option 1996 Plan
necessary to conform to any applicable law or governmental regulation relating
to the Option, the Additional Option or to the issuance or delivery of Common
Stock on exercise hereof.
14. Any contrary provision hereof notwithstanding, neither the Option
nor the Additional Option shall be exercisable by, and the Corporation shall not
be obligated to sell or deliver any Common Stock subject thereto, to a resident
of any country other than the United States of America and unless and until such
Common Stock and the sale thereof pursuant to the Option or the Additional
Option have been registered or otherwise qualified under applicable state and
federal laws or regulations or confirmation of exemption from such state or
federal laws or regulations shall have been obtained and such registration or
qualification or exemption shall continue to be effective, all as the
Corporation shall, in its sole discretion, determine to be necessary or
advisable. The Corporation shall use its best efforts to maintain registration
and applicable qualification of such Common Stock and the sale thereof with the
Securities and Exchange Commission and applicable state regulatory agencies;
provided, however, that the Corporation shall have no obligation to register or
qualify such Common Stock under the laws of any non-United States of
America jurisdiction.
15. Terms used in this Agreement which are defined in the Plan are used
herein as so defined.
EXECUTED This 11th day of March, 1997
National Processing, Inc.
BY: \s\ William R. Robertson
------------------------------------
William R. Robertson, Chairman
Robert E. Showalter hereby accepts the grant to him of the foregoing Option
\s\ Robert E. Showalter
---------------------------------------
Robert E. Showalter
Page 6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001016277
<NAME> NATIONAL PROCESSING, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 19,594
<SECURITIES> 116,839
<RECEIVABLES> 70,800
<ALLOWANCES> 0
<INVENTORY> 5,657
<CURRENT-ASSETS> 278,345
<PP&E> 119,142
<DEPRECIATION> 59,066
<TOTAL-ASSETS> 430,282
<CURRENT-LIABILITIES> 106,169
<BONDS> 0
<COMMON> 1
0
0
<OTHER-SE> 316,067
<TOTAL-LIABILITY-AND-EQUITY> 430,282
<SALES> 0
<TOTAL-REVENUES> 88,420
<CGS> 0
<TOTAL-COSTS> 65,742
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 178
<INCOME-TAX> (192)
<INCOME-CONTINUING> 370
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 370
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
