<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
of 1934
For the quarterly period ended June 30, 1998
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 shares outstanding of the Registrant's Common Stock as of August
12, 1998 was 50,644,651.
1
<PAGE> 2
NATIONAL PROCESSING, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income -
Three Months and Six Months Ended
June 30, 1998 and 1997 4
Condensed Consolidated Statements of
Cash Flows -Six Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Shareholders
On May 21, 1998, at the Annual Meeting of Shareholders
of the Registrant, shareholders took the following actions:
1. Elected as directors all nominees designated in the proxy
statement of April 10, 1998, as follows:
</TABLE>
<TABLE>
<CAPTION>
Number of Votes
For Withheld
<S> <C> <C>
Christos M. Cotsakos 48,553,479 26,258
Jeffrey D. Kelly 48,552,529 27,208
Robert E. Showalter 48,552,129 27,608
</TABLE>
<TABLE>
<S> <C>
2. Approved the selection of Ernst & Young LLP,
independent accountants, as auditors for the year 1998:
48,565,487 votes cast for, 3,350 votes cast against,
10,900 votes withheld.
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
NATIONAL PROCESSING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Unaudited
June 30 December 31
1998 1997
---- ----
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 31,570 $ 38,887
Securities available for sale - 1,188
Accounts receivable-trade 70,898 104,752
Check inventory 4,487 7,395
Restricted deposits-client funds 101,674 83,183
Deferred tax assets 8,761 10,941
Other current assets 12,187 10,064
-------- --------
Total current assets 229,577 256,410
Property and equipment:
Furniture and equipment 105,980 94,976
Building and leasehold improvements 21,571 15,679
Software 18,956 16,219
Property leased from affiliate 4,173 4,173
Land and improvements 2,535 1,591
-------- --------
153,215 132,638
Accumulated depreciation and amortization 75,220 66,467
-------- --------
77,995 66,171
Other Assets:
Goodwill, net of accumulated amortization of
$13,174 in 1998 and $10,616 in 1997 176,080 170,327
Acquired merchant portfolios 19,606 21,115
Other assets 9,437 8,004
-------- --------
Total other assets 205,123 199,446
-------- --------
TOTAL ASSETS $512,695 $522,027
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Restricted deposits-client funds $101,674 $ 83,183
Accounts payable-trade 4,216 5,209
Merchant payable-check services 3,750 7,271
Accrued bankcard assessments 13,698 19,806
Income tax payable to NCC 4,415 4,262
Acquisition balance due - 26,781
Other accrued liabilities 32,065 30,551
-------- --------
Total current liabilities 159,818 177,063
Obligation under property leased from affiliate 2,404 2,591
Other long-term liabilities 1,896 2,674
Deferred tax liabilities 4,688 2,874
-------- --------
Total liabilities 168,806 185,202
Shareholders' equity:
Preferred stock, without par value; 5,000,000
shares authorized; no shares issued or outstanding - -
Common stock, without par value; 95,000,000 shares
authorized; 50,644,651 and 50,575,000 shares issued
and outstanding in 1998 and 1997, respectively 1 1
Contributed capital 175,799 175,215
Retained earnings 168,089 161,609
-------- --------
Total shareholders' equity 343,889 336,825
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $512,695 $522,027
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
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NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 119,626 $ 94,969 $ 233,634 $183,389
Operating expenses 59,624 45,820 112,075 88,612
Wages and other personnel expenses 32,577 22,989 64,599 45,939
General and administrative expenses 17,864 12,534 32,548 25,769
Restructuring charges - - - 6,340
Depreciation and amortization 6,820 3,968 13,071 7,977
--------- -------- --------- --------
INCOME FROM OPERATIONS 2,741 9,658 11,341 8,752
Net interest (expense) income (319) 1,229 (334) 2,313
--------- -------- --------- --------
Income before income taxes 2,422 10,887 11,007 11,065
Provision for income taxes 852 3,730 4,527 3,538
--------- -------- --------- --------
NET INCOME $ 1,570 $ 7,157 $ 6,480 $ 7,527
========= ======== ========= ========
BASIC AND DILUTED INCOME PER COMMON SHARE
$ 0.03 $ 0.14 $ 0.13 $ 0.15
========= ======== ========= ========
</TABLE>
See notes to condensed consolidated financial statements
4
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NATIONAL PROCESSING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1998 1997
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 6,480 $ 7,527
Items not requiring cash currently:
Depreciation and amortization 13,071 7,977
Restructuring charge - 4,871
Deferred income taxes 3,994 -
Change in current assets and liabilities:
Accounts receivable 34,490 24,866
Check inventory 2,908 1,390
Accounts payable-trade (1,104) (6,080)
Merchant payable-check services (3,521) (604)
Accrued bankcard assessments (6,108) (1,213)
Income taxes payable 153 (1,396)
Other current assets/liabilities (653) (3,432)
Other, net (5,541) (3,315)
-------- ---------
Net cash provided by operating activities 44,169 30,591
-------- ---------
INVESTING ACTIVITIES
Capital expenditures (20,274) (13,327)
Purchases of securities available for sale - (307,045)
Proceeds from sales and maturity of securities
available for sale 1,188 327,575
Acquisitions, net of cash acquired (32,797) (14,690)
-------- ---------
Net cash used by investing activities (51,883) (7,487)
-------- ---------
FINANCING ACTIVITIES
Principal payments under property leased from affiliate (187) (72)
Net cash proceeds from exercise of stock options 584 -
-------- ---------
Net cash provided (used) by financing activities 397 (72)
-------- ---------
Net (decrease) increase in cash and cash equivalents (7,317) 23,032
Cash and cash equivalents, beginning of period 38,887 3,330
-------- ---------
Cash and cash equivalents, end of period $ 31,570 $ 26,362
======== =========
Supplemental Disclosure
Taxes paid $ 1,015 $ 6,544
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 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, 1997 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, 1997
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 June 30, 1998, other accrued liabilities
include $1.1 million related to the restructuring charge.
3. RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform with the
1998 presentation.
4. ACQUISITIONS
On January 2, 1998, the Company acquired the remaining 20.4% of the
common stock of FA Holdings, Inc., the sole owner of Financial Alliance
Processing Services, Inc., an independent sales organization
specializing in selling credit and debit card processing services, for
$26.8 million.
6
<PAGE> 7
On January 15, 1998, the Company acquired all of the outstanding
shares of JBH Travel Audit Inc. ("JBH"), a company which audits fees
payable to travel agencies, for $6.3 million in cash. The purchase
price is subject to increase by as much as $2.0 million based upon the
earnings of the acquired company during its next 2 years of operation.
The acquisition, which has been accounted for as a purchase, increased
the Company's goodwill by $4.6 million which is being amortized over 40
years. The results of JBH's operations since its acquisition are
included in the Company's results of operations. The combined pro forma
effect of the JBH transaction was not material to previously reported
periods.
Supplemental cash flow information related to the acquisition is as
follows:
(Dollars in thousands)
---------------------------------------------------------------
Net assets other than cash acquired $ 1,384
Purchase price in excess of net assets acquired 4,632
-------
Net cash used to acquire JBH $ 6,016
=======
5. IMPAIRMENT OF LONG-LIVED ASSETS
In June 1998, the Company wrote-off $2,600,000 of internally developed
software and related costs following the cancellation of a significant
customer processing contract. The write-off decreased net income by
$1,558,000 or $.03 per share.
6. COMMITMENTS AND CONTINGENCIES
The Company's remittance operation accepts checks received on behalf of
customers and remits the funds to the customer. Certain amounts are
charged back by banks to the Company for errors in deposits, NSF
checks, etc. The Company maintains an in-process inventory of these
items which it normally settles without significant charge to the
Company. As a result of problems associated with the conversion of the
remittance product to a new image based system, the in-process
inventory of bank charge backs has increased over normal operating
levels. The consolidated statements of income for the three and six
month periods ended June 30, 1998 reflect charges of $.3 million and
$1.6 million, respectively, for chargebacks deemed to be unrecoverable.
Although the amount of any additional loss related to these chargebacks
is not determinable at this time, management estimates that it could
ultimately reach as much as $4.5 million.
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.
7
<PAGE> 8
7. NET INCOME PER COMMON SHARE
The calculation of net income per common share follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
BASIC
<S> <C> <C> <C> <C>
Net Income $ 1,570 $ 7,157 $ 6,480 $ 7,527
Average common shares outstanding 50,621 50,575 50,598 50,575
Net income per common share - basic $ .03 $ .14 $ .13 $ .15
DILUTED
Net income $ 1,570 $ 7,157 $ 6,480 $ 7,527
Average common shares outstanding 50,621 50,575 50,598 50,575
Stock option adjustment 329 114 302 57
Average common shares outstanding - diluted 50,950 50,689 50,900 50,632
Net income per common share - diluted $ .03 $ .14 $ .13 $ .15
</TABLE>
8. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. This statement establishes standards for
reporting the components of comprehensive income and requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be included in a financial statement
that is displayed with the same prominence as other financial
statements. Comprehensive income includes net income as well as certain
items that are reported directly within a separate component of
shareholders' equity and bypass net income. The Company adopted the
provisions of SFAS No. 130 in the first quarter of 1998; however, any
differences between net income and comprehensive income are not
material.
8
<PAGE> 9
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.
The financial information and related discussion included herein
reflect the results of operations of the following acquisitions from their
respective acquisition dates; on February 4, 1997, the Company acquired 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 Caribbean Data Services,
Ltd., a data processing company; on October 24, 1997, the Company acquired 79.6%
of the outstanding shares of FA Holdings, Inc., a debit and credit card
processor (the Company acquired the remaining outstanding shares of FA Holdings,
Inc. on January 2, 1998); on January 15, 1998 the Company acquired JBH Travel
Audit, Inc., a travel fee auditing company.
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.
9
<PAGE> 10
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 other personnel expenses include wages and
personnel expenses 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses 49.9% 48.2% 48.0% 48.3%
Wages and other personnel expenses 27.2% 24.2% 27.6% 25.1%
General & administrative expenses 14.9% 13.2% 13.9% 14.1%
Restructuring charge 0.0% 0.0% 0.0% 3.5%
Depreciation and amortization 5.7% 4.2% 5.6% 4.3%
----- ----- ----- -----
Income from operations 2.3% 10.2% 4.8% 4.7%
Net interest (expense) income (0.3%) 1.3% (0.1%) 1.3%
----- ----- ----- -----
Income before income taxes 2.0% 11.5% 4.7% 6.0%
Provision for income taxes 0.7% 3.9% 1.9% 1.9%
----- ----- ----- -----
Net income 1.3% 7.6% 2.8% 4.1%
===== ===== ===== =====
</TABLE>
10
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues. Consolidated revenue increased $24.6 million, or 26.0%, to
$119.6 million for the quarter ended June 30, 1998, from $95.0 million for the
comparable 1997 period. The increase is primarily due to revenues from the last
five acquisitions which contributed $23.5 million. Consolidated revenues from
the core business group increased $1.2 million, or 1.3%. Core business increases
resulted principally from increases in the merchant card operations offset by
decreases in the remittance and merchant check operations.
Costs and Expenses. Consolidated costs and expenses increased $31.6
million, or 37.0%, to $116.9 million for the quarter ended June 30, 1998 from
$85.3 million during the comparable 1997 period.
Operating expenses increased $13.8 million, or 30.0%, to $59.6 million
for the quarter ended June 30, 1998 from $45.8 million in 1997. The increase was
primarily due to the last five acquisitions which contributed $7.7 million in
1998 operating expenses. The Company's core businesses reflected increases in
operating expense of $6.1 million principally due to $1.4 million of a total
$2.6 million write-off of internally developed software and related cost
following the cancellation of a significant customer contract at the freight
operations, increases in operating expenditures at the remittance operations due
to delays in converting to its new imaging technology and increased revenues at
the merchant card operations.
Wages and other personnel expenses increased $9.6 million, or 41.8%, to
$32.6 million for the quarter ended June 30, 1998, from $23.0 million in 1997.
This increase is due primarily to the last five acquisitions which added $9.8
million in 1998.
General and administrative expenses increased $5.3 million, or 42.5%,
to $17.9 million for the quarter ended June 30, 1998, from $12.5 million in
1997. This increase resulted from $1.2 million of the total $2.6 million freight
software write-off discussed above and the general and administrative expenses
contributed in 1998 by the last five acquisitions.
Depreciation and amortization increased $2.9 million, or 71.9%, to $6.8
million for the quarter ended June 30, 1998, from $4.0 million in 1997. The
increase was primarily due to the amortization of intangibles and the
depreciation of fixed assets acquired in the last five acquisitions and
additions of fixed assets at the Company's core businesses.
Net Interest Income. The Company incurred net interest expense of $0.3
million in the 1998 period compared to net interest income of $1.2 million in
1997. This decrease resulted from decreased investment balances reflecting the
cash used for the 1997 and 1998 acquisitions.
Tax Provision. Income tax expense for the quarter ended June 30, 1998
was $0.9 million compared to $3.7 million in 1997. The decrease resulted
principally from the decrease in taxable income of $8.5 million to $2.4 million
for the quarter ended June 30, 1998.
11
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Consolidated revenue increased $50.2 million, or 27.4%, to
$233.6 million for the six month period ended June 30, 1998, from $183.4 million
for the comparable 1997 period. The increase is primarily due to revenues from
the last five acquisitions which contributed $49.0 million. Consolidated
revenues from the core business group increased $1.2 million, or .6%. Core
business increases resulted principally from increases in the merchant card
operations offset by decreases in the remittance and merchant check operations.
Costs and Expenses. Consolidated costs and expenses increased $47.7
million, or 27.3%, to $222.3 million for the six month period ended June 30,
1998 from $174.6 million during the comparable 1997 period.
Operating expenses increased $23.5 million, or 26.5%, to $112.1 million
for the six month period ended June 30, 1998 from $88.6 million in 1997. The
increase was primarily due to the last five acquisitions which contributed $13.7
million in 1998 operating expenses. The Company's core businesses reflected
increases in operating expense of $9.8 million principally due to $1.4 million
of a total $2.6 million write-off of internally developed software and related
cost following the cancellation of a significant customer contract at the
freight operations, increases in operating expenditures at the remittance
operations due to delays in converting to its new imaging technology and
increased revenues at the merchant card operations.
Wages and other personnel expenses increased $18.7 million, or 40.6%,
to $64.6 million for the six month period ended June 30, 1998, from $45.9
million in 1997. This increase is due primarily to the last five acquisitions
which added $18.6 million in 1998.
General and administrative expenses increased $6.8 million, or 26.3%,
to $32.5 million for the six month period ended June 30, 1998, from $25.8
million in 1997. This increase resulted from $1.2 million of the total $2.6
million freight software write-off discussed above and the general and
administrative expenses contributed in 1998 by the last five acquisitions.
Restructuring charges of $6.3 million in 1997 resulted from $5.1
million for severance pay and $1.2 million for other costs, related to
organizational restructuring.
Depreciation and amortization increased $5.1 million, or 63.9%, to
$13.1 million for the six month period ended June 30, 1998, from $8.0 million in
1997. The increase was primarily due to the amortization of intangibles and the
depreciation of fixed assets acquired in the last five acquisitions and
additions of fixed assets at the Company's core businesses.
Net Interest Income. The Company incurred net interest expense of $0.3
million in the 1998 period compared to net interest income of $2.3 million in
1997. This decrease resulted from decreased investment balances reflecting the
cash used for the 1997 and 1998 acquisitions.
12
<PAGE> 13
Tax Provision. Income tax expense for the six month period ended June
30, 1998 was $4.5 million compared to $3.5 million in 1997. The increase
resulted principally from non-taxable interest income in 1997.
LINE OF BUSINESS REVIEW
The composition of the Company's statements of income by line of
business follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Merchant Travel Corporate
Services Services Services Corporate Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $70,296 $55,826 $12,950 $11,316 $36,380 $27,826 $ - $ - $119,626 $94,969
Operating expenses 45,500 37,963 2,726 2,212 11,398 5,627 - 18 59,624 45,820
Wages and other
personnel expenses 8,340 4,401 5,251 4,955 18,986 13,632 - - 32,577 22,989
General and
Administrative
expenses 8,248 6,496 1,852 1,594 7,763 4,444 - - 17,864 12,534
Depreciation and
amortization 3,118 1,902 826 628 2,877 1,437 - - 6,820 3,968
-------------------------------------------------------------------------------------------------------------
Income (loss) from
operations 5,090 5,064 2,295 1,927 (4,644) 2,686 - (18) 2,741 9,658
Net interest income
(expense) (70) 33 (93) 16 (156) 14 - 1,166 (319) 1,229
-------------------------------------------------------------------------------------------------------------
Income (loss)
before income taxes 5,020 5,097 2,202 1,943 (4,800) 2,700 - 1,148 2,422 10,887
Provision for
(benefit from)
income taxes 1,818 1,974 685 700 (1,651) 914 - 142 852 3,730
-------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,202 $ 3,123 $ 1,517 $ 1,243 $ (3,149) $ 1,786 $ - $1,006 $ 1,570 $ 7,157
-------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $134,208 $105,394 $25,624 $22,684 $73,802 $55,311 $ - $ - $233,634 $183,389
Operating expenses 86,151 72,844 5,288 4,524 20,636 11,187 - 57 112,075 88,612
Wages and other
personnel expenses 16,035 8,914 10,730 9,869 37,834 27,156 - - 64,599 45,939
General and
Administrative
expenses 15,630 13,273 3,490 3,313 13,428 9,183 - - 32,548 25,769
Restructuring charge - - - - - - - 6,340 - 6,340
Depreciation and
amortization 6,215 3,851 1,572 1,219 5,284 2,907 - - 13,071 7,977
-------------------------------------------------------------------------------------------------------------
Income (loss) from
operations 10,177 6,512 4,544 3,759 (3,380) 4,878 - (6,397) 11,341 8,752
Net interest income
(expense) (25) 78 (127) 39 (182) 26 - 2,170 (334) 2,313
-------------------------------------------------------------------------------------------------------------
Income (loss)
before income taxes 10,152 6,590 4,417 3,798 (3,562) 4,904 - (4,227) 11,007 11,065
Provision for
(benefit from)
income taxes 4,181 2,824 1,557 1,475 (1,211) 1,792 - (2,553) 4,527 3,538
-------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,971 $ 3,766 $ 2,860 $ 2,323 $ (2,351) $ 3,112 $ - $ (1,674) $ 6,480 $ 7,527
-------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 14
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, Travel Services and Corporate
Services.
Merchant Services.
Merchant Services authorizes, processes and settles credit and debit
card transactions and authorizes and collects checks for a variety of merchants.
Historically, the Company has derived a substantial portion of its merchant card
revenues from larger merchants. The October 1997 acquisition of FA Holdings,
Inc., a debit and credit card processor specializing in smaller merchants
increased revenues from smaller 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 for the three month period ended June 30,
1998 compared to $3.1 million for the comparable 1997 period. Net income
increases from the Financial Alliance acquisition were offset by increases in
merchant card operating expenses and decreases in merchant check revenues.
Net income was $6.0 million for the six month period ended June 30,
1998 compared to $3.8 million for the comparable 1997 period. The increase was
due to higher revenues from the Financial Alliance acquisition and increases in
fee income at the Company's core merchant card operations during the first
quarter of 1998 which were not matched by comparable increases in operating
expenses. The merchant check operations contributed to the increased net income
in the first quarter with slightly lower revenues more than offset by lower
operating expenses.
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 $1.5 million and $2.9 million for the three month and
six month periods ended June 30, 1998, compared to $1.2 million and $2.3 million
for the comparable 1997 periods. The increases for both the three and six month
periods resulted principally from the Company's January 1998 acquisition of JBH
Travel Audit, Inc. and reduced operating expenses at its core operations.
14
<PAGE> 15
Corporate Services.
Corporate Services processes remittances, accounts payable and freight
bills and provides integrated document solutions involving electronic imaging,
archival, processing and payment settlement.
The three and six month periods ended June 30, 1998 reflected net
losses of $3.1 million and $2.4 million compared to net income of $1.8 million
and $3.1 million for the comparable 1997 periods. The decrease for both the
three and six month periods was due primarily to decreases in volume and
increased costs related to the implementation of imaging technologies at the
Company's remittance operations, and a $2.6 million write-off of internally
developed software and related costs following the cancellation of a significant
customer contract at freight operations. It is anticipated that the higher costs
and other operating problems associated with the remittance operations will
persist through the second half of 1998, with the likely result that corporate
services will continue to incur losses.
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 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, office furniture, and building expansion and remodeling.
During the three and six month periods ended June 30, 1998, the Company's
capital expenditures totaled $13.9 million and $20.3 million respectively. Such
expenditures were principally financed from operating cash flow, which totaled
approximately $26.4 million and $44.2 million for the three and six month
periods respectively. Operating cash flow during the three and six month periods
ended June 30, 1997, totaled $20.0 million and $30.6 million and capital
expenditures were $7.5 million and $13.3 million. The Company expects capital
expenditures for the remainder of 1998 to be approximately $10.5 million. 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
15
<PAGE> 16
depending upon future acquisition activity. Increases in working capital needs
are expected to be financed through operating cash flow and current cash and
investment balances.
The Company maintains restricted cash balances held on behalf of
clients pending distribution to vendors which are shown on the balance sheet as
assets and equivalent, offsetting liabilities. These cash balances totaled
approximately $101.7 million and $83.2 million as of June 30, 1998 and December
31, 1997, respectively.
FORWARD LOOKING STATEMENT
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 timely resolve the aforementioned operating issues in Corporate
Services; competitive factors generally, in particular price competition, and
other risks detailed from time to time in the Registrant's SEC reports.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K:
a. EXHIBITS
27.1 Financial Data Schedule.
b. REPORTS ON FORM 8-K
June 22, 1998: On June 22, 1998, National Processing, Inc. announced
that earnings were expected to fall below the June 18, 1998 consensus
estimates of $.12 and $.62 per share for the second quarter and full
year 1998 by as much as one-half and one-fourth, respectively.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL PROCESSING, INC.
Date: August 13, 1998 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)
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
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