<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 Act of 1934
For the quarterly period ended June 30, 1996
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)
1231 Durrett Lane, Louisville, Kentucky 40285-0001
(Address of principal executive offices) (Zip Code)
(502) 364-2000
(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 NO X
--- ---
The registrant had 50,575,000 shares of common stock, without par
value ("Common Stock"), outstanding as of August 30, 1996.
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NATIONAL PROCESSING, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income -
Three Months and Six Months
Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flow -
Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Independent Accountant's Review Report 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
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PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
NATIONAL PROCESSING, INC
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
1996 1995
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,976 $ 22,618
Accounts receivable 66,447 82,409
Check inventory 5,606 6,376
Restricted deposits-client funds 48,404 55,773
Other current assets 6,302 1,603
-------- --------
Total current assets 160,735 168,779
Property and Equipment:
Furniture and equipment 68,862 62,456
Building and leasehold improvements 10,332 9,199
Property leased from affiliate 4,173 4,173
Land and improvements 616 616
-------- --------
83,983 76,444
Accumulated depreciation and amortization 48,932 44,948
-------- --------
35,051 31,496
Other assets:
Goodwill, net of accumulated amortization of $6,967 in 1996
and $5,982 in 1995 71,620 72,604
Deferred contract costs,net 4,587 4,816
Other assets 3,820 3,601
-------- --------
Total other assets 80,027 81,021
-------- --------
Total assets $275,813 $281,296
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable-client funds $ 48,404 $ 55,773
Accounts payable-trade 4,899 9,625
Merchant payable- check services 5,850 7,307
Accrued bankcard assessments 15,733 17,297
Income tax payable to NCC 1,813 1,045
Other accrued liabilities 9,348 13,623
-------- --------
Total current liabilities 86,047 104,670
Obligation under property leased from affiliate 2,599 2,671
-------- --------
Total liabilities 88,646 107,341
Stockholder's equity:
Preferred stock, without par value; 5,000,000 shares authorized;
no shares outstanding -- --
Common stock, without par value; 95,000,0000 shares authorized;
43,100,000 shares issued and outstanding 1 1
Contributed capital 64,825 64,825
Retained earnings 122,341 109,129
-------- --------
Total stockholder's equity 187,167 173,955
-------- --------
Total liabilities and stockholder's equity $275,813 $281,296
======== ========
</TABLE>
See notes to consolidated financial statements
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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
------------------ -------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $91,757 $84,902 $175,704 $163,252
Operating expenses 49,293 47,816 94,625 90,843
Wages and benefits 15,531 13,471 29,735 27,089
General and administrative expenses 10,879 10,250 22,403 20,663
Depreciation and amortization 3,392 2,646 6,368 5,149
------- ------- -------- --------
OPERATING PROFIT 12,662 10,719 22,573 19,508
Net interest income 259 136 553 223
------- ------- -------- --------
Income before income taxes 12,921 10,855 23,126 19,731
Provision for income taxes 5,569 4,554 9,915 8,263
------- ------- -------- --------
NET INCOME $ 7,352 $ 6,301 $ 13,211 $ 11,468
======= ======= ======== ========
NET INCOME PER SHARE $ 0.17 $ 0.15 $ 0.31 $ 0.27
======= ======= ======== ========
Shares used in computation 43,100 43,100 43,100 43,100
</TABLE>
See notes to consolidated financial statements
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NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1996 1995
-------- --------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 13,211 $ 11,468
Items not requiring cash currently:
Depreciation and amortization 6,368 5,149
Provision for uncollectible checks 12,626 15,604
Change in current assets and liabilities:
Accounts receivable 15,962 11,167
Check inventory (11,856) (14,364)
Accounts payable-trade (4,726) (201)
Merchant payable-check services (1,457) (2,385)
Bankcard assessments (1,564) 513
Income taxes payable and receivable 768 1,759
Other current assets/liabilities (8,974) 1,470
Other (43) 1,522
-------- --------
Net cash provided by operations 20,315 31,702
-------- --------
INVESTING ACTIVITIES
Capital expenditures (8,885) (3,334)
-------- --------
Net cash (used) for investing activities (8,885) (3,334)
-------- --------
FINANCING ACTIVITIES
Principal payments under property leased from affiliate (72) (72)
Due to affiliates -- (14,391)
-------- --------
Net cash provided(used) for financing activities (72) (14,463)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,358 13,905
Cash and cash equivalents, beginning of period 22,618 16,779
-------- --------
Cash and cash equivalents, end of period $ 33,976 $ 30,684
======== ========
SUPPLEMENTAL DISCLOSURES
Taxes paid $ 8,318 $ 7,788
Net interest received 553 223
</TABLE>
See notes to consolidated financial statements
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<PAGE> 6
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, 1995 has
been derived from the audited financial statements at that date, the
accompanying 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 the Company's audited consolidated
financial statements for the year ended December 31, 1995 for a fuller
discussion 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.
This quarterly report is the Company's first Form 10-Q filing subsequent to
the initial public offering of the Company's Common Stock pursuant to a Form S-1
Registration Statement (file no. 333-05507) which became effective August 8,
1996. For further information, refer to the consolidated financial statements
and related footnotes included in the Company's Registration Statement as filed
with the SEC.
2. INITIAL PUBLIC OFFERING
In August 1996, the Company sold 7,475,000 shares of its Common Stock in an
initial public offering at a price of $16.50 per share. The net proceeds from
the offering of approximately $115 million will be used to fund future
acquisitions, to fund strategic technology investments and for general corporate
purposes.
3. CONTINGENT LIABILITES
In the ordinary 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.
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[ERNST & YOUNG LLP LOGO] [ERNST & YOUNG LETTERHEAD]
Independent Accountants' Review Report
Board of Directors
National Processing, Inc.
We have reviewed the accompanying consolidated balance sheet of National
Processing, Inc. and subsidiaries as of June 30, 1996, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 1996 and 1995, and the consolidated statements of cash flows for
the six-month periods ended June 30, 1996 and 1995. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of National Processing, Inc. as of
December 31, 1995, and the related consolidated statements of income,
shareholder's equity, and cash flows for the year then ended (not presented
herein) and in our report dated June 6, 1996, we expressed an unqualified
opinion on those consolidated financial statements.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Cleveland, Ohio
August 30, 1996
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
The Company is a leading provider of 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's six month revenues of $175.7 million in 1996 grew 7.6% from the
same period in 1995. During the same period, the Company's net income grew 15.2%
to $13.2 million.
The Company's internal revenue growth was augmented by the recent strategic
acquisition of the remittance processing assets of First Data Resources, Inc. in
December 1995 (the "FDR remittance acquisition"). The Company plans to continue
to supplement growth by entering into relationships with independent sales
organizations ("ISOs") and by acquiring processing companies, processor
portfolios, ISOs, transaction processors serving corporations seeking to
outsource administrative and financial functions, and software development
operations.
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a percentage
of revenues for the period indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30
---------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues....................... 100.0% 100.0% 100.0% 100.0%
Operating Expenses............. 53.7 56.3 53.9 55.6
Wages & Benefits............... 16.9 15.9 16.9 16.6
G&A Expense.................... 11.9 12.1 12.8 12.7
Depreciation & Amortization.... 3.7 3.1 3.6 3.2
---- ---- ---- ----
Income from Operations......... 13.8 12.6 12.8 12.0
Net Interest Income ........... .3 .2 .3 .1
---- ---- ---- ----
Income Before Taxes............ 14.1 12.8 13.1 12.1
Provision for Income Taxes..... 6.1 5.4 5.6 5.1
---- ---- ---- ----
Net Income..................... 8.0% 7.4% 7.5% 7.0%
==== ==== ==== ====
</TABLE>
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THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1995
REVENUES. Consolidated revenues increased $6.9 million, or 8.1% to $91.8
million for the three months ended June 30, 1996 from $84.9 million for the
comparable 1995 period. The increase was primarily due to (i) increases in
revenues from the Company's Merchant Card Services business, which rose 9.1%
over the prior year second quarter as a result of increased transaction volume,
and (ii) growth in the remittance processing business which showed a 62%
revenue gain in the quarter compared with the same 1995 period.
The composition of the Company's revenues from its businesses for these periods
is as follows:
<TABLE>
<CAPTION>
For the Three Months
Ended June 30
--------------------
1996 1995
---- ----
<S> <C> <C>
Merchant Services............................. 58.6% 60.8%
Corporate Services............................ 26.1 22.7
Travel Services............................... 15.3 16.5
</TABLE>
COSTS AND EXPENSES. Consolidated costs and expenses increased $4.9 million, or
6.6%, to $79.1 million for the three months ended June 30, 1996 from $74.2
million during the comparable 1995 period. The expense increases during the
three months ended June 30, 1996 were comprised of several major items,
including a $2.6 million, or 19.4%, rise in merchant processing assessment fees
resulting from increased volume and an increase in fees charged by VISA(R), and
a $2.9 million, or 71.9%, rise in wages and benefits for hourly employees in the
remittance processing business as a result of the FDR remittance acquisition and
staffing additions required to support a new contract.
Uncollectible check expense declined $1.4 million, or 15.4%, to $7.7 million for
the three months ended June 30, 1996 from $9.1 million during the comparable
1995 period. The smaller uncollectible check expense reflected a 7.0%
improvement in the collection rate on returned checks compared to the prior year
period.
Depreciation and amortization for the three months ended June 30, 1996 was $3.4
million compared to $2.6 million for the same 1995 period, reflecting
depreciation related to the Company's Merchant Card Services business and
remittance processing systems projects and increased amortization of
intangibles attributable to the FDR remittance acquisition.
TAX PROVISION AND NET INCOME. Income taxes for the three months ended June 30,
1996 were $5.6 million compared to $4.6 million for the comparable period in
1995. Net income for the three months ended June 30, 1996 increased 16.7% to
$7.4 million from $6.3 million for the three months ended June 30, 1995. The
increase resulted from revenue growth and improved margins due to the factors
described above.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Consolidated revenues increased $12.5 million, or 7.6%, to $175.7
million for the six months ended June 30, 1996 from $163.2 million for the
comparable 1995 period. The increase was primarily due to transaction volume
gains in the Company's Merchant Services and Corporate Services businesses.
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<PAGE> 10
The composition of the Company's revenues from its businesses for these periods
is as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30
-------------------
1996 1995
---- ----
<S> <C> <C>
Merchant Services 57.8% 59.5%
Corporate Services 26.4 23.3
Travel Services 15.8 17.2
</TABLE>
COSTS AND EXPENSES. Consolidated costs and expenses increased $9.4 million, or
6.5%, to $153.1 million for the six months ended June 30, 1996 from $143.7
million during the comparable 1995 period. The increases were primarily due to
increases in purchased services such as authorization and assessment fees, wages
and benefits associated with remittance processing operations, and depreciation
associated with various technology upgrades.
Uncollectible check expense declined $2.8 million, or 15.8%, to $14.8 million
for the six months ended June 30, 1996 from $17.6 million during the comparable
1995 period. The smaller uncollectible check expense reflected both improved
collection rates on returned checks and slightly lower volume compared to the
prior year period.
Depreciation and amortization for the six months ended June 30, 1996 was $6.4
million compared to $5.1 million during the same 1995 period, primarily
attributable to increased amortization of intangibles associated with the FDR
remittance acquisition.
TAX PROVISION AND NET INCOME. Income taxes were $9.9 million and $8.3 million
for the six months ended June 30, 1996 and 1995, respectively. Net income for
the six months ended June 30, 1996 increased 15.2% to $13.2 million from $11.5
million for the six months ended June 30, 1995. The increase resulted primarily
from profit margin improvements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of capital resources include acquisitions, capital
expenditures and working capital.
The Company had no outstanding obligations associated with bank indebtedness as
of June 30, 1996. The Company has obtained a commitment from an unaffiliated
financial institution to provide unsecured credit under a line and revolving
facility in an aggregate amount of $75.0 million. The closing of such credit
facility is subject to, among other things, the execution of definitive
documentation, which is expected to contain representations, warranties and
covenants customary for credit facilities of this type.
The Company's capital expenditures include amounts for computer systems hardware
as well as scanning equipment associated with imaging projects. During the six
months ended June 30, 1996, the Company's capital expenditures totaled
approximately $8.9 million. Such expenditures were financed from operating cash
flow, which totaled approximately $20.3 million before capital expenditures for
the six months ended June 30, 1996. Capital expenditures in 1996 are expected to
be $14 million (including the $8.9 million made in the first half of 1996).
The Company does not carry substantial amounts of inventory and does not
anticipate significant growth in accounts receivable to support revenue growth.
Increased working capital needs are financed through operating cash flow.
Depending upon the Company's future acquisition activity, proceeds from the
Company's recent initial public offering may be dedicated for these purposes.
It is expected that the Company's future acquisitions will be funded from the
$114,965,500 net proceeds (before deducting offering expenses) from the initial
public offering of its Common Stock described in Footnote 2 of the Consolidated
Financial Statements herein. Such acquisitions may also be funded from
operating cash flows and borrowings under the Company's credit facilities as
needed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL PROCESSING, INC.
Date: August 30, 1996 By: /s/ Richard A. Alston
----------------------
Richard A. Alston
Executive Vice President, Finance
and Corporate Development
(Principal Financial Officer)
By: /s/ Glen Rhodes
----------------------
Glen Rhodes
Chief Accounting Officer
(Principal Accounting Officer)
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