<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 September 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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 outstanding as
of September 30, 1996.
<PAGE> 2
NATIONAL PROCESSING, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
---------------
<S> <C> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income - Three
and Nine Months Ended September 30, 1996 and 1995 3
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 4
Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements -
September 30, 1996 6
Independent Accountant's Review Report 7
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 12
</TABLE>
2
<PAGE> 3
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- -----------------------------------
1996 1995 1996 1995
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $97,069 $85,136 $272,773 $248,388
Operating expenses 51,728 48,483 146,353 139,326
Wages and benefits 16,526 13,212 46,261 40,301
General and administrative expenses 13,726 10,322 36,129 30,985
Depreciation and amortization 3,079 2,623 9,447 7,772
---------------- --------------- ---------------- ----------------
OPERATING PROFIT 12,010 10,496 34,583 30,004
Net interest income 908 101 1,461 324
---------------- --------------- ---------------- ----------------
Income before income taxes 12,918 10,597 36,044 30,328
Provision for income taxes 5,314 4,427 15,229 12,690
---------------- --------------- ---------------- ----------------
NET INCOME $7,604 $6,170 $20,815 $17,638
================ =============== ================ ================
NET INCOME PER SHARE $0.16 $0.14 $0.47 $0.41
================ =============== ================ ================
Shares used in computation 47,597 43,100 44,610 43,100
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
NATIONAL PROCESSING, INC
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
1996 1995
--------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $108,886 $22,618
Securities available for sale, at market 37,900 -
Accounts receivable 79,084 82,409
Check inventory 6,184 6,376
Restricted deposits-client funds 47,874 55,773
Other current assets 1,023 1,603
--------------------- ------------------
Total current assets 280,951 168,779
Property and Equipment:
Furniture and equipment 73,949 62,456
Building and leasehold improvements 11,607 9,199
Property leased from affiliate 4,173 4,173
Land and improvements 616 616
--------------------- ------------------
90,345 76,444
Accumulated depreciation and amortization 51,253 44,948
--------------------- ------------------
39,092 31,496
Other assets:
Goodwill, net of accumulated amortization of $7,457 in 1996
and $5,982 in 1995 71,129 72,604
Deferred contract costs,net 4,508 4,816
Other assets 9,632 3,601
--------------------- ------------------
Total other assets 85,269 81,021
--------------------- ------------------
Total assets $405,312 $281,296
===================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-client funds $47,874 $55,773
Accounts payable-trade 7,831 9,625
Merchant payable-check services 5,919 7,307
Accrued bankcard assessments 16,722 17,297
Income tax payable to NCC 2,595 1,045
Other accrued liabilities 15,722 13,623
--------------------- ------------------
Total current liabilities: 96,663 104,670
Obligation under property leased from affiliate 2,563 2,671
--------------------- ------------------
Total liabilities 99,226 107,341
Stockholders' equity:
Preferred stock; without par; 5,000,000 shares authorized
no shares outstanding - -
Common stock, without par value; 95,000,0000 shares authorized;
50,575,000 and 43,100,000 shares issued and outstanding
in 1996 and 1995 respectively 1 1
Contributed capital 176,141 64,825
Retained earnings 129,944 109,129
--------------------- ------------------
Total stockholders' equity 306,086 173,955
--------------------- ------------------
Total liabilities and stockholders' equity $405,312 $281,296
===================== ==================
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $20,815 $17,638
Items not requiring cash currently:
Depreciation and amortization 9,447 7,772
Provision for uncollectible checks 20,948 23,477
Change in current assets and liabilities:
Accounts receivable 3,325 13,448
Check inventory (20,756) (20,614)
Accounts payable-trade (1,794) (188)
Merchant payable-check services (1,388) (3,093)
Bankcard assessments (575) 872
Income taxes payable 1,550 1,145
Other current assets/liabilities 2,675 778
Other (23) (189)
---------------- ----------------
Net cash provided by operations 34,224 41,046
---------------- ----------------
INVESTING ACTIVITIES
Capital expenditures (21,264) (5,793)
Purchase of securities available for sale (37,900) -
---------------- ----------------
Net cash (used) for investing activities (59,164) (5,793)
---------------- ----------------
Financing Activities
Principal payments under property leased from affiliate (108) (108)
Net cash proceeds from initial public offering of common stock 111,316 -
Due to affiliates - (14,422)
---------------- ----------------
Net cash provided(used) for financing activities 111,208 (14,530)
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 86,268 20,723
Cash and cash equivalents, beginning of period 22,618 16,779
---------------- ----------------
Cash and cash equivalents, end of period $108,886 $37,502
================ ================
SUPPLEMENTAL DISCLOSURES
Taxes paid $12,849 $11,841
Net interest received 1,461 324
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(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 (as contained in the
Company's Registration Statement on Form S-1, file no. 333-05507) for a fuller
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. 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 $111,316,000, after the underwriting discount and offering
expenses, will be used to fund future acquisitions, to fund strategic
technology investments and for general corporate purposes. The net proceeds are
invested in cash equivalents and securities available for sale which are
carried at fair value. Any unrealized gains or losses will be reported
separately through stockholders' equity, net of tax.
3. 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.
6
<PAGE> 7
[LOGO] ERNST & YOUNG LLP - 1300 Huntington Building - Phone: 216 861 5000
925 Euclid Avenue
Cleveland, Ohio 44115-1405
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 September 30, 1996, and the related
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1996 and 1995, and the consolidated statements of cash
flows for the nine-month periods ended September 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
Cleveland, Ohio
October 24, 1996
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
7
<PAGE> 8
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 nine month revenues of $272.8 million in 1996 grew 9.8% from the
comparable 1995 period. The Company's net income for the nine months ended
September 30, 1996 grew to $20.8 million, an 18% increase over the same 1995
period.
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 Nine Months
Ended Ended
September 30 September 30
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0%
Operating Expenses......... 53.3 57.0 53.7 56.1
Wages & Benefits............. 17.0 15.5 16.9 16.2
G & A Expense................. 14.1 12.1 13.2 12.5
Depreciation & Amortization 3.2 3.1 3.5 3.1
------- ------- ------- -------
Income from Operations..... 12.4 12.3 12.7 12.1
Net Interest Income............ .9 .1 .5 .1
------- ------- ------- -------
Income Before Taxes 13.3 12.4 13.2 12.2
Provision for Income Taxes 5.5 5.2 5.6 5.1
------- ------- ------- -------
Net Income........................ 7.8% 7.2% 7.6% 7.1%
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES. Consolidated revenues increased $11.9 million, or 14.0%, to $97.1
million for the three months ended September 30, 1996 from $85.1 million for the
comparable 1995 period. The increase was primarily due to (i) growth in the
remittance processing business which showed a 67.9% revenue gain in the quarter
compared with the same 1995 period, (ii) increases in revenues from the
Company's merchant card services business, which rose 13.7% over the prior year
third quarter as a result of increased transaction volume, and (iii) growth in
imaging solutions which increased 48% over the prior year.
The composition of the Company's revenues from its businesses for these periods
is as follows:
<TABLE>
<CAPTION>
For the Three Months
Ended September 30th
--------------------
1996 1995
---- ----
<S> <C> <C>
Merchant Services 59.1% 61.2%
Corporate Services 26.3 22.7
Travel Services 14.6 16.1
</TABLE>
COSTS AND EXPENSES. Consolidated costs and expenses increased $10.4 million, or
14.0%, to $85.1 million for the three months ended September 30, 1996 from $74.6
million during the comparable 1995 period. The expense increases during the
three months ended September 30, 1996 were comprised of several major items,
including a $2.8 million, or 95.1%, increase in wages and benefits to support
new contracts and the FDR remittance acquisition. General and administrative
expenses increased $3.4 million, or 33%, as a result of increased facilities
costs and associated with expanded remittance activities, systems expenses
associated with the Company's imaging projects and expenses relating to
operating as a public company.
Depreciation and amortization for the three months ended September 30, 1996 was
$3.1 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 September
30, 1996 were $5.3 million compared to $4.4 million for the same period in 1995.
Net income for the three months ended September 30, 1996 increased 23.2% to $7.6
million from $6.2 million for the three months ended September 30, 1995. The
increase resulted from revenue growth and improved margins due to the factors
described above.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES. Consolidated revenues increased $24.4 million, or 9.8%, to $272.8
million for the nine months ended September 30, 1996 from $248.4 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.
9
<PAGE> 10
The composition of the Company's revenues from its businesses for these periods
is as follows:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
-------------------
1996 1995
----- -----
<S> <C> <C>
Merchant Services 58.3% 60.1%
Corporate Services 26.3 23.1
Travel Services 15.4 16.8
</TABLE>
COSTS AND EXPENSES. Consolidated costs and expenses increased $19.8 million, or
9.1%, to $238.2 million for the nine months ended September 30, 1996 from $218.4
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 $2.2 million, or 8.3%, to $24.2 million for
the nine months ended September 30, 1996 from $26.4 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 nine months ended September 30, 1996 was
$9.4 million compared to $7.8 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 $15.2 million and $12.7 million
for the nine months ended September 30, 1996 and 1995, respectively. Net income
for the nine months ended September 30, 1996 increased 18.0% to $20.8 million
from $17.6 million for the nine months ended September 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 September 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 nine
months ended September 30, 1996, the Company's capital expenditures totaled
approximately $21.3 million. Such expenditures were financed from operating cash
flow, which totaled approximately $34.2 million before capital expenditures for
the nine months ended September 30, 1996.
10
<PAGE> 11
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
net proceeds 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.
11
<PAGE> 12
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
11 Statement RE: Computation of Per Share Earnings
27 Financial Data Schedule
Third Quarter
b. Reports on Form 8-K
None
12
<PAGE> 13
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: October 25, 1996 By: /s/ Richard A. Alston
-------------------------------
Richard A. Alston
Executive Vice President,
Finance and Corporate Development
(Principal Financial Officer)
By: /s/ Danny L. McDaniel
-------------------------------
Chief Accounting Officer
(Principal Accounting Officer)
13
<PAGE> 1
NATIONAL PROCESSING, INC.
EXHIBIT 11-STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------------------------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
PRIMARY
<S> <C> <C> <C> <C>
Average shares outstanding 47,487,500 43,100,000 44,573,175 43,100,000
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 109,133 0 36,643 0
Total 47,596,633 43,100,000 44,609,818 43,100,000
---------- ---------- ---------- ----------
Net income $7,604,000 $6,170,000 $20,815,000 $17,638,000
---------- ---------- ----------- -----------
Per share amount $0.16 $0.14 $0.47 $0.41
----- ----- ----- -----
FULLY DILUTED
Average shares outstanding 47,487,500 43,100,000 44,573,175 43,100,000
Net effect of dilutive stock options-
based on the treasury stock method
using the quarter-end market price,
if higher than average market price 194,373 0 65,264 0
------- - ------ -
Total 47,681,873 43,100,000 44,638,439 43,100,000
---------- ---------- ---------- ----------
Net income $7,604,000 $6,170,000 $20,815,000 $17,638,000
---------- ---------- ----------- -----------
Per share amount $0.16 $0.14 $0.47 $0.41
----- ----- ----- -----
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 108,886
<SECURITIES> 37,900
<RECEIVABLES> 79,084
<ALLOWANCES> 0
<INVENTORY> 6,184
<CURRENT-ASSETS> 280,951
<PP&E> 90,345
<DEPRECIATION> (51,253)
<TOTAL-ASSETS> 405,312
<CURRENT-LIABILITIES> 96,663
<BONDS> 0
<COMMON> 1
0
0
<OTHER-SE> 306,086
<TOTAL-LIABILITY-AND-EQUITY> 405,312
<SALES> 0
<TOTAL-REVENUES> 272,773
<CGS> 0
<TOTAL-COSTS> 192,614
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,044
<INCOME-TAX> 15,229
<INCOME-CONTINUING> 20,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,815
<EPS-PRIMARY> .47
<EPS-DILUTED> 0
</TABLE>
