<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 September 30, 1999
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) 315-2000
(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 [X] NO [ ]
The number of shares outstanding of the Registrant's Common Stock as of October
29, 1999 was 50,772,985.
1
<PAGE> 2
NATIONAL PROCESSING, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -- September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations --
Three Months and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (None)
Item 2. Changes in Securities and Use of Proceeds (None)
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders (None)
Item 5. Other Information (None)
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE> 3
NATIONAL PROCESSING, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
----------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 78,520 $ 7,254
Short-term investments 60,000 -
Accounts receivable-trade 69,047 104,759
Check inventory - 2,901
Restricted deposits-client funds 28,049 91,484
Deferred tax assets 2,675 3,688
Other current assets 10,063 13,434
------- -------
Total current assets 248,354 223,520
Property and equipment:
Furniture and equipment 79,910 116,420
Building and leasehold improvements 20,978 23,843
Software 17,608 23,537
Property leased from affiliate 4,173 4,173
Land and improvements 2,851 2,828
------- -------
125,520 170,801
Accumulated depreciation and amortization 62,167 82,680
------- -------
63,353 88,121
Other assets:
Goodwill, net of accumulated amortization of
$4,459 in 1999 and $14,202 in 1998 87,003 171,489
Acquired merchant portfolios 11,570 18,255
Deferred tax assets 2,764 2,764
Other assets 6,384 8,284
------- -------
Total other assets 107,721 200,792
------- -------
TOTAL ASSETS $ 419,428 $ 512,433
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Restricted deposits-client funds $ 28,049 $ 91,484
Accounts payable-trade 3,063 3,075
Merchant payable-check services - 3,690
Accrued bankcard assessments 16,404 17,753
Income tax payable to NCC 19,155 4,376
Other accrued liabilities 40,809 30,729
------- -------
Total current liabilities 107,480 151,107
Obligation under property leased from affiliate 2,155 2,264
Other long-term liabilities 796 796
Deferred tax liabilities 3,210 5,607
------- -------
Total liabilities 113,641 159,774
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; 1 1
50,766,318 and 50,644,651 shares issued and outstanding
in 1999 and 1998, respectively
Contributed capital 176,818 175,799
Retained earnings 128,968 176,859
--------- --------
Total shareholders' equity 305,787 352,659
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 419,428 $ 512,433
========= ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 94,909 $ 121,430 $ 329,185 $ 354,257
Other income - 4,000 - 4,000
Operating expenses 47,479 64,642 165,290 176,717
Wages and other personnel expenses 18,930 31,977 74,085 96,576
General and administrative expenses 12,625 16,760 42,104 49,308
Restructuring charges - - 2,234 -
Impairment loss and related expenses - - 67,432 -
Depreciation and amortization 5,249 6,718 17,081 19,789
------- --------- ---------- ---------
OPERATING PROFIT (LOSS) 10,626 5,333 (39,041) 15,867
Net interest income 2,044 116 2,628 589
------- --------- ---------- ---------
Income (loss) before income taxes 12,670 5,449 (36,413) 16,456
Provision for income taxes 4,349 2,068 11,478 6,595
------- --------- ---------- ---------
NET INCOME (LOSS) $ 8,321 $ 3,381 $ (47,891) $ 9,861
======= ========= ========== =========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ .16 $ .06 $ (0.94) $ .19
======= ========= ========== =========
</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
1999 1998
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (47,891) $ 9,861
Items not requiring cash currently:
Depreciation and amortization 17,081 19,789
Restructuring charges 1,167 -
Impairment loss and related expenses 57,047 -
Loss on disposition of fixed assets 585 2,267
Deferred income taxes (1,384) 4,327
Change in assets and liabilities:
Accounts receivable-trade 26,581 33,833
Check inventory (1,032) 3,406
Accounts payable-trade (12) (1,193)
Merchant payable-check services 1,809 (3,624)
Accrued bankcard assessments (1,349) (3,741)
Income taxes payable to NCC 14,779 953
Other current assets/liabilities 9,218 3,631
Other, net 1,088 (1,964)
------- -------
Net cash provided by operating activities 77,687 67,545
------- ------
INVESTING ACTIVITIES
Capital expenditures (11,660) (34,442)
Proceeds from sale of fixed assets 456 -
Purchases of short-term investments (60,000) -
Proceeds from sales and maturities of securities
available for sale - 1,188
Proceeds from sale of business lines 63,873 -
Acquisitions, net of cash acquired - (36,023)
------- ------
Net cash used by investing activities (7,331) (69,277)
------- ------
FINANCING ACTIVITIES
Principal payments under property leased from affiliate (109) (281)
Net cash proceeds from exercise of stock options 1,019 584
------- ------
Net cash provided by financing activities 910 303
------- ------
Net increase (decrease) in cash and cash equivalents 71,266 (1,429)
Cash and cash equivalents, beginning of period 7,254 38,887
------- ------
Cash and cash equivalents, end of period $ 78,520 $ 37,458
======= =======
Supplemental cash flow information:
Taxes (refunded) paid $ (7,028) $ 4,431
</TABLE>
See notes to consolidated financial statements
5
<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 information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, although the
balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements at that date, the accompanying
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, 1998, which include full
disclosure of relevant financial policies and information.
In the opinion of management, the accompanying 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 CHARGES
During 1999, the Company recorded restructuring charges of $2.2
million, including $1.9 million for severance pay for approximately 540
employees and $.3 million for other costs. These charges related to
several of the Company's operating facilities which have been or are in
the process of being closed and consolidated into the Company's other
current facilities. At September 30, 1999, the remaining liability was
$1.2 million and related to future severance payments.
6
<PAGE> 7
3. SALES OF BUSINESS LINES, IMPAIRMENT LOSS AND RELATED EXPENSES
During the first quarter of 1999, the Company recorded an
impairment loss of $73.9 million pre-tax, or $72.0 million after-tax,
related to the anticipated sale or wind-down of its Freight, Payables,
Remittance and Check business lines. The loss was recorded in
accordance with FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Effective April 1, 1999, the Company sold its Freight and Payables
business lines for $19.6 million. Effective June 1, 1999, the Company
sold its Remittance and Check business lines for $44.3 million. As a
result of the final dispositions of these business lines, the Company
recorded a pre-tax credit of $6.5 million to the impairment loss in the
second quarter of 1999. For the nine-month period ended September 30,
1999, the impairment loss and related expenses netted to $67.4 million
pre-tax, or $68.3 million after-tax, and reduced earnings per share by
$1.35. At September 30, 1999, the Company had $4.5 million remaining
related to the final obligations of these dispositions recorded in its
other accrued liabilities. The remaining obligation is primarily for
future severance payments.
4. COMMITMENTS AND CONTINGENCIES
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
5. NET INCOME (LOSS) PER COMMON SHARE
The calculation of net income (loss) per common share follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net income (loss) $ 8,321 $ 3,381 $(47,891) $ 9,861
Average common shares outstanding 50,749 50,644 50,680 50,614
Net income (loss) per common share -- basic $ .16 $ .06 $ (.94) $ .19
DILUTED
Net income (loss) $ 8,321 $ 3,381 $(47,891) $ 9,861
Average common shares outstanding 50,749 50,644 50,680 50,614
Stock option adjustment 77 47 - 163
Average common shares outstanding -- diluted 50,826 50,691 50,680 50,777
Net income (loss) per common share -- diluted $ .16 $ .06 $ (.94) $ .19
</TABLE>
6. SEGMENT REPORTING
National Processing, Inc. operates three business segments -
Merchant Services, Travel Services and Corporate Services. Merchant
Services authorizes, processes and settles credit and debit card
transactions for a variety of merchants. 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 contract with the Airlines Reporting Corporation ("ARC").
The Company is compensated on a "cost plus" basis under this contract.
Revenues from Corporate Services are derived from providing integrated
document solutions involving electronic imaging, archival, processing
and payment settlement. The business segments are identified by the
services they offer. During the second quarter of 1999, the Company
sold its Check business line (formerly part of the Merchant Services
segment) and also sold its Remittance, Payables and Freight business
lines (all formerly part of the Corporate Services segment). See Note 3
for additional information related to the disposition of the business
lines. The accounting policies of the reportable segments are the same
as those described in Note 1.
8
<PAGE> 9
The reported results reflect the underlying economics of the
segments. Indirect general and administrative expenses are allocated to
the segments based upon various methods determined by the nature of the
expenses. There are no intersegment revenues.
<TABLE>
<CAPTION>
(In thousands) MERCHANT TRAVEL CORPORATE CONSOLIDATED
SERVICES SERVICES SERVICES CORPORATE TOTAL
-------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Revenues from external customers $ 66,118 $12,177 $16,614 $ - $ 94,909
Operating profit 9,154 3,030 1,554 - 13,738
Depreciation and amortization 1,626 390 3,233 - 5,249
Net interest income 1,363 447 234 - 2,044
Net operating assets 108,018 10,518 32,130 33,527 184,193
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Revenues from external customers $ 72,480 $12,285 $36,665 $ - $121,430
Operating profit (loss) 8,635 2,765 (3,832) - 7,568
Depreciation and amortization 3,121 795 2,802 - 6,718
Net interest income (expense) 264 (80) (68) - 116
Net operating assets 171,084 14,490 99,986 26,801 312,361
</TABLE>
<TABLE>
<CAPTION>
MERCHANT TRAVEL CORPORATE CONSOLIDATED
SERVICES SERVICES SERVICES CORPORATE TOTAL
-------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers $213,931 $34,957 $ 80,297 $ - $ 329,185
Impairment loss and related expenses 21,114 - 46,318 - 67,432
Operating profit (loss) 2,384 7,439 (42,487) - (32,664)
Depreciation and amortization 7,852 1,951 7,278 - 17,081
Net interest income 1,748 554 326 - 2,628
Net operating assets 108,018 10,518 32,130 33,527 184,193
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers $206,050 $37,898 $110,309 $ - $ 354,257
Operating profit (loss) 20,637 7,740 (6,054) - 22,323
Depreciation and amortization 9,360 2,311 8,118 - 19,789
Net interest income (expense) 878 (196) (93) - 589
Net operating assets 171,084 14,490 99,986 26,801 312,361
</TABLE>
9
<PAGE> 10
The following represent reconciliations of the Company's reportable
segment operating profit to the consolidated operating profit and the
Company's reportable segment net operating assets to consolidated net
operating assets.
<TABLE>
<CAPTION>
(In thousands) FOR THE QUARTER ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Operating profit:
Total operating profit for reportable segments $ 13,738 $ 7,568
General and administrative expenses -- non-operating 3,112 2,235
------- ------
Consolidated operating profit $ 10,626 $ 5,333
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Operating profit (loss):
Total operating profit (loss) for reportable segments $ (32,664) $ 22,323
General and administrative expenses -- non-operating 6,377 6,456
------- ------
Consolidated operating profit (loss) $ (39,041) $ 15,867
======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Net operating assets:
Total net operating assets for reportable segments $ 184,193 $ 349,805
Cash and short-term investments 138,520 7,254
Taxes (16,926) (4,400)
-------- --------
Consolidated net operating assets $ 305,787 $ 352,659
======== ========
</TABLE>
Depreciation expense for certain corporate fixed assets is allocated to
the three segments.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
National Processing, Inc. (the "Company"), through its wholly-owned
operating subsidiary National Processing Company ("NPC"), provides credit and
debit card processing services to merchants of all sizes in multiple vertical
market segments. In addition, the Company provides corporate outsourcing,
transaction processing services and customized processing solutions.
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 completion of 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
1,265,400 shares of the Company's common stock in the open market and currently
owns 88% of the Company's outstanding common stock.
Effective April 1, 1999, the Company sold its Freight and Payables
business lines for $19.6 million. Effective June 1, 1999, the Company sold its
Check and Remittance business lines for $44.3 million.
COMPONENTS OF REVENUES AND EXPENSES
Revenues. The Company's Merchant Services revenues are primarily
derived from fees paid by merchants for the authorization and settlement of
credit and debit card transactions, exclusive of interchange fees. Merchant fees
paid to the Company 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 airline tickets, health insurance claims, credit card applications
and other outsourced services. Revenues from Travel Services are dependent on
the volume of ticket sales by travel agents on behalf of airlines. A small
portion of revenues is derived from earnings on cash balances, which are
maintained by customers pursuant to contract terms.
Expenses. Operating expenses include all direct costs of providing
services to customers, excluding wages and other personnel expenses. The most
significant components of operating expenses are assessment fees, authorization
fees and data processing expenses. Wages and other personnel expenses include
wages and benefits for hourly employees. General and administrative expenses
include management salaries and benefits, facilities maintenance and software
applications programming.
11
<PAGE> 12
RESULTS OF OPERATIONS
The Company's operating results with and without the restructuring
charges and impairment loss and related expenses is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 PERCENT SEPTEMBER 30 PERCENT
(In thousands, except per share amounts) 1999 1998 CHANGE 1999 1998 CHANGE
----- ----- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Excluding restructuring charges and impairment loss:
Pre-tax earnings $ 12,670 $ 5,449 133 % $ 33,253 $ 16,456 102 %
Taxes 4,349 2,068 110 11,006 6,595 67
------ ----- ------ ------
Net income 8,321 3,381 146 22,247 9,861 126
====== ===== ====== ======
Per share -- diluted .16 .06 167 .44 .19 132
====== ===== ====== ======
Restructuring charges and impairment loss:
Pre-tax loss - - (69,666) -
Taxes - - 472 -
------ ----- ------ ------
After-tax loss - - (70,138) -
====== ===== ======= ======
Per share -- diluted - - (1.38)
====== ===== ======= ======
Total:
Pre-tax earnings (loss) 12,670 5,449 133 % (36,413) 16,456 NM %
Taxes 4,349 2,068 110 11,478 6,595 74
------ ----- ------- ------
After-tax earnings (loss) 8,321 3,381 146 (47,891) 9,861 NM
====== ===== ======= ======
Per share -- diluted $ .16 $ .06 167 $ (.94) $ .19 NM
====== ===== ======= ======
</TABLE>
NM - Not Meaningful
The following table summarizes the Company's operating results as a
percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Other income - 3.3% - 1.1%
Operating expenses 50.0% 53.2% 50.2% 49.9%
Wages and other personnel expenses 20.0% 26.3% 22.5% 27.2%
General and administrative expenses 13.3% 13.8% 12.8% 13.9%
Restructuring charges - - .7% -
Impairment loss and related expenses - - 20.5% -
Depreciation and amortization 5.5% 5.6% 5.2% 5.6%
------------- ------------ ------------ ------------
Operating profit (loss) 11.2% 4.4% (11.9)% 4.5%
Net interest income 2.2% 0.1% 0.8% 0.2%
------------- ------------ ------------ ------------
Income (loss) before income taxes 13.4% 4.5% (11.1)% 4.7%
Provision for income taxes 4.6% 1.7% 3.5% 1.9%
------------- ------------ ------------ ------------
Net income (loss) 8.8% 2.8% (14.6)% 2.8%
============= ============ ============ ============
</TABLE>
12
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues. Consolidated revenues for the quarter ended September 30,
1999, were $94.9 million, up 15% from comparable amounts in 1998, and were
derived solely from the Company's core business units -- Merchant Services,
Travel Services and Corporate Services. Comparable 1998 revenues were $82.4
million from these core units. The increase in revenues is due to increased
business volumes in the Merchant Services and Corporate Services segments.
Consolidated revenues for the third quarter of 1998 were $121.4 million and
included $39.0 million for business lines which were divested in the first half
of 1999: Freight, Payables, Remittance, and Check Services.
Other Income. Other income in 1998 reflects a one-time settlement fee
of $4.0 million for the cancellation of a merchant card processing contract.
Costs and Expenses. Total costs and expenses decreased $35.8 million,
or 30%, to $84.3 million for the third quarter of 1999 compared to $120.1
million for the same period in 1998.
Operating expenses decreased $17.1 million, or 27%, to $47.5 million
for the quarter ended September 30, 1999 from $64.6 million for the same period
in 1998. The decrease was due to declines in operating expenses for the business
lines that have been exited. These business lines had no operating expenses in
the third quarter of 1999 compared to $23.0 million for the same period in 1998.
The operating expenses of the retained business lines increased 14% from $41.6
million in 1998 to $47.5 million in 1999. This increase was due to increases in
business volumes, increases in purchased services in the Merchant Services
segment, and additional information technology expenses.
Wages and other personnel expenses decreased $13.1 million, or 41%, to
$18.9 million for the quarter ended September 30, 1999, from $32.0 million in
1998. This decrease is due to declines in the business lines that have been
exited. These business lines had no expenses in the third quarter of 1999
compared to $13.2 million for the same period in 1998. Wages and other personnel
expenses for the retained business lines were $18.8 million for the third
quarter of 1998 compared to $18.9 million for the same period in 1999. These
expenses for the retained businesses were relatively flat despite increases in
revenue primarily due to improved productivity and other cost saving
initiatives.
General and administrative expenses decreased $4.2 million, or 25%, to
$12.6 million for the quarter ended September 30, 1999, from $16.8 million in
1998. This decrease was due to declines in the business lines that have been
exited. These business lines had no expenses in the third quarter of 1999
compared to $9.5 million for the same period in 1998. Expenses for the retained
businesses increased 73% from $7.3 million in 1998 to $12.6 million in 1999.
This increase resulted principally from increases in information technology
expenses and increases in sales and support services related to the Merchant and
Corporate Services operations.
Depreciation and amortization expense decreased $1.5 million, or 22%,
to $5.2 million for the quarter ended September 30, 1999, from $6.7 million in
1998. The exited business lines had no expense in the third quarter of 1999
compared to $2.2 million for the same period in 1998. Expense for the retained
business lines increased 16% from $4.5 million in 1998 to $5.2 million in 1999.
This increase was due to additional investments in property and equipment.
13
<PAGE> 14
Net Interest Income. Net interest income was $2.0 million for the
quarter ended September 30, 1999 compared to $0.1 million in the third quarter
of 1998. This increase resulted from increased investment balances from the
receipt of sale proceeds from the divested businesses in the second quarter of
1999 and increases in operating receipts primarily from the Merchant Services
segment.
Tax Provision. The effective tax rate was 34.3% for the third quarter
of 1999 compared to 38.0% for the same period a year ago. The decrease was due
primarily to increases in foreign income, which is taxed at lower rates, in the
third quarter of 1999 compared to the same period in 1998.
Net Income. Net income for the third quarter of 1999 was $8.3 million,
or $0.16 per share, compared to $3.4 million, or $0.06 per share, for the same
quarter in 1998. Net income for the Company's retained businesses increased 12%
to $8.3 million in the third quarter of 1999 from $7.4 million in the third
quarter of 1998. Excluding the impact of the one-time settlement fee of $4.0
million discussed above, net income for the Company's retained businesses
increased 66% from $5.0 million in the third quarter of 1998 to $8.3 million in
the third quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues. Consolidated revenues decreased $25.1 million, or 7%, to
$329.2 million for the nine months ended September 30, 1999, from $354.3 million
for the comparable 1998 period. Revenues for the Company's retained business
lines increased 15% year-over-year to $271.9 million for the first nine months
of 1999 from $235.7 million for the same period of 1998. This increase is due to
increases in business volumes in the Merchant Services and Corporate Services
segments. The exited business lines (Freight, Payables, Remittance and Check)
had revenues of $57.3 million in 1999 compared to $118.6 million in 1998.
Other Income. Other income in 1998 reflects a one-time settlement fee
of $4.0 million for the cancellation of a merchant card processing contract.
Costs and Expenses. Excluding nonrecurring restructuring charges and
the impairment loss, total costs and expenses decreased $43.8 million, or 13%,
to $298.6 million for the third quarter of 1999 compared to $342.4 million for
the same period in 1998.
In the first half of 1999, a pre-tax charge of $67.4 million was
recorded for losses and expenses related to the dispositions of the Freight,
Payables, Remittance and Check business lines. The loss totaled $68.3 million
after-tax, or $1.35 per share. Further discussion regarding the divestitures is
included in Note 3 - Sale of Business Lines, Impairment Loss and Related
Expenses.
Restructuring charges totaling $2.2 million pre-tax, or $1.8 million
and $.03 per share after-tax, were recorded in the first quarter of 1999 in
conjunction with the planned closing of several of the Company's operating
facilities. The charges include $1.9 million for severance pay for certain
employees and $0.3 million for other related costs. See Note 2 - Restructuring
Charges for further information.
14
<PAGE> 15
Operating expenses decreased $11.4 million, or 6%, to $165.3 million
for the nine months ended September 30, 1999 from $176.7 million for the same
period in 1998. The retained business lines had an increase of 16% from $120.0
million in 1998 to $138.9 million in 1999. This increase was due to increases in
business volumes, increases in purchased services in the Merchant Services
segment and additional information technology expenses. Operating expenses for
the exited business lines were $56.7 million in 1998 and $26.4 million in 1999.
Wages and other personnel expenses decreased $22.5 million, or 23%, to
$74.1 million for the nine months ended September 30, 1999, from $96.6 million
for the same period in 1998. Expenses for the exited business lines were $41.7
million for the nine months ended September 30, 1998 and $19.6 million for the
same period in 1999. Expenses for the retained business lines declined 1% from
$54.9 million in 1998 to $54.5 million in 1999. These expenses for the retained
businesses were relatively flat despite increases in business volumes primarily
due to improved productivity and other cost saving initiatives.
General and administrative expenses decreased $7.2 million, or 15%, to
$42.1 million for the nine months ended September 30, 1999, from $49.3 million
for the comparable period in 1998. This decrease is due to declines in the
exited business lines, partially offset by increased costs in the retained
business lines. Expenses for the retained businesses increased 28% from $25.6
million in 1998 to $32.7 million in 1999. This increase resulted principally
from increases in information technology expenses and increases in sales and
support services related to the Merchant Card and Outsourcing Services
operations. Expenses for the exited business lines were $23.7 million in 1998
and $9.4 million in 1999.
Depreciation and amortization expense decreased $2.7 million, or 14%,
to $17.1 million for the nine months ended September 30, 1999, from $19.8
million in the comparable period in 1998. Depreciation and amortization expense
for the exited business lines were $6.5 million in 1998 and $3.0 million in
1999. Expense for the retained business lines increased 6% from $13.3 million in
1998 to $14.1 million in 1999. This increase was due to additional investments
in property and equipment.
Net Interest Income. Net interest income increased to $2.6 million for
the nine months ended September 30, 1999 from $0.6 million for the same period
in 1998. This increase resulted from increased investment balances from the
receipt of sale proceeds from the divested businesses during the 1999 second
quarter and increases in operating receipts primarily from the Merchant Services
segment.
Tax Provision. Excluding the impact of the restructuring charges and
the impairment loss, the effective tax rate was 33.1% for the nine months ended
September 30, 1999 compared to 40.1% for the same period a year ago. The
decrease was due primarily to increases in foreign income, which is taxed at
lower rates, in the nine months ended September 30, 1999 compared to the same
period in 1998. The overall effective tax rate, inclusive of the restructuring
charges and impairment loss, was higher in 1999 due to the write off of $65.7
million of nondeductible goodwill included in the impairment loss on the exited
business lines.
15
<PAGE> 16
Net Income (Loss). A net loss of $47.9 million, or $.94 per share, was
incurred during the first nine months of 1999 compared with net income of $9.9
million, or $0.19 per share, for the comparable period of 1998. Excluding the
restructuring charges and impairment loss, net income was $22.2 million, or
$0.44 per share, for the first nine months of 1999 compared to $9.9 million, or
$0.19 per share, for the corresponding period in 1998. Net income for the
Company's retained businesses increased 27% to $21.3 million in 1999, up from
$16.7 million in 1998. Excluding the impact of the one-time settlement fee of
$4.0 million discussed above, net income for the Company's retained businesses
increased 49% from $14.3 million in 1998 to $21.3 million in 1999.
BUSINESS SEGMENT REVIEW
Selected financial information for the Company's three business
segments, Merchant Services, Travel Services and Corporate Services, is
presented in Note 6, Segment Reporting. The following is an analysis of the
Company's operations by business segment.
Merchant Services
Revenues of $66.1 million for the quarter and $213.9 million for the
nine months ended September 30, 1999 decreased 10%, or $6.4 million, and
increased $7.9 million or 4%, respectively, from the comparable 1998 periods.
Revenues for the retained Merchant Card business line increased for the
three-month period and nine-month period ended September 30, 1999 by 15%, or
$8.8 million, and 19%, or $29.7 million, respectively, due primarily to
increases in volumes, new accounts and price increases. Year-to-date operating
profit (loss) for 1999 includes an impairment and related expenses charge of
$21.1 million pre-tax due to the sale of the Check Services business line and
restructuring charges of $0.5 million pre-tax due to the closing and relocation
of a portion of the Merchant Card operating facilities. Operating profit for the
quarter and nine months ended September 30, 1998 includes a one-time settlement
fee of $4.0 million. Excluding the Check Services business line which includes
the impairment loss and excluding the one-time settlement fee in 1998, operating
profit for the three-month period and nine-month period was up 92%, or $4.4
million and 70%, or $9.6 million, respectively, relative to the same periods in
1998. Operating profits were higher for 1999 due to higher business volumes and
improved productivity and other cost saving initiatives.
Travel Services
Revenues of $12.1 million for the quarter and $35.0 for the nine months
ended September 30, 1999 decreased 1%, or $0.1 million, and 8%, or $2.9 million,
respectively, from the comparable 1998 periods due to a decline in volume and a
reduction in expenses, primarily related to the processing contract with the
Airlines Reporting Corporation (ARC). The decline in revenue was caused by the
conversion from paper to electronic reporting starting mid-1998. Because the
Company is compensated by ARC on a cost plus basis, revenue also declined as a
result of a decline in general and administrative expenses and wages and other
personnel expenses. Operating profit increased $0.3 million, or 11% for the
third quarter of 1999 to $3.0 million from $2.7 million in 1998 and declined
$0.3 million, or 4%, for the first nine months from $7.7 million in 1998 to $7.4
million in 1999.
16
<PAGE> 17
Corporate Services
Revenues of $16.6 million for the quarter and $80.3 million for the
nine months ended September 30, 1999 decreased 55%, or $20.1 million, and 27%,
or $30.0 million, respectively, from the comparable 1998 periods. For the first
nine months of 1999, Corporate Services incurred an operating loss of $42.5
million compared to an operating loss of $6.1 million for the comparable 1998
period. The 1999 period includes an impairment and related expenses charge of
$46.3 million due to the divestiture of the Freight, Payables and Remittance
business lines and restructuring charges of $1.7 million due to the closing and
relocation of a portion of the operations. Excluding the exited business lines,
revenues for the quarter ended September 30, 1999 were up 30%, or $3.8 million
due to increased business volumes, and operating profit was down 18%, or $.3
million, over the same quarter in 1998 as a result of increased operating and
general and administrative expenses. Excluding the exited business lines,
revenues for the nine months ended September 30, 1999 were up 25%, or $9.4
million, and operating profit was up 19%, or $1.0 million.
Corporate Charges
Not included in the various business lines' operating profit for
internal reporting purposes are certain Corporate charges. Corporate charges of
$3.1 million for the quarter and $6.4 million for the nine months ended
September 30, 1999, increased $0.9 million, or 39%, for the quarter ended
September 30, 1999 compared to the same period in 1998 and declined $0.1 million
or 1% for the nine months ended September 30, 1999 compared to the same period
in 1998. The increase in corporate charges for the quarter ended September 30,
1999 was due primarily to advisory and legal fees associated with the offer by
National City Corporation (NCC) to purchase all outstanding shares not owned by
NCC. This offer later expired and no shares were purchased.
SEASONALITY
The Company experiences seasonality in its businesses, particularly in
its Merchant Services and Travel Services segments. 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 include, capital expenditures,
working capital and acquisitions. 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, scanning and other document processing equipment as well
as buildings and leasehold improvements to the Juarez, Mexico and Louisville,
Kentucky operation facilities. During the nine-month period ended September 30,
l999, the Company's capital expenditures totaled $11.7 million. Such
expenditures were financed from operating cash flows, which totaled $77.7
million for the nine-month period. Operating cash flows during the nine-month
period ended
17
<PAGE> 18
September 30, 1998 totaled $67.5 million and capital expenditures were $34.4
million. The Company expects capital expenditures for the remainder of 1999 to
be $7.2 million principally to expand processing capacity and functionality in
Merchant Services and Corporate Services. 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 flows and current cash 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 $28.0
million and $91.5 million as of September 30, 1999 and December 31, 1998,
respectively.
YEAR 2000
Management initiated the process of preparing its computer systems and
applications for the Year 2000 in February 1996. This process involves
identifying and remediating date recognition problems in computer systems and
software and other operating equipment that could be caused by the date change
from December 31, 1999 to January 1, 2000.
Management has completed its assessment of all business lines that
could be affected by the Year 2000 issue. Each business process assessment
included a review of the information systems used in that process, including
related hardware and software, the involvement of any third parties, and any
affected operating equipment. To date, all of the work necessary to complete the
remediation and testing of systems within those business processes determined to
be critical for supporting the Company's core services has been completed.
Management has modified its existing business continuity plans and is
developing contingency plans to address potential risks in the event of Year
2000 failures, including non-compliance or failure by third parties. Throughout
the remainder of 1999, management will continue to monitor the Corporation's
state of readiness and will continue to work closely with significant customers,
vendors and other business counterparties to monitor their Year 2000 progress.
Efforts in the last quarter of the year will include activities related to the
ongoing preparation and management of the actual Year 2000 event.
Management believes it has an effective plan in place to manage and
resolve the Year 2000 issue in a timely manner. Despite the Company's efforts to
date to remediate affected systems and develop contingency plans for potential
failures, management continues to manage and monitor the various Year 2000
readiness risks. Under the unlikely scenario that unanticipated failures occur,
the Company could be materially adversely affected as a result of not being able
to process transactions related to its core business activities. In addition,
non-compliance by third parties and disruptions to the economy in general
resulting from Year 2000 issues could also have a negative impact of
undeterminable magnitude on the Company.
18
<PAGE> 19
The revised estimate of the total cost of the Year 2000 project is
approximately $9.5 million. The increase from the previous estimate of $8.5
million primarily relates to additional contract labor and outside consultants
utilized for additional remediation and testing efforts that were not
anticipated in the previous estimate. Approximately 20% of the estimate
represents costs related to internal personnel working on the project and
certain capitalizable costs related to replacing non-compliant hardware and
software. To date, approximately $8.8 million of the total project costs have
been incurred. During the nine months ended September 30, 1999, costs associated
with the project totaled approximately $4.0 million.
FORWARD-LOOKING STATEMENTS
The section entitled "Year 2000" contains certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995).
These forward-looking statements involve risks and uncertainties, including
changes in general economic conditions and the Company's ability to execute its
business plans, including its plan to address the Year 2000 issue and the
ability of third parties to effectively address their Year 2000 issues. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, actual results may differ materially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the market risk disclosures included
in the Company's 1998 Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings (None)
Item 2. Changes in Securities and Use of Proceeds (None)
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders (None)
Item 5. Other Information (None)
Item 6. Exhibits and Reports on Form 8-K
a. EXHIBITS
27.1 Financial Data Schedule
b. REPORTS ON FORM 8-K (NONE)
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL PROCESSING, INC.
Date: November 11, 1999
By:
Thomas A. Wimsett
President and Chief Executive Officer
(Duly Authorized Signer)
By:
David E. Fountain
Senior Vice President and Chief Financial
Officer
20
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