<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, 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 July 30,
1999 was 50,766,318.
1
<PAGE> 2
NATIONAL PROCESSING, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Six Months Ended June 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 Disclosure About Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE> 3
<TABLE>
NATIONAL PROCESSING, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands)
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 91,538 $ 7,254
Short-term investments 60,000 --
Accounts receivable-trade 75,747 104,759
Check inventory -- 2,901
Restricted deposits-client funds 7,008 91,484
Deferred tax assets 3,540 3,688
Other current assets 10,334 13,434
-------- --------
Total current assets 248,167 223,520
Property and equipment:
Furniture and equipment 77,571 116,420
Building and leasehold improvements 20,835 23,843
Software 15,688 23,537
Property leased from affiliate 4,173 4,173
Land and improvements 2,851 2,828
-------- --------
121,118 170,801
Accumulated depreciation and amortization 59,179 82,680
-------- --------
61,939 88,121
Other assets:
Goodwill, net of accumulated amortization of
$3,888 in 1999 and $14,202 in 1998 87,574 171,489
Acquired merchant portfolios 12,141 18,255
Deferred tax assets 2,764 2,764
Other assets 7,008 8,284
-------- --------
Total other assets 109,487 200,792
-------- --------
TOTAL ASSETS $419,593 $512,433
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Restricted deposits-client funds $ 7,008 $ 91,484
Accounts payable-trade 4,188 3,075
Merchant payable-check services -- 3,690
Accrued bankcard assessments 16,257 17,753
Income tax payable to NCC 44,355 4,376
Other accrued liabilities 43,842 30,729
-------- --------
Total current liabilities 115,650 151,107
Obligation under property leased from affiliate 2,188 2,264
Other long-term liabilities 796 796
Deferred tax liabilities 4,512 5,607
-------- --------
Total liabilities 123,146 159,774
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
50,644,651 shares issued and outstanding in 1999 and 1998
Contributed capital 175,799 175,799
Retained earnings 120,647 176,859
-------- --------
Total shareholders' equity 296,447 352,659
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $419,593 $512,433
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
<TABLE>
NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $109,813 $119,178 $234,276 $232,827
Operating expenses 57,314 59,624 117,811 112,075
Wages and other personnel expenses 24,059 32,577 55,155 64,599
General and administrative expenses 12,672 17,864 29,479 32,548
Restructuring charges -- -- 2,234 --
Impairment (credit) loss and related expenses (6,500) -- 67,432 --
Depreciation and amortization 4,746 6,820 11,832 13,071
-------- -------- -------- --------
OPERATING PROFIT (LOSS) 17,522 2,293 (49,667) 10,534
Net interest income 566 129 584 474
-------- -------- -------- --------
Income (loss) before income taxes 18,088 2,422 (49,083) 11,008
Provision for income taxes 6,115 852 7,129 4,528
-------- -------- -------- --------
NET INCOME (LOSS) $ 11,973 $ 1,570 $(56,212) $ 6,480
======== ======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ .24 $ .03 $ (1.11) $ .13
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
4
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NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1999 1998
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(56,212) $ 6,480
Items not requiring cash currently:
Depreciation and amortization 11,832 13,071
Restructuring charge 2,234 --
Impairment loss and related expenses 67,432 --
Loss on disposition of fixed assets 502 --
Deferred income taxes (947) 3,994
Change in current assets and liabilities:
Accounts receivable 19,881 34,490
Check inventory (1,032) 2,908
Accounts payable-trade 1,113 (1,104)
Merchant payable-check services 1,809 (3,521)
Accrued bankcard assessments (1,496) (6,108)
Income taxes payable 39,979 153
Other current assets/liabilities 528 (653)
Other, net 340 (5,541)
-------- --------
Net cash provided by operating activities 85,963 44,169
-------- --------
INVESTING ACTIVITIES
Capital expenditures (5,896) (20,274)
Proceeds from sale of fixed assets 420 --
Purchases of short-term investments (60,000) 1,188
Proceeds from sale of business lines 63,873 --
Acquisitions, net of cash acquired -- (32,797)
-------- --------
Net cash used by investing activities (1,603) (51,883)
-------- --------
FINANCING ACTIVITIES
Principal payments under property leased from affiliate (76) (187)
Net cash proceeds from exercise of stock options -- 584
-------- --------
Net cash (used) provided by financing activities (76) 397
-------- --------
Net increase (decrease) in cash and cash equivalents 84,284 (7,317)
Cash and cash equivalents, beginning of period 7,254 38,887
-------- --------
Cash and cash equivalents, end of period $ 91,538 $ 31,570
======== ========
Supplemental cash flow information:
Taxes (refunded) paid $(32,626) $ 1,015
</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.
The Company adopted the provisions of Financial Accounting Standard
Board ("FASB") Statement No. 130, Reporting Comprehensive Income, in
1998. Any differences between net income and comprehensive income are
insignificant.
2. RESTRUCTURING CHARGES
During the three-month period ended March 31, 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
June 30, 1999, the remaining liability was $1.9 million.
6
<PAGE> 7
3. SALES OF BUSINESS LINES, IMPAIRMENT LOSS AND RELATED EXPENSES
During the three-month period ended March 31, 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 approximately $19.6 million. Effective June 1, 1999,
the Company sold its Check and Remittance 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 six-month period ended June
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 June 30, 1999, the Company had approximately $8.7
million remaining related to the final obligations of these
dispositions recorded in its other accrued liabilities.
4. RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform with the
1999 presentation.
5. 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
6. 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net income (loss) $11,973 $ 1,570 $(56,212) $ 6,480
Average common shares outstanding 50,645 50,621 50,645 50,598
Net income (loss) per common share - basic $ .24 $ .03 $ (1.11) $ .13
DILUTED
Net income (loss) $11,973 $ 1,570 $(56,212) $ 6,480
Average common shares outstanding 50,645 50,621 50,645 50,598
Stock option adjustment 2 329 -- 302
Average common shares outstanding - diluted 50,647 50,950 50,645 50,900
Net income (loss) per common share - diluted $ .24 $ .03 $ (1.11) $ .13
</TABLE>
7. 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 and authorizes and collects checks 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 which expires in December 2001.
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. The business
segments are identified by the services they offer. During the second
quarter of 1999, the Company sold its Check Services, Remittance,
Payables and Freight business lines. See Note 3 for additional
information related to the disposition of 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 inter-segment revenues.
<TABLE>
<CAPTION>
(In thousands)
MERCHANT TRAVEL CORPORATE CONSOLIDATED
SERVICES SERVICES SERVICES CORPORATE TOTAL
-------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE QUARTER ENDED JUNE 30, 1999
Revenues from external customers $ 74,021 $11,640 $ 24,152 $ -- $109,813
Impairment (credit) loss and
related expenses (9,336) -- 2,836 -- (6,500)
Operating profit (loss) 17,355 2,288 (605) -- 19,038
Depreciation and amortization 2,921 595 1,230 -- 4,746
Net interest income 358 109 99 -- 566
Net operating assets (liabilities) 90,217 17,500 (2,019) 81,773 187,471
FOR THE QUARTER ENDED JUNE 30, 1998
Revenues from external customers $ 69,953 $12,944 $ 36,281 $ -- $119,178
Operating profit (loss) 6,181 2,532 (4,032) -- 4,681
Depreciation and amortization 3,110 826 2,884 -- 6,820
Net interest income (expense) 269 (148) 8 -- 129
Net operating assets 173,468 20,290 102,457 18,889 315,104
</TABLE>
<TABLE>
<CAPTION>
MERCHANT TRAVEL CORPORATE CONSOLIDATED
SERVICES SERVICES SERVICES CORPORATE TOTAL
-------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers $147,813 $22,778 $ 63,685 $ -- $234,276
Impairment loss and related expenses 21,114 -- 46,318 -- 67,432
Operating profit (loss) (6,769) 4,409 (44,041) -- (46,401)
Depreciation and amortization 6,226 1,561 4,045 -- 11,832
Net interest income 387 107 90 -- 584
Net operating assets (liabilities) 90,217 17,500 (2,019) 81,773 187,471
FOR THE SIX MONTHS ENDED JUNE 30, 1998
Revenues from external customers $133,570 $25,614 $ 73,643 $ -- $232,827
Operating profit (loss) 12,013 4,978 (2,236) -- 14,755
Depreciation and amortization 6,042 1,735 5,294 -- 13,071
Net interest income (expense) 614 (178) 37 -- 473
Net operating assets 173,468 20,290 102,457 18,889 315,104
</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 JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Operating profit:
Total operating profit for reportable segments $19,038 $4,681
General and administrative expenses - non-operating 1,516 2,388
------- ------
Consolidated operating profit $17,522 $2,293
======= ======
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
Operating profit (loss):
Total operating profit (loss) for reportable segments $(46,401) $14,755
General and administrative expenses - non-operating 3,266 4,221
-------- -------
Consolidated operating profit (loss) $(49,667) $10,534
======== =======
AS OF JUNE 30, 1999 DECEMBER 31, 1998
------------------- -----------------
Net operating assets:
Total net operating assets for reportable segments $187,471 $349,805
Cash and short-term investments 151,538 7,254
Taxes (42,562) (4,400)
-------- --------
Consolidated net operating assets $296,447 $352,659
======== ========
</TABLE>
Depreciation expense for certain corporate fixed assets is
allocated to the three segments.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Internal Use Software
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position, 98-1 Internal Use Software. This statement
requires the capitalization of costs to acquire or develop internal use
software after certain conditions are met. The Company adopted the
provisions of this Statement effective January 1, 1999. Because the
Company's previous policy was not significantly different from the
requirements of this statement, the adoption of this statement had no
significant impact on the financial position or results of operations
of the Company.
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 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 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.
On January 15, 1998, the Company acquired JBH Travel Audit, Inc., a
company which audits fees payable to travel agencies. The financial information
and related discussion included herein reflect the results of operations of this
acquisition from its acquisition date. Effective April 1, 1999, the Company sold
its Freight and Payables business lines for approximately $19.6 million.
Effective June 1, 1999, the Company sold its Check and Remittance business lines
for approximately $44.3 million.
COMPONENTS OF REVENUE AND EXPENSES
Revenues. The Company's revenues are generated from a variety of
sources. 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, and for the acceptance of
checks. 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 remittances, accounts payable and freight
bills, and for 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.
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<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 SIX MONTHS ENDED
JUNE 30 PERCENT JUNE 30 PERCENT
(In thousands, except per share amounts) 1999 1998 CHANGE 1999 1998 CHANGE
------ ------ ------- -------- ------- -------
Excluding restructuring charges and
impairment loss:
<S> <C> <C> <C> <C> <C> <C>
Pre-tax earnings $11,588 $2,424 378% $ 20,583 $11,008 87%
Taxes 3,336 852 292 6,657 4,528 47
------- ------ -------- -------
Net income 8,252 1,572 425 13,926 6,480 115
======= ====== ======== =======
Per share - diluted .16 .03 428 .27 .13 116
======= ====== ======== =======
Restructuring charges and
impairment loss:
Pre-tax earnings (loss) 6,500 -- -- (69,666) -- --
Tax (benefit) 2,779 -- -- 472 -- --
------- ------ -------- -------
After-tax earnings (loss) 3,721 -- -- (70,138) -- --
======= ====== ======== =======
Per share - diluted .08 -- -- (1.38) -- --
======= ====== ======== =======
Total:
Pre-tax earnings (loss) 18,088 2,424 646% (49,083) 11,008 --
Taxes 6,115 852 618 7,129 4,528 57%
------- ------ -------- -------
After-tax earnings (loss) 11,973 1,572 662 (56,212) 6,480 --
======= ====== ======== =======
Per share - diluted $ .24 $ .03 666 $ (1.11) $ .13 --
======= ====== ======== =======
</TABLE>
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
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0 % 100.0% 100.0 % 100.0%
Operating expenses 52.2 % 50.0% 50.3 % 48.1%
Wages and other personnel expenses 21.9 % 27.2% 23.5 % 27.8%
General and administrative expenses 11.5 % 15.0% 12.7 % 14.0%
Restructuring charges -- -- .9 % --
Impairment (credit) loss and related expenses (5.9)% -- 28.8 % --
Depreciation and amortization 4.3 % 5.7% 5.0 % 5.6%
----- ----- ----- -----
Operating profit (loss) 16.0 % 1.9% (21.2)% 4.5%
Net interest income 0.5 % 0.1% 0.2 % 0.2%
----- ----- ----- -----
Income (loss) before income taxes 16.5 % 2.0% (21.0)% 4.7%
Provision for income taxes 5.6 % 0.7% 3.0 % 1.9%
----- ----- ----- -----
Net income (loss) 10.9 % 1.3% (24.0)% 2.8%
===== ===== ===== =====
</TABLE>
12
<PAGE> 13
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues. Consolidated revenues decreased $9.4 million, or 7.9%, to
$109.8 million for the quarter ended June 30, 1999, from $119.2 million for the
comparable 1998 period. The business lines that have been exited (Freight,
Payables, Remittance and Check) had revenues of $18.5 million in the second
quarter of 1999 compared to $38.7 million for the same period in 1998. Revenues
for the Company's retained business lines (Merchant Card Services, Travel
Services and Outsourcing Services) increased 13.4% year-over-year to $91.3
million in the second quarter of 1999 from $80.5 million in the second quarter
of 1998.
Costs and Expenses. Excluding the impairment credit recorded in the
second quarter of 1999, total costs and expenses decreased $18.1 million, or
15.5%, to $98.8 million for the second quarter of 1999 compared to $116.9
million for the same period in 1998.
In the second quarter of 1999, a pre-tax credit of $6.5 million was
recorded related to the dispositions of the Freight, Payables, Remittance and
Check business lines. The credit, which totaled $3.7 million after-tax, or $0.08
per share, represents adjustments to the first quarter estimated impairment loss
for the disposition of these business lines, which were completed during the
second quarter. Further discussion regarding the divestitures is included in
Note 3 - Sale of Business Lines, Impairment Loss and Related Expenses. The
divestitures will allow the Company to focus more closely on the retained
business lines.
Operating expenses decreased $2.3 million, or 3.9%, to $57.3 million
for the quarter ended June 30, 1999 from $59.6 million for the same period in
1998. The decrease was due to declines in operating expenses for the business
lines that have been exited. Operating expenses for these business lines
decreased 48.3% from $19.0 million for the second quarter of 1998 to $9.8
million for the same period in 1999. The operating expenses of the retained
business lines increased 16.9% from $40.6 million in 1998 to $47.5 million in
1999. This increase was due to increases in revenues, increases in purchased
services in the Merchant Services segment and additional information technology
expenses. Operating expenses for 1998 included $1.4 million of a total $2.6
million write-off of internally developed software and related costs following
the cancellation of a significant customer contract in the Freight business
line. The remainder of the write-off was included in general and administrative
expenses
Wages and other personnel expenses decreased $8.5 million, or 26.1%, to
$24.1 million for the quarter ended June 30, 1999, from $32.6 million in 1998.
This decrease is due to declines in the business lines that have been exited.
Expenses for these business lines decreased 60.1% from $14.1 million for the
second quarter of 1998 to $5.6 million for the same period in 1999. Wages and
other personnel expenses for the retained business lines totaled $18.5 million
in both the second quarters of 1998 and 1999. These expenses for the retained
businesses were flat in spite of increases in revenue primarily due to attrition
and personnel cost reduction efforts put in place at the beginning of 1999.
13
<PAGE> 14
General and administrative expenses decreased $5.2 million, or 29.0%,
to $12.7 million for the quarter ended June 30, 1999, from $17.9 million in
1998. This decrease was due to declines in the business lines that have been
exited. Expenses for these business lines decreased 64.6% from $8.9 million for
the second quarter of 1998 to $3.2 million for the same period in 1999. Expenses
for the retained businesses increased 6.2% from $9.0 million in 1998 to $9.5
million in 1999. This increase resulted principally from increases in
information technology expenses, including Year 2000 expenses and increases in
sales and support services related to the Merchant and Outsourcing Services
operations. 1998 expenses included $1.2 million of the total $2.6 million
freight software write-off discussed above.
Depreciation and amortization decreased $2.1 million, or 30.4%, to $4.7
million for the quarter ended June 30, 1999, from $6.8 million in 1998. The
exited business lines had a decline of 86.2% from $2.3 million for the second
quarter of 1998 to $0.3 million for the same period in 1999. The retained
business lines had a decline of 1.6% from $4.5 million in 1998 to $4.4 million
in 1999.
Net Interest Income. The Company earned net interest of $0.6 million
for the quarter ended June 30, 1999 compared to $0.1 million in the second
quarter of 1998. This increase resulted from increased investment balances
resulting from the receipt of sale proceeds from the divested businesses and
increases in operating receipts primarily from the Merchant Services segment.
Tax Provision. Excluding the impact of the impairment credit recorded
in the second quarter of 1999, the effective tax rate was 28.8% for the second
quarter of 1999 compared to 35.2% for the same period a year ago. The decrease
was due primarily to lower tax rates on foreign income and to increases in
foreign income in the second quarter of 1999 compared to the same period in
1998.
Net Income. Net income for the second quarter was $12.0 million, or
$0.24 per share, compared to $1.6 million, or $0.03 per share, for the same
quarter in 1998. Excluding the one-time impairment credit recorded in 1999, net
income was $8.3 million, or $0.16 per share for the second quarter of 1999,
compared to $1.6 million, or $0.03 per share, for the corresponding period in
1998. Net income for the Company's retained businesses increased 63.6% to $8.5
million in the second quarter of 1999, up from $5.2 million in the second
quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Consolidated revenues increased $1.4 million, or 0.6%, to
$234.3 million for the six months ended June 30, 1999, from $232.8 million for
the comparable 1998 period. Revenues for the Company's retained business lines
(Merchant Card Services, Travel Services and Outsourcing Services) increased
14.3% year-over-year to $175.2 million for the first six months of 1999 from
$153.3 million for the same period of 1998. The exited business lines (Freight,
Payables, Remittance and Check) had revenues of $59.1 million in 1999 compared
to $79.5 million in 1998.
14
<PAGE> 15
Costs and Expenses. Excluding nonrecurring restructuring charges and
the impairment loss, total costs and expenses decreased $8.0 million, or 3.6%,
to $214.3 million for the first half of 1999 compared to $222.3 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. The divestitures will allow the Company to focus more closely on its
core business segments.
Restructuring charges totaling $2.2 million pre-tax, or $1.8 million
and $.03 per share after-tax, also 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.
Operating expenses increased $5.7 million, or 5.1%, to $117.8 million
for the six months ended June 30, 1999 from $112.1 million for the same period
in 1998. The retained business lines had an increase of 18.9% from $76.4 million
in 1998 to $90.8 million in 1999. This increase was due to increases in
revenues, increases in purchased services in the Merchant Services segment and
additional information technology expenses. Operating expenses for 1998 included
$1.4 million of a total $2.6 million write-off of internally developed software
and related costs following the cancellation of a significant customer contract
in the Freight business line. The remainder of the write-off was included in
general and administrative expenses. Operating expenses for the exited business
lines decreased 24.4% from $35.7 million in 1998 to $27.0 million in 1999.
Wages and other personnel expenses decreased $9.4 million, or 14.6%, to
$55.2 million for the six months ended June 30, 1999, from $64.6 million for the
same period in 1998. This decrease is due to declines in the exited business
lines and personnel cost reduction efforts put in place at the beginning of
1999. Expenses for the divested business lines decreased 29.2% from $28.4
million for the first half of 1998 to $20.1 million for the same period in 1999.
Expenses for the retained business lines declined 2.7% from $36.1 million in
1998 to $35.1 million in 1999. These expenses for the retained businesses were
relatively flat in spite of increases in revenue primarily due to attrition and
the personnel cost reduction efforts put in place at the beginning of 1999.
General and administrative expenses decreased $3.1 million, or 9.4%, to
$29.5 million for the six months ended June 30, 1999, from $32.5 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 exited business lines decreased 34.4% from $15.3 million
in 1998 to $10.0 million in 1999. Expenses for the retained businesses increased
13.2%
15
<PAGE> 16
from $17.2 million in 1998 to $19.5 million in 1999. This increase resulted
principally from increases in information technology expenses, including Year
2000 expenses and increases in sales and support services related to the
Merchant Card and Outsourcing Services operations. 1998 expenses included $1.2
million of the total $2.6 million freight software write-off discussed above.
Depreciation and amortization decreased $1.2 million, or 9.5%, to $11.8
million for the first half of 1999, from $13.1 million in the first half of
1998. The exited business lines had a decline of 30.5% from $4.4 million in 1998
to $3.0 million in 1999. The retained business lines had an increase of 1.1%
from $8.7 million in 1998 to $8.8 million in 1999.
Net Interest Income. Net interest income increased 23.2% to $0.6
million for the six months ended June 30, 1999 from $0.5 million for the same
period in 1998. This increase resulted from increased investment balances
resulting from the receipt of sale proceeds from the divested businesses during
the 1999 second quarter and increases in operating receipts during the same
quarter primarily from the Merchant Services segment.
Tax Provision. Excluding the impact of the restructuring charges
recorded in the first quarter of 1999 and the impairment loss recorded in the
first half of 1999, the effective tax rate was 32.3% for the first half of 1999
compared to 41.1% for the same period a year ago. The decrease was due primarily
to lower tax rates on foreign income and to increases in foreign income in the
first half of 1999 compared to the same period in 1998.
The overall effective tax rate was also impacted by the write off of
$65.7 million of nondeductible goodwill included in the impairment loss on the
exited business lines.
Net Income (Loss). A net loss of $56.2 million, or $1.11 per share, was
incurred during the first six months of 1999 compared with net income of $6.5
million, or $0.13 per share, for the similar period of 1998. Excluding the
restructuring charges and impairment loss, net income was $13.9 million, or
$0.27 per share, for the first six months of 1999 compared to $6.5 million, or
$0.13 per share, for the corresponding period in 1998. Net income for the
Company's retained businesses increased 37.9% to $12.9 million in 1999, up from
$9.3 million in 1998.
BUSINESS SEGMENT REVIEW
Selected financial information for the Company's three business
segments, Merchant Services, Travel Services and Corporate Services, is
presented in Note 7, Segment Reporting. The following is an analysis of the
Company's operations by business segment.
Merchant Services
Revenues for the three-month period ended June 30, 1999 increased 5.8%,
or $4.1 million, and increased for the six-month period ended June 30, 1999
$14.2 million or 0.6%. Revenues for the retained Merchant Card business line
increased for the three-month period and six-month period ended June 30, 1999 by
17.9%, or $9.8 million, and 20.4%, or $20.9 million, respectively, due primarily
to increases in volumes, new accounts and price increases. Year-to-date
16
<PAGE> 17
operating profit (loss) 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 Merchant Card operating facilities. Excluding the Check Services
business line, operating profit for the second quarter of 1999 was up 44.7%, or
$2.5 million over the same quarter in 1998 and was up 52.0%, or $4.7 million for
the six months ended June 30, 1999 over the same period in 1998.
Travel Services
Revenues for the quarter and six months ended June 30, 1999 decreased
10.1%, or $1.3 million, and 11.1%, or $2.8 million, respectively, due to a
decline in volume and a reduction in expenses, primarily related to processing
under the contract with the Airlines Reporting Corporation (ARC). The decline in
volume was caused by the conversion from paper to electronic ticketing and
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
declined $0.2 million, or 8.0% for the second quarter from $2.5 million in 1998
to $2.3 million in 1999 and declined $0.6 million, or 12.0%, for the first six
months from $5.0 million in 1998 to $4.4 million in 1999. The contract with ARC,
which expires in December 2001, is currently being renegotiated, and, as a
result, is expected to be extended through December 2005.
Corporate Services
Revenues for the three months and six months ended June 30, 1999 were
down 33.4%, or $12.1 million, and 13.5%, or $10.0 million, respectively,
compared to the same periods in 1998. Operating profit (loss) 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
Outsourcing Services operations. Excluding the exited business lines, revenues
and operating profit for the quarter ended June 30, 1999 were up 18.2%, or $2.3
million, and 77.7%, or $1.0 million, over the same quarter in 1998 as a result
of increased volume and pricing. Excluding the exited business lines, revenues
for the six months ended June 30, 1999 were up 15.4%, or $3.9 million, and
operating profit was down 12.5%, or $0.4 million. The decline in the operating
profit was the result of the $1.7 million restructuring charge. The retained
business line within Corporate Services is Outsourcing Services. Within this
business line, the Company performs numerous administrative and clerical
outsourcing services for over 60 major companies. These services include
operation of mailrooms, image scanning, data entry, fulfillment and database
creation services.
Corporate Charges
Not included in the various business lines' operating profit for
internal reporting purposes are certain Corporate charges. On a consolidated
basis, these charges declined $0.9 million, or 36.6%, for the quarter ended June
30, 1999 compared to the same period in 1998 and declined $1.0 million or 22.7%
for the six months ended June 30, 1999 compared to the same period in 1998.
17
<PAGE> 18
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 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, scanning and other document processing equipment as well
as buildings and leasehold improvements to the Juarez, Mexico and Louisville,
Kentucky operation facilities. During the six-month period ended June 30, l999,
the Company's capital expenditures totaled $5.9 million. Such expenditures were
principally financed from operating cash flow, which totaled approximately $86.0
million for the six-month period. Operating cash flow during the six-month
period ended June 30, 1998 totaled $44.2 million and capital expenditures were
$20.3 million. The Company expects capital expenditures for the remainder of
1999 to be approximately $9.5 million principally to enhance processing
capabilities 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
approximately $7.0 million and $91.5 million as of June 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.
18
<PAGE> 19
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 is currently working on end-to-end testing, which involves
ensuring that the Company's systems interact properly with the systems of its
significant customers, vendors and other business counter parties. To date, a
substantial portion of this work has been successfully completed. It is expected
that this testing will be finished in the third quarter of 1999.
Management believes it has an effective plan in place to resolve the
Year 2000 issue in a timely manner, and, thus far, the Company's Year 2000
remediation activities have tracked in accordance with its plan. Management has
modified its 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. Despite the Company's efforts to
date to remediate affected systems and develop contingency plans for potential
risks, 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.
The estimate of the total cost of the Year 2000 project is
approximately $8.5 million. Approximately 20% of this 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, $6.7
million of the total project costs have been incurred. During the six months
ended June 30, 1999, incremental costs associated with the project totaled
approximately $2.0 million.
FORWARD-LOOKING STATEMENTS
The sections entitled "Business Segment Review" and "Year 2000" contain
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 DISCLOSURE ABOUT MARKET RISK
There were no material changes to the market risk disclosures included
in the Company's 1998 Form 10-K.
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 26, 1999, at the Annual Shareholders Meeting of the Registrant,
shareholders took the following actions:
1. Elected as directors all nominees designated in the proxy statement of
May 10, 1999 as follows:
<TABLE>
<CAPTION>
Number of Votes
For Withheld
--- --------
<S> <C> <C>
James R. Bell, III 46,344,442 224,600
Aureliano Gonzalez-Baz 46,344,242 224,800
Preston B. Heller, Jr. 46,344,242 224,800
Robert G. Siefers 46,344,217 224,825
</TABLE>
2. Approved the selection of Ernst & Young LLP as independent auditors for
the Registrant for 1999: 46,566,942 votes cast for, 100 votes cast
against, and 2,000 votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
A. EXHIBITS
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
April 19, 1999: On April 15, 1999, the Registrant issued a press
release reporting earnings for the first quarter of fiscal year 1999.
April 23, 1999: On April 14, 1999, the Registrant issued a press
release announcing that National Processing Company ("NPC") had reached
a definitive agreement with International Payment Services, Inc. for
the sale of NPC Check Services, Inc., a wholly-owned subsidiary of NPC.
May 21, 1999: On May 3, 1999, the Registrant issued a press release
announcing that NPC had closed on the previously announced sales of its
Freight and Payables business lines. The Registrant also reported that
a press release was issued on May 6, 1999 announcing that NPC had
reached a definitive agreement with First Tennessee Bank, NA for the
sale of NPC's Remittance business line.
June 3, 1999: On June 1, 1999, the Registrant issued a press release
announcing that NPC had closed on the previously announced sales of its
Remittance and Check business lines.
20
<PAGE> 21
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: July 30, 1999 By: /s/ Jim W. Cate
------------------------------
Jim W. Cate
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ David E. Fountain
------------------------------
David E. Fountain
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
21
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