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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________to___________
COMMISSION FILE NUMBER: 1-11905
NATIONAL PROCESSING, INC.
(Exact name of Registrant as specified in its charter)
Ohio 61-1303983
(State or other jurisdiction I.R.S. Employer Identification No.)
of incorporation or organization)
1231 Durrett Lane
Louisville, Kentucky 40285-0001
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (502) 315-2000
Securities registered pursuant to Section 12(b) of the act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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 |_|
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 1999 was $29,415,190. The market value
calculation was determined using the closing sale price of the registrant's
common stock on March 23, 1999, as reported on the New York Stock Exchange.
The number of shares outstanding of the Registrant's Common Stock as of March
29, 1999 was 50,644,651.
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TABLES OF CONTENTS
Form 10-K Annual Report
Part I PAGE
----
ITEM 1. BUSINESS........................................................ 3
ITEM 2. PROPERTIES...................................................... 6
ITEM 3. LEGAL PROCEEDINGS............................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS........................................... 7
ITEM 6. SELECTED FINANCIAL DATA......................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 9
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK....... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 14
ITEM 11. EXECUTIVE COMPENSATION.......................................... 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................... 16
SIGNATURES ................................................................ 17
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PART I
ITEM 1. BUSINESS
National Processing, Inc. ("NPI", the "Company" or "Registrant"), through
its wholly owned operating subsidiary National Processing Company ("NPC"), is a
provider of low-cost high-volume transaction processing services and customized
processing solutions. Deploying technology and applications software, the
Company currently provides products and services which include (i) processing of
card transactions ("Merchant Card Services") and check transactions ("Merchant
Check Services") for merchants and other commercial businesses (collectively
known as "Merchant Services"), (ii) outsourcing of administrative and financial
functions for corporations seeking to reduce overhead costs ("Corporate
Services"), and (iii) ticket processing and settlement for providers of
travel-related services ("Travel Services").
NPI is an Ohio corporation that was formerly a wholly owned subsidiary of
National City Corporation, an Ohio-headquartered bank holding company ("National
City" or "NCC"). Following the completion of NPI's initial public offering in
August 1996, National City continued to own 85% of NPI's outstanding common
stock, without par value ("Common Stock" or "NPI Common Stock"). NPI was formed
on June 5, 1996 to hold all of the Common Stock of National Processing Company.
To effect the transaction, NPI issued 43,100,000 shares of Common Stock (after
giving retroactive effect to the 57,465.67 to 1 stock split which was effective
on June 6, 1996) to National City and National City contributed the Common Stock
of NPC (then a wholly owned subsidiary of NCC) to NPI. On August 9, 1996, NPI
sold 7,475,000 shares of its Common stock in an initial public offering;
retaining the net proceeds from the transaction to fund internal business
development needs. In May 1997, National City purchased 1,265,400 shares of
NPI's common stock in the open market and currently owns 88% of NPI's
outstanding common stock. NPI maintains operations, employees and contracts
substantially independent of National City's other operating subsidiaries. NPI
and National City are parties to agreements pursuant to which National City and
its subsidiaries provide NPI, and NPI provides National City and its
subsidiaries, certain administrative support, operations, and processing
services. NPI is also a party to a tax sharing agreement and a registration
rights agreement with National City.
Merchant Services represented approximately 60% of the Company's revenues
in 1998 and provided services to approximately 400,000 merchant locations.
Corporate Services functions include accounts payable processing, remittance
processing, freight bill audit and funds settlement services, outsourcing
services and electronic commerce products. Corporate Services represented
approximately 30% of the Company's revenues in 1998. Travel Services provides
settlement functions to the airline industry for all ticket purchases made
through travel agents in the United States. In addition to ticket payment
processing, the Company provides lift document processing services for many
airline companies. Travel Services includes electronic commission payment
solutions which are targeted primarily at travel related companies such as auto
rental agencies, hotels and cruise lines, which reduce costs and provide
management information. Travel Services accounted for approximately 10% of the
Company's revenues in 1998.
An important component of the Company's profitability has been access to
low-cost international labor markets. The Company established its initial
presence internationally with the opening of a processing facility in Juarez,
Mexico in 1988. During 1997, the Company acquired Caribbean Data services, Ltd.,
a data processing company with operating facilities in Barbados and the
Dominican Republic, and MRS Jamaica, Inc., a healthcare form processing company
with operating facilities in Jamaica. At December 31, 1998, international
operations employed approximately 63.8% of the Company's employees.
The Company announced in late 1998 and early 1999 that the Board of
Directors had authorized management to investigate potential strategic options
for various product and business lines, including the possible restructuring,
divestiture, or liquidation of certain lines. The Company's management closely
evaluated the profitability and future growth potential of the Company's various
businesses, particularly three business lines within the Corporate Services
segment and one business line within the Merchant Services segment. The
Corporate Services business lines under consideration engage in freight bill
audit and settlement services, the administration of payable functions on an
outsourcing basis for large corporations, and remittance processing. The
Merchant Services business line under consideration engages in check
authorization and guarantee activities. Since that effort began, the Company
entered into an agreement in February 1999 to sell the freight payment and
payables business lines. In addition, in March 1999, the Board of Directors
committed to the definite divestiture, either through sale or liquidation, of
the check authorization and remittance business lines. (See further discussion
of these events in the sections that follow entitled Merchant Services Segment
and the Corporate Services Segment and in Note O to the Consolidated Financial
Statements.) These actions will allow
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the Company to focus more closely on its core businesses which include merchant
card processing, outsourcing services and travel services.
The Company experiences seasonality in its businesses, particularly in its
Merchant Services and Travel Services business. 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.
The Company estimates that the average tenure of its relationships with
its 50 largest customers has been approximately ten years.
Industry Overview
The transaction processing industry has experienced strong volume growth
in recent years, as acceptance and use of credit cards, debit cards and checks
have grown, and corporations have increasingly outsourced non-core
administrative and financial functions in order to reduce costs, capitalize upon
advances in technology, and enhance the quality and availability of management
information. This growth has created considerable competition in the marketplace
which has resulted in additional focus on economies of scale. In addition to
competition, the cost of advancing technology and customer demand for a broad
product line have caused rapid consolidation among transaction processing
providers. The industry is expected to continue to grow and consolidate and to
experience continued increases in competition.
Merchant Services Segment
The Company's merchant services business consists of activities related to
merchant card processing and merchant check processing. As previously mentioned,
in the first quarter of 1999, the Company committed to divest the merchant check
business so that the Company can focus more closely on its core merchant card
processing business. This business maintains significant scale in an industry
that is still experiencing 10% to 15% organic growth.
Payment processing volume for commercial businesses has grown steadily in
recent years as a result of a proliferation in the uses and types of credit and
debit cards, wider acceptance of such cards among merchants and increased
consumer usage of such cards. Advances in payment processing and
telecommunications technology have been a key factor contributing to this
growth. The transition from paper-based to electronic processing, for example,
provides greater convenience to merchants and consumers, reduces fees charged to
merchants, and facilitates faster, more accurate settlement of payments.
The merchant card processing market is generally characterized by three
tiers of merchants consisting of national, regional, and numerous local
merchants. Historically, the Company has focused on servicing national
merchants, while many smaller transaction processors, such as Independent Sales
Organizations (ISOs) and regional banks, have offered a more limited range of
services to regional and local businesses. In October 1997, the Company
strategically expanded its card processing business through the acquisition of
approximately 80%, and in January 1998, the remaining 20%, of the common stock
of FA Holdings, Inc., the sole owner of Financial Alliance Processing Services,
Inc., an independent sales organization that specializes in selling credit and
debit card processing services to smaller merchants.
This acquisition allowed NPC to diversify its customer base (i.e., prior
to this acquisition, the Company had primarily focused on servicing national
merchants), enhance its risk management systems and, most importantly,
significantly expand its distribution capabilities. Through approximately 300
commission only sales representatives and third party distribution
relationships, the Company currently generates approximately 5,000 new merchant
applications each month.
The Company's current customer base consists of approximately 140,000
customers with over 400,000 locations, all of which are based in the United
States. No one customer contributes more than 10% to merchant card revenue. In
1998 and 1997, card processing represented approximately 77.9% and 71.2%,
respectively, and 89.4% and 79.6%, respectively, of total merchant services
revenues and operating profit.
The merchant services market is extremely competitive, which results in
pricing pressure and creates the need for continuous improvement in technology
both to satisfy customer demands and to reduce operating costs. The costs to
meet merchant requirements for improved service, satisfy the demands for
additional technology-driven applications, and the scale driven nature of the
industry have made it difficult for small scale
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transaction processors to remain competitive. As a result, the transaction
processing industry will likely continue to undergo rapid consolidation over the
next few years.
According to published industry sources, the three largest credit and
debit card transaction processors handled 51.8% of total credit and debit card
sales volume for calendar year 1997. (the Nilson Report - March, 1998). The
remaining market is highly fragmented among smaller merchant service providers.
The Company is well positioned to grow aggressively its national and regional
customer portfolios through continued expansion of direct and third party
distribution channels.
Corporate Services Segment
The Company's Corporate Services business provides outsourcing services,
remittance processing, accounts payable processing and freight bill audit and
settlement services to businesses. The corporate outsourcing marketplace is
competitive with a few relatively large providers and numerous smaller
providers. The cost advantages associated with large-scale processing, and the
ability to invest in new technology that delivers value-added services at lower
per unit costs have enabled large-scale providers to capture much of the
transaction processing and outsourcing requirements of large corporations.
Corporate Services' response to this competition has been to acquire additional
international labor infrastructure, initially in Mexico and, through 1997
acquisitions, in Dominican Republic, Barbados and Jamaica. Secondly, Corporate
Services is spending capital and management time to re-engineer processing
platforms to incorporate outsourcing services and internet technologies and to
maximize the benefit of the international labor infrastructure. These changes
are expected to position Corporate Services with a more competitive product
capability in the future.
In 1999, management committed to a plan to divest the remittance
processing, accounts payable processing and freight bill audit and settlement
services business lines so that the Company can focus more closely on its core
outsourcing services business. Collectively, the three business lines that will
be divested made up 62.4% and 77.7% of total Corporate Services revenues for
1998 and 1997, respectively. These lines had an operating loss of $12.1 million
for 1998 out of a total operating loss of $6.9 million for Corporate Services.
These lines contributed $8.1 million, or 48.5% of the total corporate services
operating profit of $16.6 million for 1997.
The remaining business within Corporate Services is outsourcing services
and represents a growing business that began in the early 1990's. Within this
business, the Company performs numerous administrative and clerical outsourcing
services for over 60 major companies. This includes operation of mailrooms,
image scanning, data entry, fulfillment and database creation services. Revenues
from outsourcing services increased $26.0 million, or 105.3%, from 1997 to 1998,
caused partly by the full year revenue recognition of two businesses acquired
during 1997. Operating profit from outsourcing services for 1998 amounted to
$5.2 million and represented 15.2% of total operating profit for the business
segments of the Company.
The market for outsourcing services continues to grow. Large companies are
outsourcing non-strategic functions within their organizations to companies such
as NPC. The Company's customers for outsourcing services include health
insurance companies, credit card issuers, airlines, transportation companies and
brokerage services. In 1998, several new customer relationships were developed
and the new sales outlook for 1999 remains attractive.
In order to remain cost competitive, the Company and many of its
competitors have moved to international locations to reduce operating expenses.
The Company has four strategic international locations in the Caribbean and
Mexico.
Travel Services Segment
The Company's Travel Services business derived approximately 76% of its
revenues in 1998 from an exclusive long-term contract with the Airlines
Reporting Corporation ("ARC"). The Company is compensated on a "cost plus" basis
under its current contract with the ARC, which expires in December 2001. That
contract is currently being renegotiated, and, as a result, is expected to be
extended through December 2005. The Company believes that there are only a few
other providers that can compete in providing high volume processing for the
travel related industries.
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Regulation
As a result of National City's ownership in NPI and as long as National
City has a controlling interest, NPI is subject to banking laws, regulations and
orders (collectively, the "Banking Laws"). For example, NPI is subject to the
supervision and examination of the Board of Governors of the Federal Reserve
System ("FRB"), one of the principal regulatory bodies having jurisdiction over
National City. The FRB reviews acquisitions and new businesses to be engaged in
by NPI, and the FRB's written approval is required in order for NPI to
consummate an acquisition. Pursuant to the Bank Holding Act, NPI shall not
engage in any activity, or own, control, or have the power to vote more than 5%
of any class of voting security of any company engaged in any activity (i) for
which the Bank Holding Act requires a bank holding company to receive prior
approval from the FRB without such approval having been obtained, or (ii) that
would cause NPI or any affiliate of NPI to violate any regulation,
administrative order, or court order made pursuant to the Bank Holding Act. If
at any time it is determined that any activity conducted by NPI or any
subsidiary does not comply with the requirements of the Bank Holding Act, NPI is
required to take all reasonable steps to cease such activity, or to divest any
ownership or control position. If National City is unable to obtain the
necessary consent or approval for any business activity substantially different
from those business activities NPI currently conducts, then NPI may not engage
in any of those new business activities or proceed with the contemplated
acquisition of a business that would engage in such new activities. NPI does not
believe, however, that either the Banking Laws or the Bank Holding Act will
impede significantly the manner in which NPI intends to conduct its business or
its product and service offerings, although there can be no assurance that the
Banking Laws or Bank Holding Act will not have such an effect.
The Company is currently engaged in check guarantee and collection
services. As such, the Company is subject to certain consumer collection laws,
orders and regulations (collectively, "Consumer Laws") and the laws of the
various states in which such activities are conducted, which among other things:
(i) require the Company to obtain and maintain certain licenses and
qualifications; (ii) limit the fees and other charges the Company is allowed to
charge; and (iii) require specified disclosures. The Company is also subject to
various other federal, state, local and foreign laws, orders and regulations
applicable to the Company's operations in the jurisdictions where it conducts
business. Where applicable, regulators and other persons are authorized to seek
remedies against entities such as the Company for violations of such laws,
including the Consumer Laws.
Through National City Bank of Kentucky, which serves as a member bank for
the Company, the Company is registered with VISA(R) and MasterCard(R) as a
certified processor and member service provider. As a result, the Company must
adhere to the standards of the VISA(R) and MasterCard(R) credit card
associations or else risk suspension or termination of its designation and/or
status. There can be no assurance that (i) VISA(R) and MasterCard(R) will
maintain the Company's registrations; (ii) the current VISA(R) and MasterCard(R)
rules allowing the Company and other nonbank transaction processors to market
and provide transaction processing services will remain in effect; or (iii)
VISA(R) and MasterCard(R) will continue to interpret their rules as they have
done in the past, which may have an impact on the Company's business operations.
Employees
As of December 31, 1998, the Company and its subsidiaries had 10,478
full-time and 308 part-time employees.
ITEM 2. PROPERTIES
The Company leases its processing facility in Louisville, Kentucky,
consisting of approximately 223,000 square feet, from National City Bank of
Kentucky, a wholly owned subsidiary of National City. (See Transactions with
Affiliates, Note E to Consolidated Financial Statements). The Company's lease
for the Louisville processing facility expires on February 28, 2019. The Company
also leases its operations center in Phoenix, Arizona. The Phoenix facility
consists of approximately 50,000 square feet for which the final lease term
expires on July 31, 1999. In an effort to improve both its operating
efficiencies and standardize its customer service levels, at the expiration of
this lease, the Company plans to consolidate significantly all of its remaining
operations in its Phoenix, AZ facility to its Louisville, KY facility. The
Company's Juarez operation owns and utilizes four properties totaling 225,000
square feet. The Company's other processing facilities have varying lease
expiration terms and range in size from 3,900 square feet to 41,300 square feet
and are located throughout the United States, Barbados, Dominican Republic,
Jamaica, and Mexico. The Company's 26 marketing and sales offices have varying
lease expiration
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terms and range in size from 100 square feet to 9,000 square feet and are
located throughout the United States. All properties leased and owned by the
Company are in good repair and suitable condition for the purposes for which
they are used. The Company periodically reviews its space requirements to
consolidate and dispose of or sublet facilities which are no longer required in
connection with its businesses and to acquire new space to meet the needs of its
businesses.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions arising in the ordinary course of business are
pending against the Company. None of the litigation pending against the Company,
individually or collectively, in the opinion of management, is expected to have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol NAP. The common stock has been quoted on the New York Stock Exchange
since August 9, 1996, the date of the initial public offering of the Company's
common stock. The quarterly high and low closing price and the final day's
closing price of the Company's common stock for each of the quarterly periods in
1998 and 1997 were:
<TABLE>
<CAPTION>
Fiscal year ended December 31, 1998 High Low Close
---- --- -----
<S> <C> <C> <C>
First Quarter $12.500 $ 9.750 $12.375
Second Quarter 12.938 9.500 10.688
Third Quarter 11.313 6.563 6.750
Fourth Quarter 7.063 5.438 5.500
<CAPTION>
Fiscal year ended December 31, 1997
<S> <C> <C> <C>
First Quarter $16.125 $ 7.875 $ 8.000
Second Quarter 11.250 6.750 10.250
Third Quarter 11.625 9.125 11.125
Fourth Quarter 11.688 9.375 9.875
</TABLE>
The number of holders of record of the Company's common stock as of March
23, 1999 was 127. The Company believes that it has significantly more than 127
beneficial holders of its common stock.
The Company has never declared or paid cash dividends on its common stock
and has no plans to pay cash dividends in the foreseeable future. The
declaration and payment of cash dividends on the Company's common stock is at
the discretion of the Company's Board of Directors and any decision to declare a
dividend will be based on a number of factors, including, but not limited to,
earnings, financial condition, borrowing covenants and other factors deemed
relevant.
The name and address of the Company's common stock transfer agent and
registrar is National City Bank, Corporate Trust Operations, Department 5352,
P.O. Box 92301, Cleveland, Ohio, 44193-0900 (1-800-622-6757).
Investors or analysts requiring further information should contact Thomas
A. Richlovsky, Investor Relations, Department 2101, P.O. Box 5756, Cleveland,
Ohio, 44101-0756 (1-216-575-2126).
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ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with the consolidated financial
statements and related notes thereto and management's discussion and analysis of
financial condition and results of operations included in Item 7.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:(1)
Revenues $ 483.2 $ 405.7 $ 373.7 $ 339.3 $ 319.5
Other Income 4.0 -- 3.9 -- --
Operating Expenses 242.5 193.4 182.3 173.4 161.9
Wages and Other Personnel Expenses 126.9 101.6 83.2 69.9 73.6
General and Administrative
Expenses 66.8 50.8 49.0 41.8 40.2
Restructuring Charge -- 13.3 -- -- --
Depreciation and
Amortization 26.8 17.8 12.8 10.4 9.6
-------- -------- -------- -------- --------
Income from Operations 24.2 28.8 50.3 43.8 34.2
Net Interest Income (Expense) .9 4.0 2.8 .6 (.6)
-------- -------- -------- -------- --------
Income Before Taxes 25.1 32.8 53.1 44.4 33.6
Provision for Income Taxes 9.8 11.7 21.7 18.6 14.3
-------- -------- -------- -------- --------
Net Income $ 15.3 $ 21.1 $ 31.4 $ 25.8 $ 19.3
======== ======== ======== ======== ========
Basic and Diluted Net Income
per Common Share (2) $ 0.30 $ 0.42 $ 0.68 $ 0.60 $ 0.45
======== ======== ======== ======== ========
Average Shares Outstanding
- diluted (2) 50.7 50.7 46.1 43.1 43.1
Balance Sheet Data:
Working Capital $ 72.4 $ 79.3 $ 178.8 $ 64.1 $ 45.6
Goodwill 171.4 170.3 70.6 72.6 73.5
Total Assets 512.4 523.3 418.6 281.3 288.4
Total Liabilities 159.8 186.4 102.9 107.3 140.2
Shareholders' Equity $ 352.7 $ 336.8 $ 315.7 $ 174.0 $ 148.2
</TABLE>
(1) The above information includes the impact of the following acquisitions
during the period presented: in December 1995, the Company acquired the
remittance processing business of First Data Resources, Inc.; on February
4, 1997, the Company acquired NTA, Inc. a freight payment processing
company; on June 18, 1997, the Company acquired the operating assets and
liabilities of Intracon, Inc., a freight payment processing company; on
June 20, 1997, the Company acquired the operating assets and liabilities
of MRS Jamaica, Inc., a healthcare form processing company; on September
30, 1997, the Company acquired Caribbean Data Services, Ltd., a data
processing company; on October 24, 1997, the Company acquired 79.6% of the
outstanding shares of FA Holdings, Inc., a debit and credit card processor
(the Company acquired the remaining outstanding shares of FA Holdings,
Inc. on January 2, 1998); on January 15, 1998, the Company acquired JBH
Travel Audit Inc., a company which audits fees payable to travel agencies.
These transactions were accounted for as purchases; accordingly, the
results of operations are included in the statements of income from the
respective acquisition dates.
(2) Net income per share for 1994 and 1995 has been calculated based on
43,100,000 shares outstanding which reflects the retroactive effect of the
57,465.67 to one stock split effective June 6, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is a 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.
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. Revenues derived from services provided to
affiliates are immaterial.
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 benefits include wages and benefits
for hourly employees. General and administrative expenses include management
salaries and benefits, facilities maintenance and software applications
programming.
Results of Operations
The following table summarized the Company's operating results and sets
forth such results as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
Operating Results:
(in millions)
<S> <C> <C> <C>
Revenues $ 483.2 $ 405.7 $ 373.7
Other Income 4.0 -- 3.9
Operating Expenses 242.5 193.4 182.3
Wages and Other Personnel Expenses 126.9 101.6 83.2
General and Administrative Expenses 66.8 50.8 49.0
Restructuring Charge -- 13.3 --
Depreciation and Amortization 26.8 17.8 12.8
------- ------- -------
Income from Operations 24.2 28.8 50.3
Net Interest Income .9 4.0 2.8
------- ------- -------
Income Before Taxes 25.1 32.8 53.1
Provision for Income Taxes 9.8 11.7 21.7
------- ------- -------
Net Income $ 15.3 $ 21.1 $ 31.4
======= ======= =======
As a Percentage of Revenues:
Revenues 100.0% 100.0% 100.0%
Other Income .8 -- 1.0
Operating Expenses 50.2 47.7 48.8
Wages and Other Personnel Expenses 26.3 25.0 22.2
General and Administrative Expenses 13.8 12.5 13.1
Restructuring Charge -- 3.3 --
Depreciation and Amortization 5.5 4.4 3.5
------- ------- -------
Income from Operations 5.0 7.1 13.4
Net Interest Income .2 1.0 .8
------- ------- -------
Income Before Taxes 5.2 8.1 14.2
Provision for Income Taxes 2.0 2.9 5.8
------- ------- -------
Net Income 3.2% 5.2% 8.4%
======= ======= =======
</TABLE>
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Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Revenues: Consolidated revenues increased $77.5 million, or 19.1% to
$483.2 million for the year ended December 31, 1998 from $405.7 million for
1997. The increase was primarily due to revenues generated from the last five
acquisitions that contributed $70.5 million. The remaining increase resulted
primarily from increases in the merchant card operations partially offset by
decreases in the remittance and merchant check operations.
The composition of the Company's revenues for these periods is as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31
1998 1997
---- ----
<S> <C> <C>
Merchant Services 59.5% 57.6%
Corporate Services 30.3% 31.1%
Travel Services 10.2% 11.3%
</TABLE>
Other Income: Other income in 1998 reflects a settlement for the
cancellation of a third party merchant card processing contract.
Costs and Expenses: Consolidated costs and expenses increased $86.2
million, or 22.9%, to $463.0 million for the year ended December 31, 1998 from
$376.8 million during 1997.
Operating expenses increased $49.1 million, or 25.4%, to $242.5 million
for the year ended December 31, 1998 from $193.4 million in 1997. The increase
was primarily due to the last six acquisitions that contributed $23.0 million
in operating expenses. The Company's core businesses reflected increases in
operating expense of $26.1 million, principally due to increased volumes and
expanded sales distribution channels, information technology and customer
services at the merchant card operations and increases at the remittance
operations due to $5.2 million for research adjustments and $2.4 million in
additional expenses due to delays in converting to its new imaging technology.
The Company's remittance operation accepts checks received on behalf of
customers and remits the funds to the customer. The research adjustments
relate to the amounts charged back by the banks to the Company for errors in
deposits, NSF checks, etc. The Company maintains an in-process inventory of
these items that it normally settles without significant charges. As a result
of problems associated with the conversion of the remittance product to a new
image based system, the in-process inventory of bank charge backs increased
over normal operating levels. Additional increases resulted from the write-off
of internally developed software and related costs following the cancellation
of a significant customer contract at the freight operations. These increases
were offset by decreases at the merchant check operations.
Wages and other personnel expenses increased $25.4 million, or 25.0%, to
$127.0 million for the year ended December 31, 1998, from $101.6 million in
1998. This increase was due primarily to the last six acquisitions that added
$29.0 million in 1998. These increases were partially offset by wage decreases
at the remittance and travel operations resulting from decreases in processing
volumes.
General and administrative expenses increased $16.0 million, or 31.7%, to
$66.8 million for the twelve months ended December 31, 1998, from $50.8 million
in 1997. This increase resulted principally from increases in information
technology expenses including $4.7 million incurred for Year 2000 compliance,
$1.2 million of the total $2.6 million freight software write-off discussed
above, and increases in sales and support services related to the company's last
three acquisitions.
Depreciation and amortization increased $9.0 million, or 50.2%, to $26.8
million for the year ended December 31, 1998, from $17.8 million in 1997. The
increase was primarily due to the amortization of intangibles and the
depreciation of fixed assets acquired in the last six acquisitions, which
contributed $6.5 million, and additional fixed asset expenditures.
Net Interest Income: The Company earned net interest income of $0.9
million for the year ended December 31, 1998 compared to $4.0 million in 1997.
This decrease resulted from decreased investment balances reflecting the cash
used for the 1997 and 1998 acquisitions.
Tax Provision: The provision for income taxes for 1998 was $9.8 million
compared to $11.7 million in 1997. The decrease resulted from the decrease in
taxable income of $7.7 million to $25.1 million. Additionally, the 1997
effective tax rate was lower than the 1998 rate due to a significant increase in
non-tax deductible goodwill amortization in 1998 resulting from 1997 and 1998
business acquisitions and due to non-taxable interest income from investments in
1997. The Company has approximately $51.0 million of state net operating loss
carryforwards for income tax purposes available to offset future taxable income
in the related states from 1999 to 2013. In 1998, the Company determined that it
was more likely than not that future taxable income would be generated in these
states sufficient to justify the deferred tax assets recorded, net of the
related valuation allowance of $2.4 million.
10
<PAGE> 11
Net Income: Excluding the 1997 restructuring charge, which totaled $8.1
million after-tax, net income for the year ended December 31, 1998 decreased
$13.9 million to $15.3 million from $29.2 million for the same period in 1997.
The decrease resulted primarily from the additional expenses for research
adjustments, the additional expenses due to delays in converting to new imaging
technology, the write-off of internally developed software and costs incurred in
conjunction with Year 2000 compliance.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Consolidated revenues increased $32.0 million, or 8.6% to $405.7
million for the year ended December 31, 1997 from $373.7 million for 1996. The
increase was primarily due to revenue gains in Merchant Services and Corporate
Services which offset a revenue decline in Travel Services. Merchant Card
Services revenue increased 6.7% in 1997 compared to 1996 due to increased
transaction volume and an increase in revenue per transaction due to a shift in
mix toward smaller volume customers. This shift in mix was in part due to the
October 1997 acquisition of FA Holdings, Inc., a credit and debit card
processing company specializing in smaller merchants. Corporate Services revenue
grew 28.2% in 1997. 67% of this growth was due to 1997 acquisitions in the
Company's freight and electronic imaging operations. The Company processed 2.8
billion transactions during 1997, representing a 7.7% transaction volume
increase over the prior year.
The composition of the Company's revenues for these periods is as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31
1997 1996
---- ----
<S> <C> <C>
Merchant Services 57.6% 59.0%
Corporate Services 31.1% 26.1%
Travel Services 11.3% 14.9%
</TABLE>
Costs and Expenses: Consolidated costs and expenses increased $49.5
million, or 15.1%, to $376.8 million for the year ended December 31, 1997 from
$327.3 million during 1996. The increase was primarily due to higher wages and
other personnel expenses within the Corporate Services operations of electronic
imaging solutions and freight, principally due to 1997 acquisitions; and higher
levels of purchased services as a result of higher business volumes and
increases in software development costs in Merchant Services.
Additional increases resulted from restructuring charges of $6.3 million
in the first quarter of 1997 related to severance pay and other costs resulting
from an organizational restructuring and $7.0 million in the fourth quarter of
1997 for the consolidation of operations and facilities following the
acquisition of FA Holdings, Inc.
Depreciation and amortization for the year ended December 31, 1997 was
$17.8 million compared to $12.8 million during 1996. This increase was primarily
due to greater expenditures on fixed assets relating to technology improvements
and increased amortization of intangibles related to the Company's 1997
acquisitions.
These increases were partially offset by lower operating costs at Travel
Services.
Net Income. Net income for the year ended December 31, 1997 decreased
32.6% to $21.1 million from $31.4 million for the year ended December 31, 1996.
The decrease resulted principally from the $8.1 million of after-tax
restructuring charges in 1997 and a 1996 $2.5 million after-tax gain on the sale
of a portfolio of merchant contracts.
Business Segment Review
Selected financial information for the Company's three business segments,
Merchant Services, Travel Services and Corporate Services, are discussed in Note
N, Segment Reporting. The following is an analysis of the Company's operations
by business segment.
Merchant Services
11
<PAGE> 12
Revenues for the year ended December 31, 1998 increased $53.8 million due
to merchant card revenue increases of $37.7 million from the FA Holdings
acquisition and additional increases at core operations, partially offset by
lower merchant check revenues from the elimination of certain unprofitable
customers and re-pricing of some continuing customers. Operating profit includes
other income of $4.0 million for a cancellation settlement of a merchant card
contract. This contract represented approximately 2% of the 1998 merchant card
revenues prior to cancellation.
Travel Services
Revenues for the year ended December 31, 1998 increased $3.5 million
primarily due to the January 1998 acquisition of JBH Travel Audit, Inc.
Operating profit was $9.9 million for the year compared to $9.0 million for
1997. This increase was also due to the acquisition of JBH Travel Audit, Inc.
and additional increases recorded at the core travel operations due to cost
savings bonuses which exceeded decreases in volumes and income from the ARC
contract.
Corporate Services
The year ended December 31, 1998 reflected an operating loss of $6.9
million compared to an operating profit of $16.6 million for 1997. The decrease
was primarily due to a $5.2 million reserve for research adjustments and
additional expenses related to the implementation of imaging technologies and
reduced revenues in remittance operations. Additional decreases resulted from a
$2.6 million write-off of internally developed software and related costs
following the cancellation in June of a significant freight customer contract.
Corporate
In March, 1997, the Company recorded expenses of $6.3 million, including
$5.0 million for severance pay for approximately 79 employees, and $1.2 million
for other costs, related to organizational restructuring. In December, 1997, the
Company recorded expenses of $7.0 million following the acquisition of FA
Holdings, Inc. The expenses resulted principally from the write-off of certain
fixed assets (totaling $5.5 million) 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 current facilities.
Liquidity and Capital Resources
The Company's primary uses of capital resources 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
Louiseville operation facilities. During the year ended December 31, 1998 the
Company's capital expenditures totaled $42.5 million. Such expenditures were
principally financed from operating cash flow, which totaled approximately
$44.6 million. Operating cash flow during the year ended December 31, 1997
totaled $34.6 million. Capital expenditures for 1997 were $28.3 million. The
Company expects capital expenditures for 1999 to be approximately $16 million
principally to enhance processing capabilities in Merchant Services and
Corporate Services.
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 flow and current cash. The Company maintains
cash balances held on behalf of clients pending distribution to vendors that are
shown on the balance sheet as assets and equivalent, offsetting liabilities.
These cash
12
<PAGE> 13
balances totaled approximately $91.5 million and $83.2 million as of December
31, 1998 and 1997, respectively. From time to time, the Company also maintains
cash deposits from certain Merchant Card Services customers as collateral for
potential contingent liabilities that are the responsibility of such customers.
At December 31, 1998 and 1997, the amount of such cash deposits was immaterial.
Year 2000
Management initiated the process of preparing its computer systems and
applications for the Year 2000 in February 1996. The 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 processes 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, 95% of the work necessary to complete the
assessment, remediation and testing of those business processes determined to be
"mission critical" has been completed. Management expects to complete the
remediation and testing of all affected systems within the critical business
processes by the end of the second quarter of 1999.
Management is also working with significant customers, vendors, and
business counter parties to monitor the progress of their Year 2000 efforts.
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 is
in the process of modifying its existing business continuity plans and is also
developing contingency plans to address potential risks in the event of Year
2000 failures, including non-compliance by third parties. Despite the Company's
efforts to date to remediate affected systems and develop contingency plans for
potential risks, management has not yet completed all activities associated with
resolving its Year 2000 issues. Under the unlikely scenario that the additional
phases are not completed, 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 material
negative impact of undeterminable magnitude on the Company.
The total cost of the Year 2000 project is estimated at $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 $4.7 million of the total
project costs have been incurred, all of which were incurred in 1998.
Forward Looking Statement
In Item 1, Business, the sections entitled Merchant Services Segment,
Corporate Services Segment and Travel Services Segment, and in Item 7, the
section entitled 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, the Company's ability to execute its business
plans, including its plan to address the Year 2000 issue, the ability of third
parties to effectively address their Year 2000 issues and the Company's ability
to carry out its plans to divest of the payables, freight, check and remittance
business lines. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, actual results may differ
materially.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk for purposes of this disclosure relates to losses due to
adverse changes in the fair value of a financial instrument caused by changes in
interest rates, foreign exchange rates or commodity prices. These exposures are
considered immaterial to the Company's financial position, results of
operations, and cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements at Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11.
EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT; ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Compensation of Directors
Members of the board of directors of NPI who are not officers of National
City, NPI or any of their subsidiaries ("Outside Directors"), receive a yearly
retainer, payable in quarterly installments, and a fee for each meeting of the
board, and each committee thereof, which they attend. The yearly retainer is
$12,000. The fee for attendance at any board meeting or any committee meeting is
$1,000. The chairperson of each committee receives a fee of $500 for each
meeting of that committee attended by that chairperson. In addition, each
non-affiliated director is awarded options to purchase 2,500 shares of NPI
Common on the first Friday following each annual meeting of NPI's shareholders,
with an exercise price equal to the market value as of the date of such first
Friday.
Pursuant to the NPI Nonemployee Directors Stock Option Plan, Messrs.
Cotsakos, Gonzalez-Baz, and Heller each received in 1998 non-qualified stock
options to purchase 2,500 shares of NPI Common at 100% of the fair market value
as of the date upon which those options were granted.
Directors
NPI's board of directors is comprised of seven individuals, four of whom
are classified as Class I directors, and three of whom are classified as Class
II directors. Each class of directors has a two-year term of office.
Accordingly, the term of office of the Class I directors, which began upon the
due election and qualification of those directors at the 1997 Annual Meeting of
Shareholders, will expire upon the due election and qualification of their
respective successors at the 1999 Annual Meeting. The term of office of the
Class II directors, which began upon the due election and qualification of those
directors at the 1998 Annual Meeting of Shareholders, will expire upon the due
election and qualification of their respective successors at the 2000 Annual
Meeting of Shareholders.
The following material contains biographical information concerning each
director, including recent employment, positions with NPI, other directorships,
age, and the number of shares of NPI Common beneficially owned, all as of
February 28, 1999. Unless otherwise indicated, the directors and nominees have
sole voting and investment power with respect to NPI's securities shown to be
owned by each.
CLASS I DIRECTORS WHOSE TERMS CONTINUE UNTIL THE 1999 ANNUAL MEETING OF
SHAREHOLDERS
JAMES R. BELL, III, Executive Vice President of National
City, since 1996. Executive Vice President of Retail
Sales and Distribution of National City, since 1998.
President and Chief Executive Officer of National City
Bank of Kentucky, a commercial bank, from 1996 to 1998.
Vice Chairman of National City Bank of Kentucky from
1995 to 1996 and Executive Vice President of National
City Bank of Kentucky from 1994 to 1995. Director of NPI
since 1996. Age: 42. Shares of NPI Common owned: 3,030.
AURELIANO GONZALEZ-BAZ, Partner in Bryan Gonzalez Vargas
y Gonzalez-Baz, a full service law firm, since 1974.
Director of NPI since 1996. Chairman of the Audit
Committee and member of the Compensation Committee. Age:
51. Shares of NPI Common owned: 0; options exercisable
within 60 days: 17,499.
PRESTON B. HELLER, Jr., Retired as Chairman, Chief
Executive Officer and President of Pioneer-Standard
Electronics, Inc., an industrial distributor of
electronics and computer products, during 1996. Prior to
that time he served as Chairman and Chief Executive
Officer from 1992 to 1995. Director of NPI since 1996.
Member of the Audit Committee and the Compensation
Committee. Age: 69. Shares of NPI Common owned: 4,500;
options exercisable within 60 days: 17,499.
ROBERT G. SIEFERS, Chairman of the Board of NPI since
May, 1997. Vice Chairman and Chief Financial Officer of
National City since August, 1997. Executive Vice
President and Chief Financial Officer of National City
from 1991 to August, 1997. Director of NPI since 1996.
Age: 53. Shares of NPI Common owned: 10,000.
CLASS II DIRECTORS WHOSE TERMS CONTINUE UNTIL THE 2000 ANNUAL MEETING
OF SHAREHOLDERS
CHRISTOS M. COTSAKOS, President and Chief Executive
Officer of E*TRADE Group, Inc., an electronic commerce
company, since 1996. President and Co-Chief Executive
Officer of A. C. Nielsen, Inc. from 1992 to 1995.
Director of NPI since 1996. Chairman of the Compensation
Committee and member of the Audit Committee. Age: 50.
Shares of NPI Common owned: 11,100; options exercisable
within 60 days: 17,499.
JEFFREY D. KELLY, Executive Vice President of National
City since 1994. Senior Vice President of National City
from 1990 to 1994. Age: 45. Shares of NPI owned: 1,000.
ROBERT E. SHOWALTER, President and Chief Executive
Officer of NPI since March 1997. President and Chief
Executive Officer of National City Bank, Northeast from
1995 to 1997 and President and Chief Executive Officer
of National City Bank, Northwest from 1991 to 1995.
Director of NPI since 1997. Age: 62. Shares of NPI
Common owned: 45,200; options exercisable within 60
days: 133,334.
REMUNERATION OF EXECUTIVE OFFICERS
AND TRANSACTIONS WITH MANAGEMENT
Executive Compensation
(a) Compensation. The following table sets forth, together with certain
other information, the compensation earned during the fiscal year ended December
31, 1998 by (i) Robert E. Showalter, who served as President and Chief Executive
Officer of NPI during March, 1998 (ii) the four most highly compensated
executive officers (other than the President and Chief Executive Officer) of
National Processing and its subsidiaries, and (iii) John J. Leehy, III who, but
for the fact that he was not serving as an executive officer of National
Processing at the end of 1998 would have been among the four most highly
compensated executive officers (other than the President and Chief Executive
Officer) who were serving as executive officers of National Processing at the
end of 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Securities
Restricted Underlying All
Other Stock Options/ Other
Name and Principal Bonus Annual Award(s) SARs LTIP Comp
Position Year Salary($) ($) Comp($) ($) (#)(6) Payouts($) ($)(7)
-------- ---- --------- --- ------- --- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert E. Showalter(1) 1998 $ 320,833 $ 0 $ 0 $ 0 70,571 $140,923 $ 48,343
President and 1997 $ 284,792 $ 216,000 $ 0 $ 0 226,481 $ 45,753 $ 31,706
Chief Executive Officer 1996 $ $ $ $ $ $
Robert E. Johnson(2) 1998 $ 173,183 $ 66,000 $ 0 $ 0 25,000 $ 0 $ 24,483
Executive Vice President 1997 $ 168,683 $ 24,350 $ 0 $ 0 75,000 $ 0 $ 21,636
1996 $ 165,667 $ 71,638 $ 0 $ 0 100,000 $ 0 $ 21,551
Donald J. Kenney(3) 1998 $ 226,154 $ 0 $ 0 $ 0 125,000 $ 0 $ 11,308
Executive Vice President 1997 $ $ $ $ $ $
1996 $ $ $ $ $ $
John J. Leehy, III(4) 1998 $ 200,000 $ 0 $ 0 $ 0 0 $ 0 $ 10,000
1997 $ 38,351 $ 0 $ 0 $ 0 100,000 $ 0 $ 0
1996 $ $ $ $ $
Gregory W. Sahrmann(5) 1998 $ 191,667 $ 42,000 $ 0 $ 0 75,000 $ 0 $ 9,611
1997 $ 36,215 $ 0 $ 0 $ 0 50,000 $ 0 $ 0
1996 $ $ $ $ $ $
Thomas A. Wimsett 1998 $ 183,333 $ 0 $ 0 $ 0 25,000 $ 0 $ 21,117
Executive Vice President 1997 $ 170,000 $ 77,700 $ 0 $ 0 100,000 $ 0 $ 24,600
1996 $ 152,500 $ 84,700 $ 0 $ 0 100,000 $ 0 $ 11,938
</TABLE>
(1) Robert E. Showalter was elected President and Chief Executive Officer of
NPI during March, 1997.
(2) Robert E. Johnson resigned as Executive Vice President of NPI effective as
of March 31, 1999.
(3) Donald J. Kenney was elected Executive Vice President of NPI on March 31,
1998.
(4) John J. Leehy, III joined NPI on October 24, 1997.
(5) Gregory W. Sahrmann joined NPI on October 24, 1997. He resigned as
Executive Vice President of NPI effective as of December 31, 1998.
(6) The Securities Underlying Options/SARS pertain to options to purchase
shares of NPI Common with the exception of Robert E. Showalter who
received options to purchase 20,571 shares of National City Common Stock,
par value $4.00 per share ("National City Common") and options to purchase
50,000 shares of NPI Common.
(7) All Other Compensation includes the Executive Savings Plan and the Savings
and Investment Plan matching and profit-sharing components together with
premiums paid by NPI in connection with split dollar insurance contracts,
but does not include retirement accruals as these are not calculable. For
the year 1998, each of the named executive officers were credited with the
following matching and profit-sharing amount under the Savings and
Investment Plan: Robert E. Showalter, $11,130; Robert E. Johnson, $11,002;
Donald J. Kenney, $6,308; John J. Leehy, III, $$6,250; Gregory W.
Sahrmann, $6,314; and Thomas A. Wimsett, $4,750. The named executive
officers were credited with the following match and profit-sharing amount
under the Executive Savings Plan during the year 1998; Robert E.
Showalter, $19,151; Robert E. Johnson, $7,309; Donald J. Kenney, $5,000;
John J. Leehy, III, $3,750; Gregory W. Sahrmann, $3,297; and Thomas A.
Wimsett, $16,367. All other compensation also includes the following
amounts equal to the full dollar value of the remainder of the premiums
paid by NPI in connection with life insurance policies issued pursuant to
the Split Dollar Life Insurance Agreements between National City and the
following named executive officers during 1998, respectively, as
applicable: Robert E. Showalter, $18,062; Robert E. Johnson, $6,172;
Donald J. Kenney, $0; John J. Leehy, III, $0; Gregory W. Sahrmann, $0; and
Thomas A. Wimsett, $0;. The premiums paid by NPI in connection with the
life insurance policies issued pursuant to such Split Dollar Life
Insurance Agreements, set forth in the preceding sentence, generally will
be recovered in full by NPI upon the cancellation or purchase by a named
executive officer of any such life insurance policy or the payment of any
death benefits under any such life insurance policy.
(b) Options. The following table provides information on options to
acquire National City Common and NPI Common granted during 1998 to the named
executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or Grant Date
Options/SARs Employees in Base Price Expiration Present
Name Granted(#) Fiscal Year(1) ($/sh) Date Value($)
---- ---------- -------------- ------ ---- --------
<S> <C> <C> <C> <C> <C>
Robert E. Showalter 50,000 (2) 6.22% $11.813 5/21/08 $347,000(6)
1,472 (3) 7.16% 67.875 7/28/08 16,531(7)
8,528 (4) 41.46% 67.875 7/28/08 95,769(7)
4,517 (5) 21.96% 69.002 7/22/06 51,584(7)
6,054 (5) 29.43% 69.062 7/28/07 69,137(7)
Robert E. Johnson(8) 25,000 (2) 3.11% 11.813 5/21/08 173,500(6)
Donald J. Kenney 100,000 (2) 12.45% 12.375 3/31/08 727,000(6)
25,000 (2) 3.11% 11.813 5/21/08 173,500(6)
John J. Leehy, III 0 0%
Gregory W. Sahrmann(9) 75,000 9.34% 11.813 5/21/08 520,500(6)
Thomas A. Wimsett 25,000 (2) 3.11% 11.813 5/21/08 173,500(6)
</TABLE>
(1) NPI granted options representing 803,300 shares to NPI employees during
1998. National City granted options representing 20,571 shares to NPI
employees during 1998.
(2) Options are options to acquire NPI Common. All such options are
non-qualified stock options. Subject to the named individual remaining in
the continuous employment of NPI, the options become exercisable 33%
annually beginning one year from the date of grant and expire not later
than 10 years from the date of grant.
(3) Options are incentive stock options to acquire National City Common. One
half of each option grant becomes exercisable one year after the date of
the grant and the remainder becomes exercisable on the second anniversary
of the grant. For incentive stock options a further restriction is placed
on the exercise of options such that the maximum number of shares of
National City Common which become initially available for purchase under
all post-1986 incentive stock option grants from National City in any
calendar year shall be limited to that number of shares the aggregate
exercise price of which does not exceed $100,000. Additional Option rights
are attached to each option and Additional Options will be granted upon
exercise, subject to certain provisions, if the exercise price or the
related tax obligation is paid using shares of National City Common owned
by the optionee.
(4) Options are non-qualified stock options to acquire National City Common.
One-half of each option grant becomes exercisable one year after the date
of grant and the remainder becomes exercisable on the second anniversary
of the grant. The options have a contractual term of 10 years. Additional
Option rights are attached to each option and Additional Options will be
granted upon exercise, subject to certain provisions, if the exercise
price or the related tax obligation is paid using shares of National City
Common owned by the optionee.
(5) Options are Additional Options as defined in the Amended and Restated
National City Corporation 1993 Stock Option Plan ("Additional Options") to
acquire National City Common. Additional Options are granted at the market
price of National City Common on the date of grant and become exercisable
6 months after the date of grant. They have a contractual term equal to
the remaining term of the original option.
(6) In accordance with Securities and Exchange Commission rules, the
Black-Scholes pricing model was used to estimate the Grant Date Present
Value. The values indicated were calculated using the following
assumptions: (i) an expected volatility of .492, (ii) an expected dividend
yield of 0%, (iii) a risk-free interest rate at the date of grant of
5.97%, (iv) an expected option life of 7 years, and (v) no discounts for
non-transferability or risk of forfeiture. The estimated values have been
included solely for purposes of disclosure in accordance with the rules of
the Securities and Exchange Commission and represent theoretical values.
The actual value, if any, an executive may realize will depend upon the
increase in the market price of NPI Common through the date of exercise.
Such an increase would benefit all shareholders of NPI.
(7) In accordance with Securities and Exchange Commission rules, the
Black-Scholes pricing model was used to estimate the Grant Date Present
Value. The values indicated were calculated using the following
assumptions: (i) an expected volatility of .208, (ii) an expected dividend
yield of 3.00%, (iii) the risk-free interest rate at the date of grant
based upon a term equal to the expected life of the option of 4.539%, (iv)
an expected option life equal to the anticipated period of time from date
of grant to exercise of 3.9 years, and (v) no discounts for
non-transferability or risk of forfeiture. The estimated values have been
included solely for purposes of disclosure in accordance with the rules of
the Securities and Exchange Commission and represent theoretical values.
The actual value, if any, an executive may realize will depend upon the
increase in the market price of National City Common through the date of
exercise. Such an increase would benefit all stockholders of National
City.
(8) Robert E. Johnson resigned as Executive Vice President of NPI effective as
of March 31, 1999. Under the terms of Mr. Johnson's resignation, Mr.
Johnson's NPI options will terminate on March 31, 2001.
(9) Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
as of December 31, 1998. Under the terms of the Stock Option Agreement
pursuant to which Mr. Sahrmann's options were granted, Mr. Sahrmann's
options terminated unexercised upon his resignation.
The following table sets forth the stock options for National City Common
and NPI Common exercised by each of the named executive officers during the
calendar year 1998 and the December 31, 1998 value of all unexercised options
for National City Common and NPI Common held by the named executive officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
Shares at 12/31/98 at 12/31/98
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($)(1) Unexercisable Unexercisable
---- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Robert E. Showalter 19,991(2) $403,508.31(2) 49,800/34,700(2) $1,900,882.04/$299,772.94(4)
0(3) 0(3) 66,667/183,333(3) $0.00/$0.00(5)
Robert E. Johnson(6) 0(2) 0(2) 14,300/100(2) $662,660.00/$4,312.50(4)
0(3) 0(3) 91,667/108,333(3) $0.00/$0.00(5)
Donald J. Kenney 0(2) 0(2) 64,260/0(2) $3,546,657.90/$0.00(4)
0(3) 0(3) 0/125,000(3) $0.00/$0.00(5)
John J. Leehy, III 0(2) 0(2) 0/0(2) $0.00/$0.00(4)
0(3) 0(3) 33,333/0(3) $0.00/$0.00(5)
Gregory W. Sahrmann(7) 0(2) 0(2) 0/0(2) $0.00/$0.00(4)
0(3) 0(3) 0/0(3) $0.00/$0.00(5)
Thomas A. Wimsett 0(2) 0(2) 6,400/100(2) $282,587.50/$4,312.50(4)
0(3) 0(3) 100,001/124,999(3) $0.00/$0.00(5)
</TABLE>
(1) The "Value Realized" is equal to the difference of the fair market value
on the date of exercise less the option exercise price.
(2) Pertains to options to purchase shares of National City Common.
(3) Pertains to options to purchase shares of NPI Common.
(4) The "Value of Unexercised In-The-Money Options/SARs at 12/31/98" is equal
to the difference (in no case less than zero) of the closing price of
National City Common on December 31, 1998, which was $72.50, less the
option/SAR exercise price.
(5) The "Value of Unexercised In-the-Money-Options/SARs at 12/31/98" is equal
to the difference (in no case less than zero) of the closing price of NPI
Common on December 31, 1998, which was $5.50, less the option/SAR exercise
price.
(6) Robert E. Johnson resigned as Executive Vice President of NPI effective as
of March 31, 1999.
(7) Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
as of December 31, 1998.
The following table provides information on the awards of long-term
incentive plan participation during the year 1998.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Estimated Future Payouts under
Performance Non-Stock
Number of or Other Price-Based Plans(3)
Shares, Units Period Until ----------------------------------
or Other Maturation or Threshold Target Maximum
Name Rights(#)(1) Payout(2) ($) ($) ($)
---- ------------ --------- --- --- ---
<S> <C> <C> <C> <C> <C>
Robert E. Showalter N/A December 31, 2001 64,547 107,579 215,158
Robert E. Johnson(4) N/A December 31, 2000 0 0 0
Donald J. Kenney N/A December 31, 2000 37,830 63,050 126,100
John J. Leehy, III N/A December 31, 2000 0 0 0
Gregory W. Sahrmann(5) N/A December 31, 2000 0 0 0
Thomas A. Wimsett N/A December 31, 2000 25,220 42,033 84,067
</TABLE>
(1) Awards are cash awards based on a percentage of the individual's base pay.
No shares or other rights are granted.
(2) Mr. Showalter participates in the National City Corporation Long-Term
Incentive Compensation Plan. His award is based on a three-year cycle
starting 1/1/99 and ending 12/31/01. All other awards were made under the
NPI Company Long-Term Incentive Compensation Plan, and are based on a
three-year cycle commencing 1/1/98 and ending 12/31/00. Mr. Wimsett was
awarded the opportunity to participate in the next three-year cycle of the
NPI Company Long-Term Incentive Compensation Plan. Under either plan,
payouts occur only at the end of the cycle.
(3) In the case of Mr. Showalter, the payout is a percentage of his average
annual salary for the three-year cycle, determined on the basis of
National City's ranking, according to increase in total shareholder return
over the three-year cycle, relative to a peer group comprised of
high-performing banking companies. In all other cases, the payout is a
percentage of the participant's average annual salary for the three-year
cycle, determined on the basis of NPI's compound growth rate in earnings
over the three-year cycle.
(4) Robert E. Johnson resigned as Executive Vice President of NPI effective
March 31, 1999. Under the terms of the National Processing Company
Long-Term Incentive Compensation Plan, participants who resign prior to
the end of a three-year cycle are not entitled to any award under the plan
for that cycle. Accordingly, the estimated future payouts to Mr. Johnson
for the three-year cycle commencing January 1, 1999 are zero.
(5) Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
as of December 31, 1998. Under the terms of the NPI Company Long-Term
Incentive Compensation Plan, participants who resign prior to the end of a
three-year cycle are not entitled to any award under the plan for that
cycle. Accordingly, the estimated future payouts to Mr. Sahrmann for the
three-year cycle commencing January 1, 1998 are zero.
The value of benefits paid or furnished by NPI in 1998 to executive
officers, other than those included in the preceding table, are less than the
amounts required to be disclosed pursuant to the Exchange Act.
DESCRIPTION OF NPI'S COMPENSATION AND BENEFIT PLANS
Savings Plan. NPI participates in the National City Savings and Investment
Plan (the "Savings Plan"). The Savings Plan is a qualified salary reduction
profit-sharing plan within the meaning of Section 401(k) of the Code. Under the
Savings Plan as amended, all eligible employees (generally, an eligible employee
is one who has completed one year of continuous service, is 21 years of age or
older and has completed 1,000 hours of service) of NPI and its adopting
subsidiaries may participate in the Savings Plan by directing their employers to
make Before-Tax Contributions (as defined in the Savings Plan) to the Savings
Plan Trust (the "Trust") for their accounts and to reduce their compensation by
an equal amount. Contributions may be directed in any whole percentage between
1% and 10% of the employee's base compensation. The employers also make
contributions to the Trust ("Matching Employer Contributions") in an amount
equal to the Matching Employer Contribution percentage then in effect (the
Matching Employer Contribution percentage is currently an amount equal to 100%
of the first 3% of the employee's pay contributed as a Before-Tax Contribution,
plus 50% of the next 4% of the employee's pay similarly contributed as a
Before-Tax Contribution, with no further Matching Employer Contribution for any
additional pay contributed as a Before-Tax Contribution). Amounts contributed
pursuant to the Savings Plan may be invested in certain investment choices.
Before-Tax Contributions and Matching Employer Contributions are fully vested at
all times.
During 1997, the Savings Plan had a profit-sharing feature based upon
National City's profitability, as measured by the percentage return on common
equity ("ROE") from year to year. The profit-sharing contribution was in
addition to the regular Matching Employer Contributions described above. The
additional amount of this profit-sharing contribution in any year was dependent
upon National City's ROE for that year and ranged, in five-cent increments from
no additional contribution, if a minimum ROE of 12% was not attained, to a
maximum of 50 cents for each $1.00 of an individual's Before-Tax Contributions
for the year if National City's ROE was equal to or greater than 18.5%. In 1997,
National City's ROE was 18.53%, which resulted in National City contributing 50
cents for each $1.00 of an individual's Before-Tax Contribution as a
profit-sharing contribution for the year 1997. The profit-sharing contribution
for the year 1998 was made in February, 1999.
Effective January 1, 1998, the profit-sharing contribution for any year,
commencing with 1998, will be determined on the basis of the reported growth in
National City's earnings per share ("EPS") since the end of the immediately
preceding year. Under the Savings Plan, the amount of the profit sharing
contribution for any year, commencing in 1998, will range, in five cent
increments, from zero, if growth in National City's reported EPS since the end
of the immediately preceding year is less than 8%, to a maximum of 50 cents for
each $1.00 of an individual's Before-Tax Contributions for that year if growth
in National City's reported EPS since the end of the immediately preceding year
is equal to or greater than 14.01%. The profit-sharing contribution for each
year will be made during the immediately succeeding year. Any profit-sharing
contribution will be in addition to any Regular Matching Employer Contributions.
Executive Plan. NPI participates in the National City Executive Savings
Plan (the "Executive Plan"). The Executive Plan is a non-qualified salary
reduction profit-sharing plan, similar to the Savings Plan. The Executive Plan
is to supplement the Savings Plan with respect to employee Before-Tax
Contributions and the attendant Matching Employer Contributions which, by reason
of an individual's annual compensation, would not be otherwise allowed because
of the annual maximum limit of the Code or because of the application, under the
Code, of actual deferral percentage testing against prohibited excessive
deferrals by highly compensated employees. The Executive Plan is substantially
similar to the Savings Plan as to amounts of employee Before-Tax Contributions
and Matching Employer Contributions.
Participants in the Executive Plan are limited to those key officers of
NPI or its subsidiaries who may be designated from time to time by the
Compensation Committee. The benefits of the Executive Plan are without regard to
any limitation imposed by the Code, or any other applicable law limiting the
amount payable under a qualified plan (such as the Savings Plan), and represent
unfunded general obligations of NPI. Portions of such benefits are subject to
certain provisions for forfeiture as set forth in the Executive Plan.
Directors of NPI or its subsidiaries who are not also employees of NPI,
National City or any of their subsidiaries are not eligible to participate in
the Savings Plan or the Executive Plan.
National Processing Company Long-Term Incentive Compensation Plan. The
National Processing Company Long-Term Incentive Compensation Plan (the
"Long-Term Plan") for Senior Officers focuses on maximizing returns to
shareholders and promotes the long-term profitability and success of NPI by
providing an incentive to those key executives who are primarily responsible
for such profitability and success.
The Long-Term Plan is administered by the Compensation Committee. Awards
are based on the earnings of NPI over a three-year cycle commencing on January 1
of each fiscal year. Each new fiscal year begins a new three-year plan cycle.
Awards under the Long-Term Plan are based on the attainment of goals over a
three-year plan cycle. Participants for plan cycles commencing on or before
January 1, 1997 may receive either a target award or a maximum award expressed
in either case as a percentage of average annual salary for the plan cycle and
determined on the basis of NPI's compound growth rate in earnings over the plan
cycle. If NPI has attained a compound growth rate in earnings of 10% over the
plan cycle, then each participant for that plan cycle shall receive the target
award. If NPI has attained a compound growth rate in earnings of 15% or more
over the plan cycle, then each participant for that plan cycle shall receive the
maximum award. In the event that NPI's compound growth rate in earnings over the
plan cycle is greater than 10% but less than 15%, the award for the plan cycle
shall be pro-rated.
Participants for plan cycles commencing on or after January 1, 1998 may
receive a threshold award, a target award or a maximum award expressed in each
case as a percentage of average annual salary for the plan cycle and determined
on the basis of NPI's ranking, according to increase in total shareholder return
over the plan cycle, relative to a peer group comprised of comparable
corporations. Prior to the beginning of each such plan cycle, the Compensation
Committee establishes threshold award, target award, and maximum award
performance levels for the plan cycle, against which NPI total stockholder
return for the plan cycle shall be compared to other members of a peer group
based on ranking of plan cycle results of NPI and members of the peer group. At
the same time, the Compensation Committee determines membership in the peer
group for the plan cycle, which is comprised of a group of comparable
corporations.
Amounts awarded under the Long-Term Plan may be in cash, in unfunded
future benefits, or a combination thereof. With the exception of the cash award,
awards are not funded, but simply remain contractual liabilities of NPI and are
subject to payment upon the recipient's termination of employment with NPI or
its subsidiaries. Generally, these unfunded benefits, together with earnings
thereon, are payable to the former officer, his beneficiary, or his estate on an
installment basis over 10 years. Unfunded future benefits awards are considered
as invested in the funds described in the Savings Plan or as directed by the
recipient from time to time in the equivalent of a savings account and are
subject to the gains or losses on those investments.
The Long-Term Plan provides that, if a change in control of NPI shall
occur, then the implementation date of that change in control shall be the last
day of all then current plan cycles, and no further plan cycles shall commence.
The award of each participant in the Long-Term Plan for any then current plan
cycle in which such participant participates shall be payable in cash to the
participant within five business days after the implementation date of the
change in control, and shall be in an amount equal to the participant's maximum
award for that plan cycle multiplied by a fraction the numerator of which is the
number of full months completed since the beginning of that plan cycle and the
denominator of which is thirty-six. In adopting this plan, it was felt this
change in control provision was appropriate in that those individuals previously
charged with providing superior total returns to the shareholders of NPI would
no longer be in the same position to guide the affairs of NPI as they were prior
to the event constituting a change in control. Furthermore, following change in
control of NPI, no further performance comparisons could be made.
Directors of NPI or its subsidiaries who are not also employees of NPI or
its subsidiaries are not eligible to participate in the Long-Term Plan.
National Processing Company Short-Term Incentive Compensation Plan. The
National Processing Company Short-Term Incentive Compensation Plan for Senior
Officers (the "Short-Term Plan") focuses on the short-term goals achieved by the
individual participant, NPI's results and in some cases, National City's
financial results. Under this plan, awards can be granted to any senior officer
of NPI, or to other officers of NPI or its subsidiaries as may be designated
from time to time by the Compensation Committee. Each participant in the
Short-Term Plan is evaluated annually with respect to performance on approved
objectives. Awards are based on individual results and can range from 0% to 70%
of the recipient's base salary in effect at the close of the year for which the
evaluation is made. Awards under this plan are paid or credited no later than
the end of first quarter of the following year.
Amounts awarded under the Short-Term Plan may be in cash, in unfunded
future benefits, or a combination thereof. With the exception of the cash award,
awards are not funded, but simply remain contractual liabilities of NPI and are
subject to payment upon the recipient's termination of employment with NPI and
its subsidiaries. Generally, these unfunded benefits, together with earnings
thereon, are payable to the former officer, his beneficiary, or his estate on an
installment basis over 10 years. Unfunded future benefits awards are considered
as invested as directed by the recipient from time to time, in funds described
in the Savings Plan or in the equivalent of a savings account and are subject to
the gains or losses on those investments.
In the event of a change in control, the Short-Term Plan provides that
each participant will be paid at the effective time of the change in control,
the maximum benefit the participant is entitled to receive under the Short-Term
Plan.
Stock Option Plan. The NPI 1996 Stock Option Plan (the "Option Plan")
generally provides for the granting of options to purchase shares of NPI Common.
The options are non-qualified options which are not intended to qualify as
Incentive Stock Options under Section 422 of the Code.
The Option Plan provides for an additional stock option grant (an
"Additional Option") when the employee has used previously owned NPI Common to
pay the exercise price of an original option grant (a swap transaction) or to
pay the amount to be withheld under applicable federal, state and local income
tax laws in connection with the exercise of an option. The additional option
feature typically encourages an employee to exercise the option grant earlier
than if the feature were not present, thereby increasing the employee's level of
equity ownership. Each Additional Option's termination date is the same as the
termination of the option that originally had the additional option feature. Its
option price is the market price at the time of the exercise of the original
option. An Additional Option is not provided upon exercise of an Additional
Option unless the board of directors directs otherwise. This feature supports
NPI's focus on increased equity ownership. The Option Plan also allows for the
granting of Appreciation Rights, but only in tandem with stock options
previously granted or contemporaneously being granted.
Under the Option Plan, no options may be granted at less than 100% of the
market value of NPI Common on the date of the grant of the option. Stock option
awards are based on current individual performance. Previous awards are not
considered except for assuring the plan maximums are not exceeded.
Agreements with Executives. Certain key executive officers of NPI have
employment agreements (the "Employment Agreements") with National Processing
Company ("NPC"), a subsidiary of NPI. Each of the Employment Agreements provides
for a minimum annual base salary that does not differ materially from the
amounts shown as salary in the Summary Compensation Table. The Employment
Agreements generally provide that if the executive officer subject thereto is
terminated for any reason other than the executive officer's violation of the
contract, an amount equal to the officer's base pay will be paid in monthly
installments, for either one or two years after termination, depending on the
position held. The Employment Agreements also generally provide for the
continuation of certain employee benefits.
Each of the executive officers who has entered into an Employment
Agreement has thereby agreed not to compete with NPI in the United States and,
in some cases, Mexico by not engaging in any capacity in any business that is
competitive with, in the case of certain executives, any business of NPC and, in
the case of the other certain executives, the business of NPI for which such
officer bears primary managerial responsibility. These non-competitive
restrictions remain in effect for the period in which the executive officer is
entitled to receive payments under the Employment Agreement following
termination as generally described above.
Severance Agreements. In order to assure itself of both present and future
continuity of management in the event of a change in control, NPI has entered
into severance agreements (the "Severance Agreements") with certain of its
senior executive officers and other key employees ("Executives"). The Severance
Agreements become immediately operative upon a change in control.
The Severance Agreements provide that following a change in control, such
Executives will be entitled to severance compensation upon termination of
employment during the period commencing with the occurrence of the change in
control and continuing until the earliest of (i) the third anniversary of the
occurrence of the change in control, (ii) death, or (iii) attainment of age
sixty-five and upon the occurrence of one or more certain additional events. As
of the date of this proxy statement, there are Severance Agreements with 14 key
employees of NPI and its subsidiaries.
The severance compensation will be a lump sum payment in an amount equal
to three times the sum (for Executives) and two times the sum (for other senior
officers) of (i) base pay at the highest rate in effect for any period prior to
the termination date plus (ii) incentive pay in an amount equal to not less than
the highest aggregate annual bonus, incentive, or other payments of cash
compensation made or to be made in regard to services rendered in any calendar
year during the three calendar years immediately preceding the year in which the
change in control occurs, less the sum of (iii) any and all payments received
from NPI, National City, or a successor or their affiliates following a change
in control plus (iv) any future payments to be made in accordance with any
Employment Agreements or other contracts between NPI and such other entities
(specifically excluding payments from any deferred compensation plan). For three
years (for Executives) and two years (for other senior officers) following
termination, NPI will arrange to provide the Executives with welfare benefits
substantially similar to those they were receiving or were entitled to receive
immediately prior to the termination date, with such three-year period
qualifying as service with NPI for the purpose of determining service credits
and benefits under NPI's various retirement benefit plans. Each Executive may
waive one year of severance pay in exchange for being released from the
non-competition restrictions contained in their respective Employment
Agreements.
NPI has agreed to pay any and all legal fees incurred by the Executives in
connection with the interpretation, enforcement, or defense of their rights
under the Severance Agreements. The term of each Severance Agreement runs until
the later of (i) the close of business on the third anniversary of the date of
that Severance Agreement or (ii) the expiration of the three-year period of
severance benefit coverage. On January 1 of each year, the term of each
Severance Agreement is automatically extended for an additional year unless, not
later than September 30 of the immediately preceding year, NPI or the Executive
shall have given notice that the party giving such notice does not wish to have
the term extended. If, prior to a change in control, an Executive ceases for any
reason to be an employee of NPI or any subsidiary thereof, however, then the
term of that Executive's Severance Agreement will immediately terminate. For
purposes of an Executive's Severance Agreement, any termination of employment of
the Executive or the removal of the Executive from the office or position in NPI
following the commencement of any discussion with a third person that ultimately
results in a change in control shall be deemed to be a termination or removal of
the Executive after a change in control.
Under the Severance Agreements, a change in control occurs upon either of
the following events: (i) NPI is merged, consolidated or reorganized into or
with another person other than National City, a successor of National City or an
affiliate of National City or (ii) NPI sells or otherwise transfers all or
substantially all of its assets to another corporation, or NPI causes or permits
the sale or transfer of all or substantially all of its assets or assets of any
subsidiary that has assets equal to or greater than 80% of the total assets of
NPI as reported on a consolidated basis, and as a result of such sale or
transfer less than 50% of the combined voting power of the then outstanding
securities of such corporation is held by National City.
Mr. Showalter has a severance agreement with National City. The severance
agreement was entered into upon the recommendation of the Compensation and
Organization Committee of the board of directors of National City, and the form
of the agreement was approved by National City's board of directors at its
December 19, 1994 meeting. The agreement becomes immediately operative upon a
change in control.
The severance agreement provides that upon termination of employment with
National City, a subsidiary, or a successor to National City within three years
following a change in control, unless the termination is because of death,
permanent disability, or cause, Mr. Showalter will be entitled to severance
compensation. The severance agreement also provides that following a change in
control, Mr. Showalter may terminate his own employment with National City or a
subsidiary with the right to severance compensation during the period commencing
with the occurrence of the change in control and continuing until the earliest
of (i) the third anniversary of the occurrence of the change in control, (ii)
death, or (iii) attainment of age sixty-five and upon the occurrence of one or
more certain additional events. His severance agreement also provides that in
the event of a change in control, he may terminate his employment with National
City or any subsidiary for any reason during the thirty-day period immediately
following the first anniversary of the first occurrence of a change in control
without cause with the right to severance compensation.
The severance compensation will be a lump sum payment in an amount equal
to three times the sum of (i) base pay at the highest rate in effect for any
period prior to the termination date plus (ii) incentive pay in an amount equal
to not less than the highest aggregate annual bonus, incentive, or other
payments of cash compensation made or to be made in regard to services rendered
in any calendar year during the three calendar years immediately preceding the
year in which the change in control occurs. For thirty-six months following the
termination, National City will arrange to provide Mr. Showalter with employee
benefits that are welfare benefits substantially similar to those which he was
receiving or was entitled to receive immediately prior to the termination date
and such thirty-six month period will be considered service with National City
for the purpose of determining service credits and benefits due and payable
under National City's various retirement benefit plans.
National City has agreed to bear the expense of any and all legal fees
incurred by Mr. Showalter associated with the interpretation, enforcement, or
defense of his rights under the severance agreement.
TRANSACTIONS WITH MANAGEMENT
Aureliano Gonzalez-Baz, a director since 1996, provided various legal
services in excess of $60,000 to NPI and its subsidiaries in the ordinary course
of business in 1998. Such services pertained to legal advice related to NPI's
business operations in foreign countries. Without exception, all services
provided by the director were at market rates. Similar additional services may
be provided in the ordinary course of business in the future.
Beneficial Ownership
As of February 28, 1999, NPI had one class of equity security
outstanding, NPI Common without par value.
Beneficial ownership of NPI's outstanding equity security, for purposes
of the ownership disclosures, has been determined in accordance with Rule 13d-3
of the General Rules and Regulations under the Securities Exchange Act of 1934
("Exchange Act"), under which Rule a person is deemed to be the beneficial owner
of securities if he or she has or shares voting power or investment power in
respect of such securities or has the right to acquire beneficial ownership
within 60 days. Accordingly, the amounts shown in the following table do not
purport to represent beneficial ownership for any purpose other than as set
forth under such Rule. Further, beneficial ownership as determined in this
manner does not necessarily bear on the economic incidence of ownership of NPI's
equity securities.
The following table sets forth the beneficial security ownership of all
shareholders known to NPI as of February 28, 1999, to be the owner of more than
five percent of NPI Common. For purposes of this disclosure, the amount of
outstanding NPI Common is the aggregate number of shares of NPI Common actually
outstanding on such date plus an amount equal to the aggregate amount of NPI
Common which could be issued upon the exercise of stock options by such person
or firm at that date. Beneficial ownership of NPI Common includes, as of such
date, those shares which could have been acquired by the exercise of stock
options.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under federal securities law, NPI's directors, certain officers, and
persons holding more than 10% of any class of NPI's equity securities are
required to report, within specified monthly and annual due dates, their
initial ownership in any class of NPI's equity securities and all subsequent
acquisitions, dispositions or other transfers of interest in such securities,
if and to the extent reportable events occur that require reporting by such due
dates. NPI is required to describe in this proxy statement whether it has
knowledge that any person required to file such a report may have failed to do
so in a timely manner. In this regard, to NPI's knowledge, based soley on the
review of copies of reports furnished to NPI by its directors and executive
officers pursuant to Rule 16a-3 promulgated pursuant to the Exchange Act, and
on written representations that no other reports were required during the
period ending December 31, 1998, all of NPI's directors and officers satisfied
such filing requirements in full.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
Name Amount
and Address and Nature of
Title of of Beneficial Beneficial Percent
Class Owner Ownership(1) of Class
----- ----- ------------ --------
<S> <C> <C> <C>
Common Stock National City Corporation
1900 East Ninth Street
Cleveland, OH 44114-3484 44,365,400 88%
</TABLE>
(1) The listed beneficial owner is not known to have had, as of February 28,
1999, the right to acquire beneficial ownership, as specified in Rule
13d-3(d)(1) under the Exchange Act, of any shares of NPI Common.
BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 28, 1999, the beneficial
security ownership (including shares with respect to which the following persons
have the right to acquire beneficial ownership within 60 days after such date)
of (a) each director and nominee of NPI; (b) the chief executive officer and the
four other most highly compensated executive officers of NPI; (c) John J. Leehy,
III, who, but for the fact that he was not serving as an executive officer of
National Processing at the end of 1998, would have been among the four most
highly compensated executive officers (other than the chief executive officer)
who were serving as executive officers of National Processing at the end of
1998; and (c) all directors and executive officers of NPI as a Group:
BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
Name Amount
and Address and Nature of
Title of of Beneficial Beneficial Percent
Class Owner Ownership of Class
----- ----- --------- --------
<S> <C> <C> <C>
Common Stock James R. Bell, III 3,030 *
Common Stock Christos M. Cotsakos 28,599(4) *
Common Stock Aureliano Gonzalez-Baz 17,499(4) *
Common Stock Preston B. Heller, Jr. 21,999(4) *
Common Stock Robert E. Johnson(1) 96,667(5) *
Common Stock Jeffrey D. Kelly 1,000 *
Common Stock Donald J. Kenney(1) 33,334(6) *
Common Stock John J. Leehy, III 33,333(7) *
Common Stock Gregory W. Sahrmann(3) 25,000 *
Common Stock Robert E. Showalter 178,534(8) *
Common Stock Robert G. Siefers 10,000 *
Common Stock Thomas A. Wimsett 107,701(9) *
Common Stock Directors and Executive
Officers of National
Processing as a Group 667,037 1.30%
</TABLE>
* The percent of NPI Common beneficially owned is less than 1%.
(1) Robert E. Johnson resigned as Executive Vice President of NPI effective as
of March 31, 1999.
(2) Donald J. Kenney was elected Executive Vice President of NPI on March 31,
1998.
(3) Gregory W. Sahrmann resigned as Executive Vice President of NPI effective
as of December 31, 1998.
(4) Includes 17,499 shares of NPI Common of which the named beneficial owner
has the right to acquire beneficial ownership, as specified in Rule
13d-3(d)(1) under the Exchange Act.
(5) Includes 91,667 shares of NPI Common of which Robert E. Johnson has the
right to acquire beneficial ownership, as specified in Rule 13d-3(d)(1)
under the Exchange Act.
(6) Includes 33,334 shares of NPI Common of which Donald J. Kenney has the
right to acquire beneficial ownership as specified in Rule 132-3(d)(1)
under the Exchange Act.
(7) Includes 33,333 shares of NPI Common of which John J. Leehy, III has the
right to acquire beneficial ownership as specified in Rule 132-3(d)(1)
under the Exchange Act.
(8) Includes 178,534 shares of NPI Common of which Robert E. Showalter has the
right to acquire beneficial ownership, as specified in Rule 13d-3(d)(1)
under the Exchange Act.
(9) Includes 100,001 shares of NPI Common of which Thomas A. Wimsett has the
right to acquire beneficial ownership as specified in Rule 132-3(d)(1)
under the Exchange Act.
14
<PAGE> 15
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Page Number
Description in Report
----------- -----------
Report of Independent Auditors 18
Consolidated Balance Sheets as of December 31, 1998 19
and 1997
Consolidated Statements of Income for each of the 21
three years in the period ended December 31, 1998
Consolidated Statements of Changes in Shareholders' 22
Equity for each of the three years in the period
ended December 31, 1998
Consolidated Statements of Cash Flows for each of 23
the three years in the period ended December 31, 1998
Notes to Consolidated Financial Statements 24
2. Financial Statement Schedules
Omitted due to inapplicability or because the required information
is immaterial to the Company's financial statements.
3. Exhibits
The index of exhibits has been filed as separate pages of the 1998
Form 10-K and is available to shareholders on request from the
Secretary of the Company at the principal executive offices. Copies
of the exhibits may be obtained at a cost of 30 cents per page.
(b) Reports on Form 8-K.
October 14, 1998: On October 14, 1998, the Registrant issued a press
release reporting earnings for the third quarter and first nine months of
fiscal 1998. The press release also disclosed that due to the lower than
expected third quarter results and an unsettled outlook, the Registrant
indicated that full-year 1998 earnings could fall short of the September
30, 1998 consensus earnings estimate of $.42 by as much as one-third.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 1999.
NATIONAL PROCESSING, INC.
By: /s/ Jim W. Cate
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert E. Showalter
- - ------------------------- President, Chief Executive Officer and
Robert E. Showalter Director (Principal Executive Officer) March 31, 1999*
/s/ Jim W. Cate
- - ------------------------- Executive Vice President and Chief
Jim W. Cate Financial Officer(Principal
Financial Officer) March 31, 1999
/s/ David E. Fountain
- - ------------------------- Senior Vice President and Chief March 31, 1999
David E. Fountain Accounting Officer (Principal
Accounting Officer)
/s/ James R. Bell, III
- - ------------------------- Director March 31, 1999*
James R. Bell, III
/s/ Robert G. Siefers
- - ------------------------- Director March 31, 1999*
Robert G. Siefers
/s/ Jeffrey D. Kelly
- - ------------------------- Director March 31, 1999*
Jeffrey D. Kelly
- - ------------------------- Director March 31, 1999
Aureliano Gonzalez-Baz
- - ------------------------- Director March 31, 1999
Christos M. Cotsakos
/s/ Preston B. Heller, Jr.
- - -------------------------- Director March 31, 1999*
Preston B. Heller, Jr.
</TABLE>
* The undersigned by signing his name hereto, does sign and execute the
Annual Report on Form 10-K for fiscal year 1998 pursuant to the Power of
Attorney executed by the above named Directors of the Company and which
have been filed with the Securities Exchange Commission on behalf of such
directors.
By: /s/ Carlton E. Langer
---------------------
Carlton E.Langer
As Attorney-in-Fact
17
<PAGE> 18
Report of Independent Auditors
The Shareholders
National Processing, Inc.
We have audited the accompanying consolidated balance sheets of National
Processing, Inc. and subsidiaries (a majority owned subsidiary of National City
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National
Processing, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Cleveland, Ohio
February 1, 1999
/s/ Ernst & Young LLP
18
<PAGE> 19
NATIONAL PROCESSING, INC.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,254 $ 40,075
Accounts receivable-trade 104,759 104,752
Check inventory 2,901 7,395
Restricted deposits--customer funds 91,484 83,183
Deferred tax assets 3,688 12,186
Other current assets 13,434 10,064
-------- --------
Total current assets 223,520 257,655
Property and equipment:
Furniture and equipment 116,420 94,976
Building and leasehold improvements 23,843 15,679
Software 23,537 16,219
Property leased from affiliate 4,173 4,173
Land and improvements 2,828 1,591
-------- --------
170,801 132,638
Accumulated depreciation and amortization 82,680 66,467
-------- --------
88,121 66,171
Other assets:
Goodwill, net of accumulated amortization
of $14,202 in 1998, $10,616 in 1997 171,489 170,327
Acquired merchant portfolios 18,255 21,115
Deferred tax assets 2,764 --
Other assets 8,284 8,004
-------- --------
Total other assets 200,792 199,446
-------- --------
Total assets $512,433 $523,272
======== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
NATIONAL PROCESSING, INC.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Restricted deposits--customer funds $ 91,484 $ 83,183
Accounts payable--trade 3,075 5,209
Merchants payable--check services 3,690 7,271
Accrued bankcard assessments 17,753 19,806
Income tax payable to NCC 4,376 5,507
Acquisition balance due -- 26,781
Other accrued liabilities 30,729 30,551
-------- --------
Total current liabilities 151,107 178,308
Obligation under property leased from affiliate 2,264 2,591
Other long-term liabilities 796 2,674
Deferred tax liabilities 5,607 2,874
-------- --------
Total liabilities 159,774 186,447
Shareholders' equity:
Preferred stock, without par value;
5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, without par value;
95,000,000 shares authorized;
50,644,651 and 50,575,000 shares issued and
outstanding in 1998 and 1997, respectively 1 1
Contributed capital 175,799 175,215
Retained earnings 176,859 161,609
-------- --------
Total shareholders' equity 352,659 336,825
-------- --------
Total liabilities and shareholders' equity $512,433 $523,272
======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
NATIONAL PROCESSING, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues $483,193 $405,661 $373,693
Other income 4,000 -- 3,868
Operating expenses 242,478 193,352 182,291
Wages and other personnel expenses 126,970 101,573 83,220
General and administrative expenses 66,814 50,750 48,959
Restructuring charge -- 13,340 --
Depreciation and amortization 26,767 17,826 12,847
-------- -------- --------
Operating profit 24,164 28,820 50,244
Net interest income 924 4,001 2,783
-------- -------- --------
Income before income taxes 25,088 32,821 53,027
Provision for income taxes 9,838 11,694 21,674
-------- -------- --------
Net income $ 15,250 $ 21,127 $ 31,353
======== ======== ========
Basic and diluted net income per common share $ 0.30 $ 0.42 $ 0.68
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
NATIONAL PROCESSING, INC.
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Contributed Retained
Stock Capital Earnings Total
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $1 $ 64,825 $109,129 $173,955
Issuance of common stock (7,475,000 shares) - 110,390 -- 110,390
Net income - -- 31,353 31,353
-- -------- -------- --------
Balance at December 31, 1996 1 175,215 140,482 315,698
Net Income - -- 21,127 21,127
-- -------- -------- --------
Balance at December 31, 1997 1 175,215 161,609 336,825
Stock options exercised - 584 -- 584
Net Income - -- 15,250 15,250
-- -------- -------- --------
Balance at December 31, 1998 $1 $175,799 $176,859 $352,659
== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
NATIONAL PROCESSING, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income $ 15,250 $ 21,127 $ 31,353
Items not requiring cash currently:
Depreciation and amortization 26,767 17,826 12,847
Restructuring charge -- 10,552 --
Deferred income tax 6,287 (3,803) 917
Loss on disposition of assets 2,430 -- --
Changes in current assets and liabilities:
Accounts receivable 629 (4,590) (8,830)
Check inventory 4,494 (972) (47)
Accounts payable--trade (2,245) (4,694) (1,536)
Merchant payable--check services (3,581) 805 (841)
Accrued bankcard assessments (2,053) 2,588 (79)
Income taxes payable/receivable (1,131) 3,597 643
Other current assets/liabilities (3,236) (4,565) (1,325)
Other, net 998 (3,252) 1,725
--------- --------- ---------
Net cash provided by operating activities 44,609 34,619 34,827
Investing activities
Capital expenditures (42,469) (28,286) (35,345)
Purchases of securities available for sale -- (444,422) (405,886)
Proceeds from sales and maturities of securities
Available for sale -- 566,859 283,484
Acquisitions, net of cash acquired (34,118) (91,881) --
Other -- -- (6,614)
--------- --------- ---------
Net cash (used for) provided by investing activities (76,587) 2,270 (164,361)
Financing activities
Payment of note payable (1,100) -- --
Principal payments under property
leased from affiliate (327) (144) (144)
Net proceeds from issuance of common stock -- -- 110,390
Exercise of stock options 584 -- --
--------- --------- ---------
Net cash (used for) provided by financing activities (843) (144) 110,246
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (32,821) 36,745 (19,288)
Cash and cash equivalents, beginning of period 40,075 3,330 22,618
--------- --------- ---------
Cash and cash equivalents, end of period $ 7,254 $ 40,075 $ 3,330
========= ========= =========
Supplemental Cash Flow Information:
Taxes paid to NCC $ 5,197 $ 14,358 $ 18,912
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Business
Organization
National Processing, Inc. and subsidiaries (the "Company") (a majority
owned subsidiary of National City Corporation ("NCC"), a bank holding company
headquartered in Cleveland, Ohio) became the owner of all of the outstanding
shares of National Processing Company ("NPC") on June 5, 1996. In connection
with its organization, the Company issued 43,100,000 shares of common stock
(after giving retroactive effect to the 57,465.67 to 1 stock split which was
effective June 6, 1996) to NCC, and NCC contributed the common stock of NPC
(then a wholly owned subsidiary of NCC) to the Company. Since both the Company
and NPC are subsidiaries of NCC, this transfer of assets was accounted for on
the basis of historical cost. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions are eliminated in consolidation.
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. Following the initial
public offering, NCC owned 85% of the Company's outstanding common stock. In May
1997, NCC purchased 1,265,000 shares of the Company's common stock in the open
market and currently owns approximately 88% of the Company's outstanding common
stock.
The Company and NCC are parties to a Registration Rights Agreement whereby
NCC has the right to require the Company to use its best efforts to register
under the Securities Act of 1933, as amended, all or a portion of the issued and
outstanding common stock held by NCC. NCC also has the right to participate, or
"piggy-back", in equity offerings initiated by the Company, subject to reduction
of the size of the offering on the advice of the managing underwriter.
Business
The Company is a leading provider of transaction processing services and
customized processing solutions. The Company currently provides these services
in three principal areas: Merchant Services, Corporate Services and Travel
Services. Within Merchant Services, the Company focuses primarily on markets for
credit and debit card processing and for check acceptance and collection. The
Company's Corporate Services business provides integrated outsourcing solutions
for customers' remittance processing, freight bill processing, corporate
accounts payable, and imaging functions (see Note O). Customers of the Company's
Merchant Services and Corporate Services are diverse in terms of both industries
and size with no significant concentration in any particular industry or
customer type. Through an exclusive contract with the Airlines Reporting
Corporation ("ARC"), which expires in December 2001, Travel Services acts as a
processor and clearing house for all airline ticket payment transactions
generated by travel agents in the United States.
B. Summary of Significant Accounting Policies
Use of Estimates
Financial statements prepared in accordance with generally accepted
accounting principles necessitate the use of estimates and assumptions by
management that affect the reported amounts of revenues and expenses, assets and
liabilities, and the disclosure requirement for contingent assets and
liabilities during and at the date of the financial statements. Consequently,
actual results could differ from those estimates.
Revenue Recognition
The Company recognizes as fee income the amounts charged by its various
businesses for the related processing activities. All revenues are recognized at
the time services are rendered.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid bank overnight repurchase
agreements, which are readily convertible to cash.
24
<PAGE> 25
Financial Instruments
The Company's financial instruments consist of cash equivalents, accounts
receivable, restricted deposits, accounts payable, merchants payable, and
payables to affiliates. The carrying values of these financial instruments
approximate their fair values.
Check Inventory
The amount paid for checks submitted to the Company by merchants
participating in its various check guarantee programs are recorded at the amount
the Company deems ultimately collectible, subject to revision based on a
continual review of collection statistics. The check inventory is classified as
current in accordance with trade practice.
Restricted Deposits--Customer Funds
The Company's travel and freight processing businesses regularly receive
funds, as part of the settlement process, in advance of the related
disbursement. Such monies are set aside in restricted accounts and a liability
is recorded for an equal and offsetting amount. As such, customer funds are not
eligible for use by the Company in its operations other than to pay related
liabilities. In all cases, customer funds are invested in highly liquid,
investment grade interest bearing securities. Investment of customer funds in
equity securities is prohibited by the Company's investment guidelines
established by the Board of Directors.
Property and Equipment
Property and equipment is stated at cost and depreciated on a
straight-line basis over the estimated useful life or term of the lease,
whichever is shorter. Maintenance and repairs are expensed as incurred, while
improvements that extend the useful life of the related asset are capitalized
and depreciated over the remaining life of the related asset. The ranges of
estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and equipment 3 to 10 years
Building and leasehold improvements 5 to 40 years
Property leased from affiliates 35 years
Land improvements 15 years
Software 3 to 5 years
</TABLE>
Upon the sale or disposal of property or equipment, the cost and
accumulated depreciation accounts are adjusted accordingly and any gain or loss
is recognized in income. Depreciation expense was $18.3 million, $14.2 million,
and $10.3 million in 1998, 1997, and 1996, respectively.
The Company capitalizes certain costs incurred to develop or obtain
internal-use software. For purposes of amortization and impairment, capitalized
costs would be treated in the same manner as other long-lived assets. To be
considered as internal-use software the software is either acquired, internally
developed, or modified solely to meet the Company's internal needs with no plans
to market the software externally. Project costs that are considered research
and development costs are expensed as incurred. Capitalized software development
and purchased software costs are reported at unamortized cost. Commencing the
month following project completion, these costs are amortized on a straight-line
basis over the estimated life of the software, not to exceed five years. For the
years ended December 31, 1998, 1997 and 1996, capitalized software amortization
totaled $.8 million, $1.3 million, and $1.3 million, respectively.
In June 1998, the Company wrote-off $2,600,000 of internally developed
software and related costs, which is included in operating expenses in the
Consolidated Statements of Income, following the cancellation of a significant
customer contract.
Acquired Merchant Portfolios
Acquired merchant portfolios represent costs allocated to customer
contracts acquired through acquisitions. These costs are amortized on a
straight-line basis over periods ranging from 7 to 15 years.
Deferred Contract Costs
Other assets include $2.1 million and $3.2 million of deferred contract
costs in 1998 and 1997, respectively. Deferred contract costs primarily
represent costs incurred to acquire new customer contracts.
25
<PAGE> 26
These costs are amortized on a straight-line basis over the life of the
customer contract. Recoverability of these costs is assessed on an ongoing basis
and writedowns to net realizable values are recorded as necessary.
Acquisitions
Operations of companies acquired in purchase transactions are included in
the consolidated statements of income from the respective acquisition dates. The
excess of the purchase price over the net assets acquired (goodwill) is
amortized on a straight-line basis over 40 years.
Asset Impairment
The company records impairment losses on long-lived assets held for use
when events and circumstances indicate that the assets may be impaired and the
undiscounted net cash flows estimated to be generated by those assets are less
than their carrying amounts. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
Merchant Payable--Check Services
As part of its check services operations, the Company reimburses merchants
for checks that are dishonored. The liability to merchants for returned checks
guaranteed by the Company is established in part based upon an estimate of the
volume of checks accepted by the various merchants which are expected to be
dishonored. Differences between the estimated and actual merchant guaranteed
check liability are recorded at the time the checks are acquired from the
merchants.
Accrued Bankcard Assessments
The liability to the VISA(R) and MasterCard(R) organizations originating
from the Company's agreements with these agencies, as an authorized processor,
is accrued and settled on a monthly and quarterly basis, respectively. The
Company recovers these assessment charges through various contractual
arrangements with its customers.
Income Taxes
The Company is included in the consolidated federal income tax return of
NCC. NCC's policy is to allocate income taxes to its subsidiaries on a separate
return basis.
Reclassifications
Certain prior year amounts in the financial statements and notes have been
reclassified to conform with the current year presentation.
C. Recent Accounting Pronouncements
Reporting Comprehensive Income
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. The Company adopted the provisions
of this statement in 1998, however, any difference between net income and
comprehensive income are insignificant.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131. Disclosures about Segments of an Enterprise and Related Information. The
provisions of this statement require disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim
financial reports issued to shareholders. The statement defines an operating
segment as a component of an enterprise that engages in business activities that
generate revenue and incur expense, whose operating results are regularly
reviewed by the chief operating decision maker in the determination of resource
allocation and assessment of performance, and for which discrete financial
information is available. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
adopted the
26
<PAGE> 27
provisions of this statement for 1998 annual reporting, and the related
disclosures are included in Note N to these financial statements.
Internal Use Software
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP), 98-1 Internal Use Software. This statement requires
the capitalization of costs to acquire or develop internal use software after
certain conditions are met. This statement is effective for fiscal years
beginning after December 15, 1998. Because the Company's current policy is not
significantly different from this statement, this statement will have no
significant impact on the financial position or results of operations of the
Company.
D. Acquisitions
On January 15, 1998, the Company acquired all the outstanding shares of
JBH Travel Audit Inc. ("JBH"), a company which audits fees payable to travel
agencies, for $6.3 million in cash. The purchase price is subject to increase by
as much as $2.0 million based upon the earnings of the acquired company during
1999. The acquisition, which has been accounted for as a purchase, increased the
Company's goodwill by $5.1 million which is being amortized over 40 years. The
results of JBH's operations are included in the Company's results of operations
from the date of acquisition. The pro forma effect of the JBH transaction was
not material to previously reported periods.
On February 4, 1997, the Company acquired all of the outstanding shares of
NTA, Inc., a freight payment processing company. On June 19, 1997, the Company
acquired the operating assets and liabilities of InTraCon, Inc., a freight
payment processing company. On June 20, 1997, the Company acquired the operating
assets and liabilities of MRS Jamaica, Inc., a healthcare form processing
company. On September 30, 1997, the Company acquired all of the outstanding
shares of Caribbean Data Services, Ltd., a data processing company. The combined
purchase price of these acquisitions was $30.3 million in cash and $4.3 million
in notes payable. $2.1 million of the notes were paid off in October 1997, $1.1
million were paid off in June 1998 and the $1.1 million balance, plus accrued
interest at 5.125% is due and payable in February 1999. The MRS Jamaica, Inc.
purchase price increased by $3.3 million in 1998 based upon the 1998 earnings of
the acquired company. The acquisitions, which have been accounted for as
purchases, increased the Company's goodwill by $32.3 million which is being
amortized over 40 years. The results of operations of these acquired companies
have been included in the consolidated financial statements since their
respective dates of acquisition.
The combined pro forma effect of these transactions was not material to
previously reported periods.
On October 24, 1997, the Company acquired 79.6% of the outstanding common
stock of FA Holdings, Inc., the sole owner of Financial Alliance Processing
Services, Inc. ("Financial Alliance"), for $67.2 million. Financial Alliance is
an independent sales organization specializing in selling credit and debit card
processing services to smaller merchants. The Company acquired the remaining
20.4% of the common stock for $26.8 million in January 1998. The acquisition,
which has been accounted for as a purchase, increased the Company's goodwill by
approximately $74 million which is being amortized over 40 years. The results of
operations of Financial Alliance have been included in the consolidated
financial statements since the date of its acquisition.
The follow unaudited pro forma information gives effect to the Financial
Alliance acquisition as if it occurred January 1, 1996 (in thousands, except per
share amounts).
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 432,325 $ 411,948
Income before income taxes 32,733 48,759
Net income 19,364 26,910
Basic and diluted net income per common share $ 0.38 $ 0.58
</TABLE>
The pro forma results include the effect of all material adjustments
related to the acquisition and have been prepared using calculations based upon
assumptions deemed reasonable by the Company. The pro forma information is
presented for informational purposes only and is not necessarily indicative of
results that would have occurred had the acquisition taken place on January 1,
1996, nor are they necessarily indicative of future results.
27
<PAGE> 28
Supplemental cash flow information related to all 1997 acquisitions is as
follows (dollars in thousands):
<TABLE>
<S> <C>
Net assets other than cash acquired $ (19,672)
Purchase price in excess of net assets acquired (101,190)
Notes and payables due 28,981
---------
Net cash used for acquisitions $ (91,881)
=========
</TABLE>
E. Transactions with Affiliates
The Company leases certain facilities from National City Bank of Kentucky
("NCBK"), a wholly owned subsidiary of NCC, under long-term agreements
classified as "Property Leased From Affiliate" in the accompanying financial
statements. Future minimum payments under these leases, which expire between
1999 and 2019, are $4.2 million, including interest of $1.9 million.
The Company uses the proof and transit department of NCBK to provide
processing for remittances. The charges for these services, which are included
in operating expenses, were $3.6 million in 1998, $5.5 million in 1997, and $4.1
million in 1996.
The Company receives certain administrative services, such as internal
audit and legal, from NCC and its affiliates. Charges for these services are
included in general and administrative expenses and totaled $2.1 million, $3.3
million, and $3.4 million, in 1998, 1997, and 1996, respectively.
F. Operating Leases
The Company leases various offices, facilities, and equipment under
noncancellable lease agreements with expiration dates through 2019. During the
normal course of business, most of these leases will be renewed or replaced by
other leases. Future minimum rental payments under these leases are $5.9 million
in 1999; $4.5 million in 2000; $2.8 million in 2001; $1.9 million in 2002, $1.6
million in 2003, and $8.9 million thereafter. Rent expense under operating
leases was $7.6 million, $7.0 million and $6.0 million, in 1998, 1997, and 1996,
respectively.
28
<PAGE> 29
G. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal $ 1,485 $ 14,354 $16,457
State 713 1,143 4,300
Deferred:
Federal 6,781 (3,803) 917
State (494) -- --
Foreign 1,353 -- --
-------- -------- -------
$ 9,838 $ 11,694 $21,674
======== ======== =======
</TABLE>
The temporary differences that gave rise to deferred tax assets and
liabilities, which are included in the income tax receivable from or payable to
NCC, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
-----------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses $ 1,572 $ 3,608 $ 412
Pension, benefits and deferred
compensation 1,594 5,037 844
State operating losses 4,681 1,245
Other 1,013 2,296 --
-------- -------- --------
8,860 12,186 1,256
Valuation allowance (2,408) -- --
-------- -------- --------
6,452 12,186 1,256
Deferred tax liabilities:
Depreciation and amortization (2,998) 41 (1,433)
Purchase accounting adjustments (3,597) (1,934) --
Other 988 (981) (518)
-------- -------- --------
(5,607) (2,874) (1,951)
-------- -------- --------
Net deferred tax assets (liabilities) $ 845 $ 9,312 $ (695)
======== ======== ========
</TABLE>
The reconciliation of the U.S. statutory income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
Non-deductible amortization 5.5 2.6 1.2
State taxes, net of federal benefit .6 1.9 5.4
Tax exempt income (.5) (4.3) --
Foreign tax benefit (2.5) -- --
Other 1.1 .4 (.7)
---- ---- ----
39.2% 35.6% 40.9%
==== ==== ====
</TABLE>
The Company has approximately $51.0 million of state net operating loss
carryforwards for income tax purposes available to offset future taxable income
in the related states from 1999 to 2013. In 1998, the Company determined that it
was more likely than not that future taxable income would be generated in these
states sufficient to justify the deferred tax assets recorded, net of the
related valuation allowance of $2.4 million.
Income before income taxes from foreign and United States operations was
approximately $4.3 million and $20.8 million, respectively in 1998. Income from
foreign operations was immaterial in 1997 and 1996.
29
<PAGE> 30
H. Employee Benefit Plans
An employee thrift plan offers all employees, who meet certain age and
eligibility requirements, a program of regular savings and investment funded by
their own contributions and discretionary matching contributions of the Company.
The Company recorded $2.6 million, $2.8 million, and $2.3 million, respectively,
in matching contributions during 1998, 1997, and 1996.
I. Net Income Per Common Share
The calculation of net income per common share follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic:
Net income $15,250 $21,127 $31,353
Average common shares outstanding 50,621 50,575 46,090
Net income per common share - basic $ .30 $ .42 $ .68
Diluted:
Net income $15,250 $21,127 $31,353
Average common shares outstanding 50,621 50,575 46,090
Stock option adjustment 92 139 59
Average common shares outstanding - diluted 50,713 50,714 46,149
Net income per common share - diluted $ .30 $ .42 $ .68
</TABLE>
J. Stock Options
The Company maintains two stock-based compensation plans that allow for
the granting of stock options to eligible employees and directors. The Company
has elected not to adopt the recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires a fair-value based method of
accounting for stock options and similar equity awards, and continues to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations to account for its stock-based
compensation plans.
On June 5, 1996, the Company was authorized to grant up to 4,000,000
options under an employee stock option plan (the "Employee Plan") and up to
200,000 options under a non-employee directors stock option plan (the "Directors
Plan"). These options are for the purchase of shares of common stock at their
market price at the date of grant. The Employee Plan pertains to officers and
key employees and the Directors Plan pertains to certain directors. For both
plans, these options generally become exercisable 33% annually beginning one
year from the date of grant and expire not later than ten years from the date of
grant.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Shares Weighted
Available Shares Average Price
for Grant Outstanding Per Share
--------- ----------- ---------
<S> <C> <C> <C>
Authorized 4,200,000 0
Granted (2,312,500) 2,312,500 $16.68
Canceled 81,667 (81,667) 16.50
---------- ---------
December 31, 1996 1,969,167 2,230,833 16.68
Granted (1,483,000) 1,483,000 9.33
Canceled 872,000 (872,000) 16.16
---------- --------- ------
December 31, 1997 1,358,167 2,841,833 13.00
Granted (818,300) 818,300 11.67
Canceled 646,601 (646,601) 12.66
Exercised 69,651 (69,651) 10.39
---------- --------- ------
December 31, 1998 1,256,119 2,943,881 $12.72
========= ========= ======
</TABLE>
At December 31, 1998 and 1997, 1,158,060 and 474,444 options,
respectively, were exercisable under the Company's option plans. No options were
exercisable at December 31, 1996. The weighted average price per share of
exerciseable options was $14.40 at December 31, 1998. For options outstanding
at December 31, 1998, the option price per share ranged from $6.13 to $20.50,
the weighted average price per share of the options was $12.72, and the
weighted-average remaining contractual life of the options was 8.0 years.
30
<PAGE> 31
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair value of stock options granted in 1996, 1997, and 1998 was
estimated at the date of grant using a Black-Scholes option pricing model. The
Black-Scholes option-pricing model was originally developed for use in
estimating the fair value of traded options, which have different
characteristics than the Company's employee stock options. The model is also
sensitive to changes in the subjective assumptions, which can materially affect
the fair value estimate. As a result, management believes that the Black-Scholes
model may not necessarily provide a reliable single measure of the fair value of
employee stock options.
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, net income and earnings per share
for 1998, 1997, and 1996 would have been $12,211,000 and $.24, $18,416,000 and
$.36, and $29,756,000 and $.65, respectively. As a result of a partial year's
vesting in 1998 and 1997 and possible changes in assumptions used in the fair
value calculation, the effects of applying SFAS No. 123 in 1998 and 1997 may not
be representative of the pro forma impact in future years.
The following weighted-average assumptions were used in the option-pricing
model: a risk-free interest rate of 5.97% in 1998 and 1997 and 6.54% in 1996, an
expected life of the option of 7 years, an expected dividend yield of 0%, and a
volatility factor of .492 for 1998, .441 for 1997 and .412 for 1996. The
weighted-average grant date fair value of options granted was $6.83, $5.16, and
$9.04 in 1998, 1997, and 1996, respectively.
K. 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.
Under the rules of VISA U.S.A. Inc. and MasterCard International
Incorporated when the Company acquires card transactions, it has certain
contingent liabilities for the transactions it processes. This contingent
liability arises in the event of a billing dispute between the merchant and a
cardholder that is not ultimately resolved in favor of the merchant and the
amount is charged back to the merchant and the disputed amount is refunded to
the cardholder. If the Company is unable to collect this amount from the
merchant's account and if the merchant refuses or is unable due to bankruptcy or
other reasons to reimburse the Company for the chargebacks, the Company will
bear the loss for the amount of the refund to the cardholder. The Company
maintains merchant deposits from certain customers as an offset to potential
contingent liabilities that are the responsibility of such customers. The
Company evaluates its risk and estimates its potential loss for chargebacks
based on historical experience.
L. Quarterly Results of Operations: (Unaudited)
Selected quarterly data for the years ended December 31, 1998 and 1997 are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $113,649 $119,177 $121,430 $128,937 $483,193
Operating profit 8,243 2,292 5,333 8,296 24,164
Net income 4,908 1,570 3,381 5,391 15,250
Diluted net income
per share $ .10 $ .03 $ .06 $ .11 $ .30
Weighted average shares 50,833 50,950 50,691 50,644 50,713
<CAPTION>
1997
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 88,420 $ 94,969 $100,780 $121,492 $405,661
Operating (loss) profit (905) 9,658 11,099 8,968 28,820
Net income 370 7,157 7,637 5,963 21,127
Diluted net income
per share $ .01 $ .14 $ .15 $ .12 $ .42
Weighted average shares 50,575 50,689 50,764 50,764 50,714
</TABLE>
31
<PAGE> 32
The above information includes the impact of a $6.3 million restructuring charge
in the first quarter of 1997; a $7.0 million restructuring charge in the fourth
quarter of 1997; a $2.6 million write-off of internally developed software in
the second quarter of 1998; $4.0 million in other revenue related to the
settlement of a contract cancellation in the third quarter of 1998; and a $5.2
million charge for remittance research adjustments in the third quarter of 1998.
32
<PAGE> 33
M. Restructuring Charge
In March 1997 the Company recorded expenses of $6.3 million, including
$5.0 million for severance pay for approximately 79 employees, and $1.2 million
for other costs, related to organizational restructuring. In December 1997 the
Company recorded expenses of $7.0 million following the acquisition of FA
Holdings, Inc. The expenses resulted principally from the write-off of certain
fixed assets (totaling $5.5 million) 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. The charges decreased
1997 net income and earnings per share by approximately $8.1 million and $.16,
respectively. At December 31, 1998 and 1997, the remaining liability related to
the restructuring charge was $1.9 million and $4.0 million, respectively. The
remaining liability at December 31, 1998 is primarily related to severance and
lease liabilities that are expected to be paid in 1999.
N. 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. Historically, the Company has
derived a substantial portion of its merchant services revenues from larger
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. The accounting
policies of the reportable segments are the same as those described in Note A.
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. The corporate entity reflects the restructuring charges
taken in the first quarter and fourth quarter of 1997 for severance pay and
other costs related to organizational restructuring.
33
<PAGE> 34
<TABLE>
<CAPTION>
(Dollars in thousands)
Merchant Corporate Consolidated
Services Travel Services Services Corporate Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Revenues from external customers $ 287,394 $ 49,237 $ 146,562 -- $ 483,193
Operating profit (loss) 30,939 9,898 (6,933) -- 33,904
Depreciation and amortization 12,688 3,124 10,955 -- 26,767
Net interest income (expense) 1,188 (278) 14 -- 924
Net operating assets 201,604 14,618 100,122 $ 33,461 349,805
Expenditures for long-lived assets $ 9,848 $ 1,861 $ 8,172 $ 22,588 $ 42,469
1997
Revenues from external customers 233,550 45,734 126,377 -- 405,661
Operating profit (loss) 26,488 8,978 16,620 $ (13,340) 38,746
Depreciation and amortization 8,698 2,292 6,836 -- 17,826
Restructuring charge 0 0 0 13,340 13,340
Net interest income (expense) (2,049) (694) (1,258) -- (4,001)
Net operating assets 196,939 11,745 99,797 (15,536) 292,945
Expenditures for long-lived assets $ 4,823 $ 1,532 $ 14,585 $ 7,346 $ 28,286
</TABLE>
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>
1998 1997
--------- ---------
<S> <C> <C>
Operating Profit
Total operating profit for reportable segments $ 33,904 $ 38,746
General and administrative expenses - non-operating (7,746) (9,870)
Other (1,994) (56)
--------- ---------
Consolidated operating profit $ 24,164 $ 28,820
========= =========
Net Operating Assets
Total net operating assets for reportable segments $ 349,805 $ 292,945
Cash 7,254 40,075
Income taxes to parent (5,245) (4,262)
Deferred tax assets 6,452 10,941
Deferred tax liabilities (5,607) (2,874)
--------- ---------
Consolidated net operating assets $ 352,659 $ 336,825
========= =========
</TABLE>
Depreciation expense for certain corporate fixed assets is allocated to the
three segments.
Corporate assets at December 31, 1997 were reduced by the restructuring related
liabilities recorded in the first and fourth quarters of 1997 as well as the
Acquisition Balance Due to Financial Alliance of approximately $26.8 million.
Revenues from foreign operations in 1998, primarily Barbados, were approximately
$50.7 million. Revenues from foreign operations were immaterial in 1997 and
1996. The net book value of foreign long-lived assets, primarily in Juarez,
Mexico, were approximately $12.1 million and $7.8 million at December 31, 1998
and 1997, respectively.
Segment information for 1996 has not been presented as it was impractical to do
so.
O. Subsequent Events (Unaudited)
In November 1998, the Company formalized a plan to restructure its
Barbados facility. As of December 31, 1998, the Company has expensed
approximately $262,000 related to the restructuring. In the first quarter of
1999, the Company expects to record approximately $1.3 million in severance
charges related to the Barbados restructuring.
In February 1999, the Company entered into an agreement with Investment
Services International Co., LLC to sell its payables and freight business lines
for approximately $37 million in cash. In addition, in March 1999, the Company
adopted a formal plan to either sell or discontinue the check and remittance
business lines. Under the provisions of FASB statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, the
Company expects to record an impairment loss of approximately $60-$70 million in
the first quarter of 1999 related to these business lines.
<PAGE> 35
NATIONAL PROCESSING, INC.
PART IV ITEM 14: EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
<S> <C>
3.1 (i) Amended Articles of Incorporation of the Registrant. (A)
3.1 (ii) Code of Regulations of the Registrant. (A)
4.1 Specimen Certificate for the Common Stock, without par
value, of the Registrant. (B)
4.2 Registration Rights Agreement between the Registrant and
National City Corporation, dated July 16, 1996. (B)
10.1 Absolute Net Ground Lease by and between Preston Manor, Inc.
and Allied Stores Corporation, dated January 16, 1969. (A)
10.2 Second Amendment to Lease by and between William G. Earley,
Plaza Centers, Inc. and First National Bank of Louisville,
dated April 15, 1986. (A)
10.3 Building Lease between First National Bank of Louisville and
NPC of Arizona, dated September 1, 1984. (B)
10.4 Sponsorship Agreement between NPC and National City Bank of
Kentucky, dated June 30, 1996. (B)
10.5 Administrative Services Agreement between NPC and National
City Corporation, dated July 15, 1996. (B)
10.6 Master Remittance Processing Services Agreement dated
February 1, 1999 by and between National City Corporation
and National Processing Company. (filed as Exhibit 10.6).
10.7 Administrative Services Agreement by and among NPC and
Stored Value Systems, Inc., dated July 3, 1996. (B)
10.8 Form of Card Services Agreement by and among NPC and its
affiliated corporations and certain bank subsidiaries of
National City Corporation. (B)
10.9 Tax Sharing Agreement between the Company and National City
Corporation, dated July 17, 1996. (B)
10.10 The Agreement between Airlines Reporting Corporation and
First National Bank of Louisville and NPC for Area
Settlement Plan Processing Services, dated October 16,
1986. (B)
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
<S> <C>
10.11 First Amendment to Agreements between Airlines Reporting
Corporation and First National Bank of Louisville and NPC,
dated December 12, 1991. (A)
10.12 1994 Amendment to Agreements between Airlines Reporting
Corporation and NPC, dated December 31, 1994. (A)
10.13 Supplemental Agreement by and between NPC and Airlines
Reporting Corporation, dated February 24, 1995. (A)
10.14 Amendment to Agreement between Airlines Reporting
Corporation and National City Bank of Kentucky and NPC, for
Area Settlement Plan Processing Services, dated August 19,
1995. (A)
10.15 (Intentionally Omitted).
10.16 (Intentionally Omitted).
10.17 (Intentionally Omitted).
10.18 (Intentionally Omitted).
10.19 (Intentionally Omitted).
10.20 Employment Agreement between the Registrant and Donald J.
Kenney dated March 19, 1998. (Incorporated herein by
reference to Exhibit 10.40 to the Registrant's Quarterly
Report on Form 10-Q for the three months ended
March 31, 1998).**
10.21 Employment Agreement and Undertaking of Confidentiality
between NPC and Thomas A. Wimsett dated May 23,1995.
(A)**
10.22 (Intentionally Omitted).
10.23 (Intentionally Omitted).
10.24 (Intentionally Omitted).
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
<S> <C>
10.25 Severance Agreement between the Registrant and Robert E.
Johnson, dated June 7, 1996. (B)**
10.26 (Intentionally Omitted).
10.27 Severance Agreement between the Registrant and Thomas A.
Wimsett, dated June 7, 1996. (B)**
10.28 (Intentionally Omitted).
10.29 1996 Stock Option Plan and Form of Stock Option Agreement.
(B)**
</TABLE>
<PAGE> 37
<TABLE>
<S> <C>
10.30 Nonemployee Directors Stock Option Plan and Form of Stock
Option Agreement (B)**
10.31 NPC's Short-Term Incentive Compensation Plan for Senior
Executives, dated January 1, 1995. (A)**
10.32 NPC's Long-Term Incentive Compensation Plan for Senior
Officers, dated January 1, 1995. (A)**
10.33 (Intentionally Omitted)
10.34 (Intentionally Omitted)
10.35 (Intentionally Omitted)
10.36 Amendment to Building Lease between National City Bank of
Kentucky and NPC, dated July 3, 1996. (B)**
10.37 Form of Severance Agreement between the Registrant and
certain Senior Vice Presidents. (B)**
10.38 Check Processing Services Agreement between National City
Bank of Kentucky and NPC. (B)
10.39 Employment Agreement and Undertaking of Confidentiality
between the Registrant and Robert E. Showalter, dated March
11, 1997. (Incorporated herein by reference to Exhibit
10.39 to the Registrants Annual Report on Form 10-K for the
year ended December 31, 1997).**
10.40 Asset Purchase Agreement between National Processing Company
and Investment Services International Co., LLC dated as of
February 20, 1999. (filed as Exhibit 10.40).
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------- ------------------------------------------------------------
<S> <C>
21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1).
23.1 Consent of Ernst & Young LLP, Independent Auditors for
National Processing, Inc. (filed as Exhibit 23.1).
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
- - --------------------------------------------------------------------------------
(A) Exhibit is incorporated herein by reference to the
applicable exhibit in the Registrant's Registration
Statement on Form S-1 (Registration No. 333-05507) filed on
June 7, 1996.
(B) Exhibit is incorporated herein by reference to the
applicable exhibit in the Registrant's Amendment No. 1 to
Form S-1 Registration Statement (Registration No.
333-05507) filed on July 18, 1996.
** Represents a management contract or compensatory plan
required to be filed pursuant to Item 14 of Form 10-K.
</TABLE>
<PAGE> 1
Exhibit 10.6
MASTER REMITTANCE PROCESSING SERVICES AGREEMENT
This MASTER REMITTANCE PROCESSING SERVICES AGREEMENT ("Agreement") is made
this 1st day of February 99, by and between the National City Corporation, a
Delaware corporation (hereinafter "Customer"), for the use and benefit of itself
and its bank and nonbank subsidiaries and affiliates, and NATIONAL PROCESSING
COMPANY, a Kentucky corporation (hereinafter "NPC").
1. Scope of Services. NPC shall provide the services set forth in the one
or more Services & Fees Schedules attached hereto, and numbered serially as
Exhibits A-1, A-2, A-3, etc. Each Services & Fee Schedule shall describe and
relate to services to be provided hereunder for the subsidiary, affiliate or
other business unit of Customer identified therein. Beginning on or after the
effective date specified in each Services & Fees Schedule, Customer shall cause
certain invoices and payments (hereinafter "Documents") to be mailed to NPC's
processing site(s) designated in such Services & Fees Schedule. NPC shall
process the Documents according to the procedures and time frames set forth in
the Performance Standards set forth in Exhibit B attached hereto and in the
additional Performance Standards corresponding to each Services & Fees Schedule,
which shall be numbered serially as Exhibits B-1, B-2, B-3, etc. The respective
Performance Standards may be modified from time to time if done in writing and
signed by both parties. NPC shall deposit all payments processed hereunder into
one or more deposit accounts maintained by Customer (or its respective
subsidiary, affiliate or other business unit) at National City Bank of Kentucky
or other mutually-accepted bank, and designated by Customer for such purpose.
NPC shall obtain a National City Bank of Kentucky demand deposit account in
Customer's name to be used for lockbox deposits and adjustments. Customer shall
notify NPC at least ninety (90) days in advance of any change in the form of its
customer payments, invoices or envelopes or the regular monthly mailing schedule
or volume of Documents or any system or other changes which would affect the
processing of the Documents (hereinafter referred to as "Document/Processing
Changes"). NPC shall admit properly identified and authorized Customer employees
onto its premises for purposes of monitoring compliance with this Agreement;
provided that such person shall not include any employee or other agent of any
competitor of NPC. Such admittance will be allowed during normal processing
hours upon one (1) business day's advance notice and shall not interfere with
NPC's operations.
2. Fees. Customer shall pay to NPC processing fees in accordance with each
Services & Fees Schedule and all conditions set forth herein. For purposes of
calculating fees, a standard item is defined as a machine-readable remittance
document whose quality generates normal rejection rates not to exceed two
percent (2%) of the monthly scanned documents volume. If the reject rate exceeds
two percent (2%) in any calendar month, then the provisions, if any, of each
Services & Fees Schedule relating to such an occurrence shall apply. Each credit
to a customer account shall be considered a separate remittance, notwithstanding
that a single check or other vehicle of payment may cover more than one such
credit. Certain fees, as indicated on each Services & Fees Schedule, are based
on charges by the Federal Reserve, FDIC and/or other depository institutions and
are subject to change. NPC shall inform Customer promptly of any changes in such
fees. NPC shall invoice Customer monthly in arrears, with a separate invoice for
each Services & Fees Schedule. A late charge equal to one and one-half percent
(1-1/2%) per month shall be imposed on all amounts remaining unpaid for more
than sixty (60) days after the date of the invoice. NPC may modify the fees in
each Services & Fees Schedule from time to time upon sixty (60) days notice to
Customer in order to fairly reflect any change in NPC's costs attributable to
any Document/Processing Changes or any changes in applicable law. NPC may also
modify the fees in each Services & Fees Schedule upon each anniversary date of
this Agreement and upon each renewal of this Agreement with not less than sixty
(60) days written notice to the Customer; provided, however, no such fee
increase shall exceed on a blended basis compared to the fees then in effect,
the greater of five percent (5%) or the Consumer Price Index (All Urban
Consumers for the group 1,200,000 or more population) for the most recent twelve
month period for which such statistics are available at the time such written
notice is given.
-1-
<PAGE> 2
3. Term & Termination. This Agreement shall have an initial term of three
(3) years, commencing on the date hereof, and shall automatically renew for
successive one (1) year terms unless terminated as provided herein. Either party
may terminate this Agreement with notice in writing to the other party at least
one hundred twenty (120) days prior to the expiration of any term of this
Agreement, and such termination shall be effective upon such expiration. If
either party shall materially default in the performance of any of its
obligations under this Agreement and shall fail or refuse to cure or commence to
cure such default within thirty (30) calendar days after written notice, the
other party may terminate this Agreement on an additional thirty (30) days
written notice. If, for any calendar month, NPC fails, with respect to four (4)
or more categories of performance (counting each category separately for each
subsidiary, affiliate or other business unit of Customer), to meet the standards
set forth in any of the Performance Standards, then such month shall be
considered a "Failed Month". The occurrence of two (2) or more Failed Months
during any twelve (12) consecutive months shall constitute a material default by
NPC of its obligations under this Agreement. If any party shall become
insolvent, be placed in receivership, made an assignment for the benefit of
creditors or seek relief or have a petition filed against it under federal
bankruptcy law, the other party may terminate this Agreement immediately upon
written notice.
4. Assignment. This Agreement may not be assigned by either party without
the prior written consent of the other (except that NPC will have the right to
subcontract portions of the NPC Services to be performed by it so long as NPC
remains responsible for such performance). The Parties acknowledge that either
of them may become a party to one or more transactions in the form of a merger
(including a reincorporation merger), consolidation, reorganization, stock sale
or exchange, sale of all or substantially all of such Party's assets or some
similar or related transaction, in any case with the result being that the
affected Party is the surviving entity or, if the affected Party is not the
surviving entity, the surviving entity continues to conduct the business
conducted by the affected Party prior to consummation of the transaction. No
such transaction involving either Party will be deemed to be an assignment of
the Agreement requiring the consent of the other, unless (a) in the case of NPC
being involved in such a transaction, the transaction (i) materially and
adversely affects NPC's ability to continue to perform the Services in
accordance with this Agreement or (ii) involves a competitor of Customer and
Customer reasonably believes that such involvement would conflict with
Customer's business interests, or (b) in the case of Customer being involved in
such a transaction, the transaction (i) materially changes the scope of Services
as described in this Agreement or the cost to Customer for such services, (ii)
impairs NPC's ability to meet the Service Levels, (iii) materially adversely
impacts the cost to NPC to perform its obligations hereunder, or (iv) impairs
Customer's ability to meet its financial obligations hereunder. In the event of
such an adverse material impact, the parties may agree upon an appropriate
modification of this Agreement.
5. Compliance with Law. Each of Customer and NPC warrants and represents
that it will comply with all applicable federal, state and local laws.
6. Confidentiality. The parties acknowledge that, during the course of
negotiation and/or the performance of this Agreement, the parties may have or
may have had access to and may receive or may have received certain confidential
or proprietary information of the other party, its parent company or its
affiliated and subsidiary companies, which that party reasonably considers
confidential and/or proprietary ("Confidential Information"). Confidential
Information includes without limitation any information pertaining to a party's
business operations. Each party will protect the other party's Confidential
Information from unauthorized dissemination and use with the same degree of care
that such party uses to protect its own like information, but in no event less
than reasonable care. Neither party will use the other's Confidential
Information for purposes other than those necessary to perform this Agreement.
Each party agrees that it will reveal such Confidential Information only to
those of its directors, officers, employees or agents with a need to know. Each
party agrees not to disclose such Confidential Information to any other third
party, except as may be agreed upon by the parties in writing (and then only
subject to written nondisclosure restrictions similar to those herein) or as
required by law. Confidential.
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<PAGE> 3
Information does not include any information which (i) is or becomes available
to a party on a non-confidential basis from a source other than the other party
or its agents or advisors, provided that such source is not bound by a
confidentiality agreement with, or other contractual, fiduciary or legal
obligation of confidentiality with respect to such information, (ii) is
independently developed by a party without use of any Confidential Information,
or (iii) is or becomes generally available to the public through no fault of a
party, and not as a result of an unauthorized disclosure by any third party. In
the event that either party is required by law to disclose any information
covered by this Agreement, the party being compelled to disclose shall provide
the other party with prompt notice of such pending disclosure so that the other
party may seek a protective order, if appropriate. The disclosing party shall
provide notice of any disclosure required by law to the other party and,
whenever reasonably possible, such notice shall be provided prior to disclosure.
Each party shall return or certify destruction of any Confidential Information
of the other party in its possession upon termination of this Agreement. The
provisions of the paragraph shall survive the termination or expiration of this
Agreement.
7. Dispute Resolution and Arbitration. The parties shall attempt to resolve
all disputes under the Agreement. The senior management of the parties shall be
the first level of resolution. If the senior managers cannot, in good faith,
resolve the dispute, the dispute will be escalated to the executive management
of both parties. If the executive managers cannot, in good faith, resolve the
dispute, the parties shall enter into arbitration as described below to resolve
such dispute. In the event that a dispute remains unresolved despite good faith
efforts of the parties, any controversy or claim arising out of or relating to
this Agreement or the breach thereof will be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA") then in effect, and judgment upon the award rendered by the
arbitrators may be entered in any court of competent jurisdiction. Any such
arbitration shall be conducted in the city nearest NPC's main U.S. office having
an AAA regional office. Unless otherwise agreed, there will be three
arbitrators. Each party shall select one arbitrator having experience with and
knowledge of computers and the information services business, and the two
selected arbitrators shall select a third arbitrator. The arbitrators may not
make any ruling, finding or award that does not conform to the terms and
conditions of this Agreement. Either party, before or during any arbitration,
may apply to a court of competent jurisdiction for a temporary restraining order
or preliminary injunction where such relief is necessary to protect its
interests pending completion of the arbitration proceedings. Arbitration will
not be required for actions for recovery of specific property, such as actions
for replevin; provided that the parties must first follow the dispute
resolution process stated above. Neither party nor the arbitrators may disclose
the existence or results of any arbitration hereunder without the prior written
consent of both parties. Before arbitration or any other form of legal or
equitable proceeding, the aggrieved party shall give the other party written
notice describing the dispute and the amount as to which it intends to initiate
action and the prior effort it has made to resolve such dispute. The parties
agree that this Agreement involves interstate commerce and, notwithstanding any
choice of law provisions in this Agreement, any arbitration hereunder shall be
governed by the Federal Arbitration Act (or any successor thereto).
8. Y2K Readiness. NPC is required to be Y2K compliant before June, 1999.
Prior to June 1, 1999, NPC shall provide to Customer reasonably sufficient
evidence of NPC's completion of Y2K certification; NPC's failure to do shall
give Customer an immediate and continuing right to terminate this Agreement as
of a date specified by it in a written notice of termination.
9. Entire Agreement. This Agreement, including all Exhibits incorporated
herein, constitutes the entire agreement between the parties with respect to the
subject matter hereof and any modification hereof must be in a writing signed by
both parties.
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<PAGE> 4
10. Excusable Failure to Perform or Delay in Performance. No party
to this Agreement shall be liable for failure to perform or delay in performance
of any of its obligations under this Agreement (except payment of amounts
already due and owing) where such failure or delay results from any act of God,
sabotage, military operation, national emergency, civil commotion, labor
disturbance, utility or computer failure, or the order, requisition, request or
recommendation of any government agency or acting government authority, or any
party's compliance therewith, or government proration, regulation, or priority,
or any change in laws or regulations which prevent any party from providing
services required by this Agreement, or any other cause beyond any party's
reasonable control whether similar or dissimilar to the foregoing causes.
11. Governing Law. This Agreement shall be governed by the laws of
the State of Ohio (without giving effect to the conflict of laws provisions
thereof); provided that any arbitration conducted pursuant to this Agreement
shall be governed by the Federal Arbitration Act (or any successor thereto). Any
suit, action, or proceeding with the respect to this Agreement shall be brought
in the courts of the State of Ohio, or in the United States District Court for
the Northern District of Ohio, Eastern Division, and the parties hereby consent
to the jurisdiction of such courts for the purpose of any such suit, action or
proceeding. Customer hereby irrevocably waives any and all objections to the
jurisdiction of such courts, including without limitation, lack of personal
jurisdiction, lack of venue, and forum non conveniens.
12. Legal Fees. If either party initiates arbitration or any legal
action to enforce any provision of this Agreement or otherwise in connection
with this Agreement, the prevailing party shall be entitled to recover from the
other its reasonable attorney fees and other legal costs in connection with such
proceedings.
13. Notices. Any notice permitted or required by this Agreement
must be in writing and shall be deemed given when sent by facsimile, registered
or certified mail, return receipt requested, or overnight delivery, and
addressed as follows:
If to NPC: National Processing Company
1231 Durrett Lane
Louisville, KY 40285
Attn: Remittance Services Manager
If to Customer: National City Corporation and National City Corporation
Consumer Loan Services Law Department
6750 Miller Road 1900 East Ninth Street
Brecksville, OH 44141 Cleveland, OH 44114
Attn: Phil McKenzie Attn: Mark Biars
14. Limitation of Liability. NPC's liability arising out of or in
any way connected with this Agreement shall not exceed the fees paid for the
services involved and shall not include any liability for any indirect,
incidental, special, or consequential damages, including without limitation lost
profits.
15. Relationship. Nothing in this Agreement shall be deemed to
create a partnership, joint venture or agency relationship between the parties.
Both parties are independent contractors and neither party is to be considered
the agent or legal representative of the other for any purpose whatsoever.
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<PAGE> 5
16. Waivers. Failure of either party to complain of any act or omission of
the other party, no matter how long the same may continue, shall not be deemed
to be a waiver by such party of any of its rights hereunder. No waiver by any
party at any time of any other provision of this Agreement shall be deemed a
waiver or breach of any other provision of this Agreement or a consent to any
subsequent breach of the same or any other provision hereunder. If any act or
omission by any party shall require the consent or approval of another party,
such consent or approval of such act or omission on any one occasion shall not
be deemed a consent to or approval of said act or omission on any subsequent
occasion or consent to or approval of any other act or omission on the same or
any subsequent occasion.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and each of the undersigned hereby warrants and represents that he or
she has been and is, on the date of this Agreement, duly authorized by all
necessary and appropriate action to execute this Agreement.
NATIONAL CITY CORPORATION NATIONAL PROCESSING COMPANY
By:________________________ By:____________________________
Name:______________________ Name:__________________________
Title:_____________________ Title:_________________________
<PAGE> 1
Exhibit 10.40
ASSET PURCHASE AGREEMENT
BETWEEN
NATIONAL PROCESSING COMPANY
("Seller")
AND
INVESTMENT SERVICES
INTERNATIONAL CO., LLC
("Buyer")
Dated As Of February __, 1999
<PAGE> 2
TABLE OF CONTENTS
1. Rules of Construction and Definitions.................................1
2. Assets
2.1 Assets to be Sold to Buyer............................... 7
2.2 Excluded Assets...........................................9
2.3 Non-Assignable Assets.....................................9
2.4 Further Assurances.......................................10
2.5 Sale at Closing Date.....................................10
2.6 Transfer of Bank Accounts and Freight Payment Accounts...11
2.7 Seller's Records.........................................11
2.8 Non-Disclosure, Non-Hire and Non-Compete Covenants.......11
3. Liabilities
3.1 Assumed Liabilities......................................12
3.2 Excluded Liabilities.....................................12
4. Consideration
4.1 Initial Determination of Cash at Closing.................13
4.2 Allocation...............................................13
5. Closing
5.1 Initial Closing..........................................13
5.2 Post-Closing Adjustments.................................13
6. Representations and Warranties of Seller
6.1 Organization.............................................14
6.2 Authorization............................................14
6.3 Consents and Defaults....................................15
6.4 Absence of Certain Changes...............................15
6.5 Litigation...............................................16
6.6 Compliance with Law......................................16
6.7 Options to Purchase......................................16
6.8 Good Title...............................................16
6.9 Customer Contracts.......................................17
6.10 Operations Agreements....................................17
6.11 Intellectual Property....................................17
6.12 Non-Compete, Non-Hire and Non-Disclosure Agreement.......18
6.13 Permits, Licenses and Other Authorizations...............18
6.14 Accounts Receivable......................................18
6.15 Freight Payment Accounts.................................19
6.16 Bank Accounts............................................19
6.17 Premises.................................................19
6.18 Books and Records........................................19
6.19 Environmental Matters....................................20
6.20 Taxes....................................................20
6.21 Misstatements or Omissions of Facts......................21
6.22 Commissions to Third Parties.............................21
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<PAGE> 3
6.23 Insolvency Proceedings...................................21
6.24 Employment Matters.......................................22
6.25 Insurance................................................22
6.26 Employee Benefit Plans...................................22
6.27 Year 2000................................................23
7. Representations and Warranties of Buyer
7.1 Organization.............................................23
7.2 Authorization............................................23
7.3 Consents ................................................23
7.4 Litigation...............................................24
7.5 Fund Availability........................................24
7.6 Commissions to Third Parties.............................24
8. Indemnifications
8.1 Seller's Indemnification of Buyer........................24
8.2 Buyer's Indemnification of Seller........................25
8.3 Notice of Claims.........................................25
8.4 Defense of Claims........................................25
8.5 Cooperation of the Parties...............................27
9. Conduct of Seller Pending Closing
9.1 Material Breach..........................................27
9.2 Consents, Waivers, Approvals and Authorizations..........27
9.3 Material Changes.........................................27
9.4 Access & Information.....................................30
9.5 HSR Act Notification.....................................30
9.6 Publicity................................................30
9.7 Cooperation and Standard of Performance..................30
9.8 Notice...................................................30
10. Conditions to Closing
10.1 Conditions to Buyer's Closing............................31
10.2 Conditions to be Satisfied by Buyer......................32
11. Post-Closing Covenants
11.1 Transition...............................................33
11.2 Sales/Transfer Taxes.....................................33
11.3 Transition Services Agreement............................33
12. Termination .........................................................33
13. Miscellaneous
13.1 Expenses.................................................34
13.2 Notices..................................................34
13.3 Confidentiality..........................................35
13.4 Survival.................................................36
13.5 Entire Agreement.........................................36
13.6 Assignment...............................................36
13.7 Successors and Assigns...................................36
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<PAGE> 4
13.8 Severability.............................................37
13.9 Waiver...................................................37
13.10 Alternative Dispute Resolution...........................37
13.11 Governing Law............................................40
13.12 Captions; Construction...................................40
13.13 Counterparts.............................................41
13.14 Schedules................................................41
<PAGE> 5
MASTER SCHEDULE LIST
EXHIBIT A - Transition Services Agreement
EXHIBIT B Escrow Agreement
SCHEDULE 1.10 - Bank Account(s)
SCHEDULE 1.21 - Customer List
SCHEDULE 2.1.5 - Excluded Trademarks
SCHEDULE 2.2 - Excluded Assets
SCHEDULE 3.1.3 - Limited Liabilities
SCHEDULE 6.3 - Consents and Defaults
SCUEDLUE 6.4 - Changes
SCHEDULE 6.5 - Litigation and Other Actions
SCHEDULE 6.8 - Encumbrances on Title (Good Title)
SCHEDULE 6.9 - Customer Contracts
SCHEDULE 6.10 - Operations Agreements
SCHEDULE 6.11 - Intellectual Property
SCHEDULE 6.12 - Non-Compete, Non-Hire and Non-Disclosure
Agreement
SCHEDULE 6.13 - Permits, Licenses and Other Authorizations
SCHEDULE 6.14 - Accounts Receivable
SCHEDULE 6.15 - Freight Payment Accounts
SCHEDULE 6.16 - Bank Accounts
SCUEDULE 6.17 - Leases
SCHEDULE 6.18 - Books and Records
SCHEDULE 6.20 - Tax Returns (Taxes)
SCHEDULE 6.24 - Employees
SCHEDULE 6.26 - Employee Benefit Plans
SCHEDULE 6.27 - Year 2000 Compliance
iv
<PAGE> 6
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made and entered into as of this _____
day of February __, 1999, by and between National Processing Company, a Kentucky
corporation ("Seller") and Investment Services International Co., LLC, a
District of Columbia limited liability company ("Buyer").
W I T N E S S E T H:
WHEREAS, Seller desires to sell, and Buyer desires to acquire certain
selected assets of Seller used in the Business and all rights to continue the
Services on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, for valuable consideration paid and each and every
covenant and agreement as set forth below, and the performance thereof, it is
agreed by and between the parties as follows:
1. Rules of Construction and Definitions. All references to any specific law,
act, statutes, regulation, or rule in this Agreement shall mean such law, act,
statute, regulation, or rule of the United States of America and, where
applicable, the laws of its states, territories, foreign jurisdictions,
protectorates and local laws. For purposes of this Agreement, the following
terms shall have the meanings indicated:
1.1. "Accountants" see Section 5.22.
1.2. "Accounts Payable" shall mean any account or note payable in
accordance with GAAP.
1.3. "Acquired Breaching Affiliate" see Section 2.8.
1.4. "Accounts Receivable" shall mean any account, advance or note
receivable in accordance with GAAP.
1.5. "Adjustment Amount" see Section 5.2.1.
1.6. "Affiliate(s)" shall mean any corporation or business organization
which is a member of a controlled group of corporations (as defined in Section
414(b) of the Internal Revenue Code), a controlled group of trades or businesses
(as defined in Section 414(c) of the Internal Revenue Code), an affiliated
service group (as defined in Section 414(m) of the Internal Revenue Code), or
any other arrangement (as defined in Section 414(c) of the Internal Revenue
Code) which includes Seller. An "NCC Affiliate" shall mean any
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<PAGE> 7
Affiliate that is not wholly-owned, directly or indirectly, by Seller. A "Seller
Affiliate" shall mean any Affiliate other than an NCC Affiliate.
1.7. "Agreement" shall mean this agreement, together with all attachments,
exhibits and appendices.
1.8. "Associates" shall mean Northwest Traffic Associates, Inc., a
Washington corporation.
1.9. "Balance Sheet Net Assets" see Section 4.
1.10. "Bank Account(s)" shall mean bank, thrift or money market accounts
related to the Business, as identified on Schedule 1.10.
1.11. "B.& L." shall mean B. & L. Consultants, Inc., a Massachusetts
corporation.
1.12. "Business" shall mean all the business activities and operations of
the Seller and all Subsidiaries related to the provision of Services, including
those described in the NPC Memorandum, the NPC Corporate Payables Confidential
Memorandum and the NPC Freight Audit and Payment Services Confidential
Memorandum, each dated December 1998.
1.13. "Cash at Closing" see Section 4.
1.14. "Claim(s)" shall mean any legal proceeding(s), claim(s), or
demand(s) instituted or asserted by any Person in respect to which any party to
this Agreement is entitled to indemnification pursuant to this Agreement.
1.15. "Closing" shall mean the closing of the transactions contemplated by
this Agreement.
1.16. "Closing Balance Sheet" see Section 5.2.2.
1.17. "Closing Date" shall mean a date selected by the parties hereto
within ten days following the receipt of all applicable approvals, consents,
expiration or earlier termination of all applicable waiting periods and
satisfaction or waiver of all other conditions precedent to Closing, or on such
other date as the parties shall mutually agree in writing.
1.18. "Code" see Section 6.26.
1.19. "Current Period" shall mean (a) any taxable year or other period
ending on or before the Closing Date for which a Tax Return is not required to
be filed on or before the Closing Date and (b) in the case of a taxable year or
other period beginning before and ending after the Closing Date, that portion of
such taxable year or other period that ends on and includes the Closing Date.
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<PAGE> 8
1.20. "Current Period Tax" shall mean the total Tax due for a Current
Period (as if no estimated payments had been made). Any Tax attributable to the
Current Period described in clause (b) of the definition of Current Period shall
be deemed to be a Current Period Tax only to the extent of the amount of such
Tax that would have been incurred if the taxable year or other period had ended
on the close of business on the Closing Date, with the basis for such tax being
determined (a) in the case of real and personal property Taxes, intangible
Taxes, ad valorem or value added Taxes, and the like, by allocating the Tax on a
daily basis, and (b) in the case of all other Taxes for such period, by closing
the books and records as of the close of business on the Closing Date:
1.21. "Customer(s)" shall mean customers and prospects of the Business as
of Closing as listed in Schedule 1.21.
1.22. "Customers Contract(s)" shall mean letters of intent, contracts,
agreements (oral or written), standing purchase orders and any other similar
documents for Services between Seller or any Subsidiary, on the one hand, and
Customers, on the other, including those identified in Schedule 6.9.
1.23. "Defense" shall mean the defense, settlement, or other disposition
of any Claim.
1.24. "Documents of Conveyance" shall mean deeds, bills of sale,
assignment and assumption agreements, endorsements, and other instruments of
transfer and conveyance together with any consents required for the same,
including any required consent to the assignment of Customer Contracts, Leases
and Operational Agreements, all in form and substance satisfactory to Buyer.
1.25. "Effective Time" shall mean 8:00 a.m. on the Closing Date, if the
last day of a calendar month, or otherwise as of the last day of the calendar
month next preceding the month during which the Closing Date occurs.
1.26. "Employee Benefit Plan" shall mean any employee benefit plan within
the meaning of Section 3(3) of ERISA or any Local Law (excluding any Local Law
applicable to Persons employed by Seller in Juarez, Mexico or Barbados.)
1.27. "Employee" means the individuals employed by Seller or any
Subsidiary as of the Closing Date who are engaged in the Business (excluding
those individuals so employed in Juarez, Mexico or Barbados).
1.28. "Environmental Law" shall mean any foreign or domestic federal,
state or local law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, determination, judgment, decree,
injunction or agreement with any Governmental Authority, or any Local Law,
relating to (a) the health, protection, preservation or restoration of the
environment including air, water vapor, surface water, groundwater, drinking
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<PAGE> 9
water supply, surface soil, subsurface soil, wetlands, plant and animal life or
any other natural resource, conservation and/or (b) the use, storage, recycling,
treatment, generation, transportation, processing, handling labeling,
production, release or disposal of Hazardous Substances. The term Environmental
Law includes (a) the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 42 U.S.C. Section 9601, et seq; the Clean Air Act, as
amended, 42 U.S.C. section 7401, et seq; the Federal Water Pollution Control
Act, as amended by the Clean Water Act, 33 U.S.C. Section 1251, et seq; the
Toxic Substances Control Act, as amended, 15 U.S.C. Section 9601, et seq.; the
Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et
seq; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq; and all
comparable state, local and foreign laws; (b) any common law (including common
law that may impose strict liability) that may impose liability for injuries or
damages due to the release of any Hazardous Substance.
1.29. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, 29 U.S.C. 1,001, et seq., as amended.
1.30. "Escrow Agent" shall mean NationsBank NA or such other signatory to
the Escrow Agreement as may be selected by Buyer with the consent of Seller,
such consent not to be unreasonably withheld, conditioned or delayed, to hold,
invest and apply the Escrow Funds in accordance with the terms of the Escrow
Agreement.
1.31. "Escrow Agreement" shall mean that certain agreement by and between
Buyer, Seller and the Escrow Agent, dated as of the Closing Date and executed
and delivered at Closing, relating to the deposit and application of the Escrow
Funds, such agreement to be substantially the same in form and content as
Exhibit B attached hereto.
1.32. "Escrow Funds" shall mean the initial deposit of three million
dollars ($3,000,000) into the Escrow Account, plus all earnings with respect to
the Escrow Account and minus (a) all losses, costs and expenses (including fees
and expenses of the Escrow Agent and any indemnity payments to the Escrow Agent)
and (b) any distributions made to Buyer from time to time in accordance with the
Escrow Agreement.
1.33. "Excluded Assets" shall mean those assets set forth in Section 2.2
of this Agreement.
1.34. "Freight Payment Account" shall mean each account established for
the receipt of Customers' funds and the payment of Customers' freight invoices.
1.35. "GAAP" shall mean U. S. generally accepted accounting principles.
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<PAGE> 10
1.36. "Governmental Authority" shall mean any government or political
subdivision, whether federal, state, local or foreign, or any agency or
instrumentality thereof, or any federal, state, local or foreign court,
arbitrator or other tribunal.
1.37. "Hazardous Substance" shall mean (a) any hazardous wastes, toxic
chemicals, materials, substances or wastes as defined by or for the purposes of
any Environmental Law or Local Law; (b) any "oil", as defined by the Clean Water
Act, as amended from time to time, and regulations promulgated thereunder
(including crude oil or any fraction thereof and any petroleum products or
derivatives thereof) or any Local Law; (c) any substance, the presence of which
is prohibited, regulated or controlled by any applicable federal, state, local
or foreign laws, regulations, statutes or ordinances now in force or hereafter
enacted or any Local Law relating to waste disposal or environmental protection
with respect to the exposure to, or manufacture, possession, presence, use,
generation, storage, transportation, treatment, release, emission, discharge,
disposal, abatement, cleanup, removal, remediation or handling of any such
substance; (d) any asbestos or asbestos-containing materials, polychlorinated
biphenyls ("PCBs") in the form of electrical equipment, fluorescent light
fixtures with ballasts, cooling oils or any other form, urea formaldehyde or
atmospheric radon; (e) any solid, liquid, gaseous or thermal irritant or
contaminant, such as smoke, vapor, soot, fumes, alkalis, acids, chemicals,
pesticides, herbicides, sewage, industrial sludge or other similar wastes; (f)
industrial, nuclear or medical by-products; (g) any lead based paint or coating
and (h) any underground storage tank(s).
1.38. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
1.39. "Internal Revenue Code" shall mean the United States Internal
Revenue Code of 1986, as amended.
1.40. "Intellectual Property" shall mean letters patent, patents, patent
applications, patent licenses, patent renewals and extensions, Software,
software licenses, know-how, licenses, trade names, brand names, trademarks,
trade secrets, copyrights, service marks, trademark registrations and
applications, service mark registrations and applications, copyright
registrations and applications and all other intangible property rights owned or
issued by the Seller or any Subsidiary in the Business.
1.41. "Lease(s)" shall mean all leasehold rights and uses and all
licenses, easements, hereditaments, tenements and appurtenances belonging or
appertaining thereto relating to any premises used or held for use in the
Business.
1.42. "Local Law" shall mean any act, statute, regulation, rule,
ordinance, order, precedent or similar law in any non-federal jurisdiction that
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<PAGE> 11
is similar in form, substance or intent to the United States act, statute,
regulation, rule, ordinance, order, or similar law mentioned in the particular
context.
1.43. "Material Adverse Effect" shall mean an event, change or occurrence
that has a material negative impact on the condition (financial or otherwise),
business, results of operations of the Business or the Subject Assets or the
Buyer as the case may be, the ability of Seller, any Subsidiary or Buyer, as the
case may be, to consummate the transactions contemplated hereby, the validity or
enforceability of this Agreement or that would delay the consummation of the
transactions contemplated hereunder.
1.44. "Multiemployer Plan" shall mean any multiemployer plan within the
meaning of Section 3(37) of ERISA or any Local Law.
1.45. "Net Assets" shall mean (i) total Subject Assets conveyed less (ii)
the sum of (A) total liabilities assumed and (B) Accounts Receivable more than
90 days old as of the Closing Date.
1.46. "NTA" shall mean NTA, Inc., a Washington corporation.
1.47. "Operations Agreements" shall mean software and computer equipment
licenses and maintenance agreements, other equipment service agreements, rental,
finance and lease agreements for personal property and all other agreements,
oral or written, other than Customer Contracts or Leases, applicable to the
Business.
1.48. "Person" shall mean any individual, sole proprietorship,
partnership, corporation, limited liability company, unincorporated society or
association, trust, estate, union, Governmental Authority or other entity.
1.49. "Prior Period" shall mean any taxable year or other period ending
before the Closing Date for which a Tax Return is required to be filed on or
before the Closing Date.
1.50. "Restricted Area" shall mean within the United States of America,
Mexico and Canada.
1.51. "Services" shall mean (i) the freight bill auditing, processing and
paying of freight bill invoices issued by common carriers to Customers and the
preparation of various reports for Customers by Seller and (ii) the accounts
payable payment processing services involving capturing Customers' accounts
payable data, matching and verifying the accuracy of Customer's purchase orders
against vendors' invoices, receiver documents and other supporting paperwork,
making payments from the Customers' account invoices and other ancillary
services such as related data entry and check printing services.
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1.52. "Software" shall mean all computer programs, materials, tapes,
know-how, object and source codes, code techniques, other written materials in
the possession or control of Seller or any Subsidiary or to which, and to the
extent to which, Seller or any Subsidiary has access and processes developed by
or on behalf of Seller or any Subsidiary for the provision of Services,
including all documentation therefor.
1.53. "Subject Assets" shall mean all assets, rights, properties and
businesses of every kind and description, whether tangible or intangible, real,
personal or mixed, owned directly or indirectly by the Seller or any Subsidiary
and used in the Business as currently conducted or pertaining to the Business or
necessary to carry on the business and operations of the Business as currently
conducted, including those assets set forth in Section 2.1 of this Agreement and
the Schedules referenced therein, together with additions thereto acquired in
the ordinary course of business prior to the Closing Date but excluding the
Excluded Assets.
1.54. "Subsidiary" shall mean any of Associates, B. & L. or NTA, and
"Subsidiaries" shall mean all of them together.
1.55. "System" shall mean any Software, hardware, databases, information
systems, interfaces or embedded control systems (microprocessor controlled,
robotic or other device).
1.56. "Tax(es)" shall mean income, gross receipts, property, sales, use,
license, excise, unitary business franchise, employment, social security,
unemployment, compensation, disability, governmental pension or insurance,
withholding or similar taxes or contributions, assessments, charges, duties,
fees or levies of any kind whatsoever (whether or not requiring the filing of
returns), together with any assessments, interest, additions, or penalties with
respect thereto and any interest in respect of such additions or penalties.
1.57. "Tax Return" shall mean any return, report, declaration, statement,
certificate, schedule, or other document required to be filed with or provided
to the Internal Revenue Service of the United States federal government, any
other federal, state, foreign or municipal agency, department, commission or
other Governmental Authority, or any other party in connection with any Tax,
including any federal, state, local or foreign income tax return, excise tax
return, franchise tax return, sales or use tax return, property tax return,
information return, stamp tax return, ad valorem or valued added tax return,
documentary tax return, gross receipts tax return, earned surplus tax return and
the like.
1.58. "Year 2000 Compliant" and its cognates means that any System (a)
shall accurately process, provide and/or receive date data (including
calculating, comparing and sequencing) within, from, into and between centuries
(including the twentieth and twenty-first centuries), including leap
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year calculations; and (b) neither the performance nor the functionality of a
System will be affected by dates prior to, on, after, or spanning January 1,
2000 or September 9, 1999. In particular, but without limitation: (i) no value
for current data will cause any error, interruption or decreased performance in
the operation of a System, (ii) all manipulations of date-related data
(including calculating, comparing, sequencing, processing and outputting) will
produce correct results for all valid dates, including when used in combination
with other products; (iii) date elements in interfaces and data storage will
specify the correct century to eliminate date ambiguity without human
intervention, including leap year calculations; (iv) where any date element is
represented without a century, the correct century will be unambiguous for all
manipulations involving that element; and (v) authorization codes, passwords and
zaps (purge functions) should function normally and in the same manner prior to,
on, after, and spanning January 1, 2000, and September 9, 1999, including the
manner in which they function with respect to expiration dates and CPU serial
numbers.
2. Assets.
2.1 Assets to be Sold to Buyer. Subject to and in reliance upon the
covenants, representations, warranties and agreements set forth herein, and
subject to the conditions in this Agreement, the Seller shall (or shall cause
its Subsidiaries to, as applicable) sell, convey, transfer, assign and deliver
to the Buyer, and the Buyer shall purchase, acquire and accept from the Seller
or such Subsidiaries on the Closing Date the Subject Assets, free and clear of
any encumbrance, lien or impediment to title, including the following:
2.1.1 Tangible Assets. All furniture, fixtures, vehicles, machinery,
communications, computer, data processing and other equipment, Software,
operating supplies, spare parts and other inventories used or held, and/or
located at any premises used or held, by Seller or any Subsidiary in connection
with the Business;
2.1.2 Customer Contracts. All Customer Contracts and work in
progress for Services;
2.1.3 Operations Agreements. All rights to and interests in
Operations Agreements;
2.1.4 Proprietary Information. All proprietary information,
including procedures, market information, surveys, listings (including telephone
numbers) used in the Business and other such proprietary information and other
intangible assets relating to the Business;
2.1.5 Intellectual Property. All rights in Intellectual Property and
all goodwill, whether of Seller or any Subsidiary, used in the Business
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therewith (excluding all names, trademarks, and service marks used by Seller for
or in connection with any of Seller's other businesses as set forth in Schedule
2.1.5);
2.1.6 Personnel Agreements. All rights (but no obligations), if any,
to all employment agreements (whether written or oral) and any non-compete,
non-hire and non-disclosure agreements with any Employee currently or formerly
associated with Seller or any Subsidiary, including each such written agreement
as described in Schedule 6.12, including all rights of enforcement thereunder
(and Seller will cooperate with Buyer at Buyer's expense in the enforcement of
any such rights, including bringing any action in its own name but under the
control of Buyer to the extent required for the effective enforcement thereof);
2.1.7 Contract Rights. All rights to and interests in or under any
written or oral contract, agreement, Lease, plan, instrument, registration,
license, franchise, certificate of occupancy, other permit or approval of any
nature, or other document, commitment, arrangement, undertaking, practice or
authorization and any intangible property rights associated with or constituting
a part of the Business;
2.1.8 Accounts Receivable. All rights, title and interest to and in
any Accounts Receivable derived from the Business (including amounts past due,
plus interest thereon) whose payment has not been received and posted as of the
Effective Time;
2.1.9 Cash and Accounts. All cash or cash equivalents on hand or in
the Bank Accounts, the Freight Payment Accounts, all marketable securities and
all prepaid items, such as utility and security deposits and the like;
2.1.10 Records. Copies of all corporate tax records and other
corporate records of the Seller and the Subsidiaries relating primarily to the
Subject Assets or the Business, and originals of all records, files,
correspondence, data, memoranda, notes, plans, contracts, recorded knowledge and
information (including lists of Customers and suppliers with respect to the
Business and Customer and sales correspondence and other files) used in
connection with or required to continue the Business as it is currently being
conducted;
2.1.11 Tax Agreements. All agreements with taxing authorities or
Governmental Authorities conveying any tax benefits, credits, exemptions,
exclusions, deductions or similar benefits to Seller or any Subsidiary with
respect to the Subject Assets or the Business;
2.1.12 Choses in Action. All rights or choses-in-action arising out
of occurrences before or after the Closing, including all rights under
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express or implied warranties in favor of the Seller or any Subsidiary, if any,
relating to the Subject Assets or the Business;
2.1.13 Certificates and Authorizations. Any and all certificates of
title and, to the extent available as a matter of law, any and all
authorizations and licenses and the like issued to Seller or any Subsidiary by
any Governmental Authority relating to the Subject Assets, the Services or the
Business;
2.1.14 Other Assets. All other assets, rights and properties of any
nature used or held for use in the Business, other than those otherwise excluded
pursuant to Section 2.2 of this Agreement.
2.2 Excluded Assets. Notwithstanding anything to the contrary
contained in Section 2.1, Seller is not selling or causing to be sold, and Buyer
is not purchasing, any of the following Excluded Assets:
(i) all rights, properties and assets which have been sold,
transferred, conveyed, assigned, delivered or otherwise
disposed of by the Seller or any Subsidiary prior to the
Closing in transactions permitted or contemplated by this
Agreement;
(ii) marketable securities, life insurance policies, insurance
policies of any other type or rights to any insurance coverage
under any of Seller's or any Subsidiary's existing policies
and any prepaid insurance premiums;
(iii) any Employee Benefit Plan and all amendments, all documents
and financial statements relating thereto or associated trust
maintained by Seller or any Subsidiary;
(iv) any rights (including tax and other refunds and claims
relating thereto) relating to the liabilities not assumed by
Buyer;
(v) any goodwill reported on the balance sheet of Seller except
for the goodwill used in the Business which is being
transferred to the Buyer pursuant to Section 2.1.5 of this
Agreement;
(vi) originals of any corporate minute books or stock records, and
any tax records and other corporate records of Seller or any
Subsidiary that are not primarily related to the Subject
Assets or the operations of the Business;
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(vii) any Hazardous Substances;
(viii) any right, property or asset used by Seller in Seller's other
businesses and listed in Schedule 2.2; and
(ix) the capital stock of the Subsidiaries.
2.3 Non-Assignable Assets. Notwithstanding anything contained in this
Agreement to the contrary, this Agreement shall not constitute an agreement or
an attempted agreement to transfer or assign any contract, license, lease,
commitment, sales or purchase order or any other agreement or any claim, right
or benefit arising thereunder or resulting therefrom, including Customer
Contracts, Leases and Operations Agreements (each for purposes of this Section
2.3, an "agreement"), if the transfer or assignment (attempted or actual) of any
such agreement without notice to or the consent of any other party thereto would
constitute a breach thereof or would in any way adversely affect the rights of
Buyer, Seller or any Subsidiary, as applicable, thereunder, unless such notice
has been timely delivered or such consent timely obtained. Seller has exercised,
at Seller's expense, (and, if requested by Buyer, after the Closing Date will
exercise, at Seller's expense) commercially reasonable efforts to timely provide
such notices and to timely obtain the consent of any party or parties to those
agreements listed on Schedule 6.3 with respect to the transfer or assignment
thereof by Seller to Buyer wherever such notice or consent is required and on
terms and conditions reasonably satisfactory to Buyer. If any such consent is
not obtained, or if an attempted assignment of an agreement would be ineffective
or would affect the rights of Buyer, Seller or any Subsidiary, as applicable,
thereunder such that Buyer would not in fact receive all rights transferred
hereunder, Seller shall use its commercially reasonable efforts to perform or
cause to be performed such agreement for the account of Buyer or otherwise
cooperate with Buyer in any arrangement reasonably necessary or desirable to
provide for Buyer the benefits and the corresponding obligations of any such
agreement, including enforcement for the benefit of Buyer of any and all rights
of Seller or any Subsidiary, as applicable, against the other party thereto
arising out of the breach, termination or cancellation of such agreement by such
other party or otherwise. To the extent Seller performs or cause the performance
under any permit or license for the benefit of Buyer pursuant to this Section
2.3 and Buyer ultimately obtains such permit or license for itself, Seller
shall, on demand by Buyer, relinquish or cause its Subsidiary to relinquish its
rights under such permit or license with respect to the Business. The parties
acknowledge and agree that Seller's undertaking pursuant to this Section 2.3
shall not render ineffective or be deemed a waiver of the condition precedent
set forth in Section 10.1.6 hereof.
2.4 Further Assurances. From time to time after the Closing, Seller will
execute and deliver or cause its Subsidiaries to execute and deliver to Buyer
such additional Documents of Conveyance, instruments of sale, transfer,
conveyance, assignment and delivery, and such consents, assurances, powers
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of attorney and other instruments as may be reasonably requested by Buyer or its
counsel in order to vest in Buyer all right, title and interest of Seller or
such Subsidiaries, as applicable, in and to the Subject Assets in order to carry
out the purpose and intent of this Agreement. Seller shall promptly transfer and
deliver or cause to be transferred and conveyed to Buyer any cash or other
property received by Seller or any Subsidiary, directly or indirectly, at any
time after the Closing Date in respect of or relating to any Subject Assets or
from the operations of the Business from and after the Effective Time. Seller
shall use its commercially reasonably efforts from and after the date hereof to
assist Buyer in obtaining extensions and renewals from Customers whose Customer
Contracts have been terminated or expired on or after December 31, 1998, or
whose Customer Contracts terminate or expire on or before July 31, 1999.
2.5 Sale at Closing Date. The sale, transfer, assignment and delivery by
the Seller and its Subsidiaries of the Subject Assets to the Buyer shall be
consummated as of the Effective Time on the Closing Date by Documents of
Conveyance.
2.6 Transfer of Bank Accounts and Freight Payment Accounts. Seller shall
cause the financial institutions in which the Bank Accounts and Freight Payment
Accounts are located to transfer the beneficial ownership of the Bank Accounts
and Freight Payment Accounts, by retitling, assignment or otherwise, to Buyer,
so that (a) as of the Closing Date, Buyer will have sole and exclusive use of,
and access to, such Bank Accounts and Freight Payment Accounts, and (b) there
will be no disruption of payments made from the accounts or deposits to such
accounts. Buyer will designate a representative to assist in coordinating the
transfer of such accounts.
2.7 Seller's Records. Buyer shall be entitled to inspect any and all
records retained by Seller or any Subsidiary and obtain copies, at the cost of
Seller, of same (or originals if reasonably requested by Buyer) at reasonable
times and locations and in the manner agreed to by Buyer and Seller. Seller
agrees either to retain all such records for a period of at least six (6) years
after the Closing Date, or, at Seller's option, to deliver such records to Buyer
prior to such time.
2.8 Non-Disclosure, Non-Hire and Non-Compete Covenants. Seller agrees that
(y) for a period of five (5) years from the Closing Date, neither Seller nor any
Seller Affiliate shall, and (z) for a period of three (3) years from the Closing
Date, no NCC Affiliate shall, nor shall any of such Persons cause a third party
to, directly or indirectly: (a) canvass, solicit or accept any business
involving or competing with any Services within the Restricted Area; (b) request
or advise any of the Customers, suppliers, potential Customers or suppliers or
other business contacts of Buyer within the Restricted Area to avoid doing
business with Buyer or to transfer, withdraw, curtail or cancel any of their
business relating to Services with Buyer; (c) induce or attempt to induce any
Person who at the time of the Closing Date is, or within 12 months prior to the
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Closing Date was, an employee of Seller or any Subsidiary or an independent
contractor engaged to provide services in connection with the Business or any of
the Services to terminate their relationships with, refuse to enter into a
relationship with or breach their agreements with Buyer or any of its
Affiliates; (d) employ any of Buyer's personnel engaged in providing Services
while employed by Buyer or, except for personnel performing solely clerical
functions for Buyer, for one (1) year after termination of such employment with
Buyer, without Buyer's prior written consent; (e) divulge, transmit or otherwise
disclose or cause to be divulged, transmitted or otherwise disclosed, or use any
information acquired by such Person, whether before or after the Closing Date,
regarding the Services within the Restricted Area; (f) either as an agent,
partner, officer, director, shareholder, member, advisor, consultant, lender,
guarantor, investor or in any other capacity, participate in, engage in or have
a financial interest in, any business which is engaged in any Services in the
Restricted Area, provided, however, that any NCC Affiliate may so act as a
consultant, advisor, lender or guarantor without breaching this clause (f) of
Section 2.8. The passive ownership of a minority interest (10% or less) in a
Person even though such Person may be a competitor of Buyer, shall not be deemed
a financial interest for purposes of clause (f) of this Section 2.8.
Notwithstanding anything set forth in the immediately preceding sentence,
it shall not be a violation of clause (f) of this Section 2.8 if any NCC
Affiliate shall acquire an interest of whatever magnitude in any bank holding
company that owns an interest in a Person whose activities would otherwise
constitute a breach of such clause ( an "Acquired Breaching Affiliate"),
provided, however, that the net income of such Acquired Breaching Affiliate may
not constitute more than five percent (5%) of the consolidated net income of
such acquired bank holding company. In the event that any NCC Affiliate shall so
acquire any Acquired Breaching Affiliate and later determine to sell or
otherwise transfer ownership of such Person or all or substantially all of its
assets, then (y) such NCC Affiliate shall so notify Buyer and offer it a
reasonable opportunity to participate in any bidding or other negotiation for
the purchase of such Person or its assets, and (z) such NCC Affiliate shall
provide Buyer with the last opportunity to bid on such purchase, providing Buyer
with a reasonable opportunity to review the penultimate bid and to enter its
final bid with respect thereto.
3. Liabilities.
3.1 Assumed Liabilities. On the Closing Date, simultaneously with the
transfer of the Subject Assets, Buyer shall assume and thereafter pay, or cause
to be paid, or otherwise satisfy or discharge those obligations and liabilities
of Seller and its Subsidiaries, if any, described below:
3.1.1 Customer Contracts. Obligations to provide Services to the
Customers pursuant to the Customer Contracts listed on Schedule 6.9 arising on
and after the Closing Date;
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3.1.2 Leases. Payment obligations for goods and services provided in
respect of the Business, the Services or any of the Subject Assets after the
Effective Time under any Leases listed on Schedule 6.17 or Operations Agreements
listed on Schedule 6.10.
3.1.3 Specified Liabilities. Those specific limited liabilities set
forth on Schedule 3.1.3 attached hereto.
3.2 Excluded Liabilities. It is specifically agreed and understood by all
parties that neither Buyer, nor any assignee, is assuming, nor shall any such
Person have any responsibility whatsoever for, any liabilities other than those
specifically identified in Section 3.1, including (a) liabilities incurred or
accrued prior to the Effective Time under or in connection with any Lease,
Customer Contract or Operations Agreement, or (b) liabilities incurred or
accrued at any time under or in connection with an Employee Benefit Plan, policy
or practice, or any employment agreement, collective bargaining agreement, or
severance or incentive compensation arrangement of Seller or any Affiliate .
Buyer is not, and shall not be, a successor employer to Seller or any Affiliate
with respect to any Employee Benefit Plan, policy or practice maintained by
Seller or such Affiliate. Seller shall remain fully liable with respect to all
such Employee Benefit Plans, policies or practices, and Buyer does not and will
not be required to assume any liability arising out of any Employee Benefit
Plan, policy or practice of Seller or such Affiliate. Buyer shall not be liable
to any Employee for any employee benefits except those employee benefits
provided under an Employee Benefit Plan, policy or practice of Buyer that
becomes available as a result of employment with Buyer. Buyer will, however,
provide severance benefits to Employees employed by Buyer for six (6) months
following the Closing Date that are no less beneficial than the severance
benefits currently being offered by Seller to the Employees.
4. Consideration.
4.1 Initial Determination of Cash at Closing. In consideration for the
sale and transfer of the Subject Assets and other commitments, representations,
warranties and restrictions made and agreed to by Seller, Buyer will (a) pay
Seller at Closing an amount equal to the book value of the Net Assets as of
December 31, 1998, as reflected on Seller's unaudited balance sheet referred to
in Section 6.18.1 ("Balance Sheet Net Assets"), plus a premium of twenty one
million dollars ($21,000,000) payable in immediately available funds via wire
transfer at Closing ("Cash at Closing"), (b) deposit into the Escrow Fund
pursuant to the Escrow Agreement the sum of three million dollars ($3,000,000)
and (b) assume the assumed liabilities as provided in Section 3.1.
4.2 Allocation. The Cash at Closing, as adjusted pursuant to Section 5.2,
shall be allocated among the Subject Assets in accordance with their
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respective fair market values as determined in good faith by the Buyer. Each of
the Seller and Buyer agrees (i) to jointly complete and separately file Form
8594 with their federal income tax return for the tax year in which the Closing
occurs and (ii) neither the Seller nor Buyer will take a position on any income,
transfer or gains tax return filed with any Governmental Authority charged with
the collection of any such tax that is in any manner inconsistent with the terms
of any such allocation without the written consent of the other party.
5. Closing.
5.1 Initial Closing. The initial Closing shall take place via exchange of
executed facsimile copies of the Documents of Conveyance and any other documents
required by this Agreement and shall be deemed to occur at the offices of
Seller, 1231 Durrett Lane, Louisville, KY 40285 on the Closing Date. For all
accounting, tax and other financial purposes, to the extent permitted by law,
Closing shall be deemed to occur at the Effective Time. Risk of loss on the
Subject Assets shall pass from Seller and its Subsidiaries to Buyer upon the
Effective Time.
5.2 Post-Closing Adjustment.
5.2.1 Adjustment Amount. The amount (as determined pursuant to
Section 5.2.2) by which (i) the book value of the Net Assets of Seller and its
Subsidiaries as of the Closing Date exceed or are less than the Balance Sheet
Net Assets shall be referred to as the "Adjustment Amount" and shall be treated
as an increase or decrease (whichever is applicable) to the purchase price paid
hereunder.
5.2.2 Adjustment Procedure. Buyer at its expense will prepare a
balance sheet ("Closing Balance Sheet") of the Net Assets of the Business as of
the Effective Time. The Closing Balance Sheet and the calculation of Net Assets
thereon, including a determination of reserves, shall be prepared in accordance
with Seller's accounting principles as applied on a consistent basis and in
accordance with GAAP. If there is a conflict between Seller's accounting
principles and GAAP, then GAAP shall prevail. Buyer will deliver the Closing
Balance Sheet to Seller within sixty (60) days after the Closing Date. If,
within thirty (30) days following delivery of the Closing Balance Sheet, Seller
has not given Buyer notice of its objection to the Closing Balance Sheet (which
notice must contain a statement of the basis of Seller's objection(s)), then the
book value of the Net Assets in the Closing Balance Sheet will be used in
computing the Adjustment Amount. If, however, Seller timely gives such notice of
objection and the parties are unable to resolve any such objections within ten
(10) days thereafter, then the issues in dispute (and only those issues) will be
submitted to Arthur Andersen, LLP, certified public accountants (the
"Accountants"), for resolution. If issues in dispute are submitted to the
Accountants for resolution: (i) each party will furnish to the Accountants such
work papers and other documents and information relating to the disputed
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issues as the Accountants may request and are available to that party or its
subsidiaries (or its independent public accountants), and will be afforded the
opportunity to present to the Accountants any material relating to the
determination and to discuss the determination with the Accountants; (ii) the
determination by the Accountants, as set forth in a notice delivered to both
parties by the Accountants, will be binding and conclusive on the parties; (iii)
Buyer and Seller will each bear 50% of the fees of the Accountants for such
determination; and (iv) the Accountants shall be acting as experts and not as
arbitrators.
5.2.3 Payment of Adjustment Amount. On the second business day
following the final determination of the Adjustment Amount, Buyer shall pay
Seller the Adjustment Amount if it is a positive number and Seller shall pay the
absolute value of the Adjustment Amount to Buyer if it is a negative number. All
payments will be made together with interest at 7% per annum compounded daily
beginning on and including the Closing Date and ending on but excluding the date
of payment.
6. Representations and Warranties of Seller. Seller hereby represents and
warrants to Buyer that:
6.1 Organization. Each of Seller and each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation as set forth in the definitions of such Person. Each of Seller and
each Subsidiary is duly qualified to do business as a foreign corporation in
each jurisdiction in which its ownership or lease of property or the nature of
the business conducted by it makes such qualification necessary, except for such
jurisdictions in which the failure to be so qualified would not have a Material
Adverse Effect.
6.2 Authorization. Seller has full corporate power and authority to
execute and deliver this Agreement and to perform fully its obligations
hereunder. The execution, delivery and performance of this Agreement by Seller
has been duly authorized by all necessary corporate action of Seller. This
Agreement has been duly executed and delivered by Seller and this Agreement
constitutes a legal, valid and binding obligation of Seller, enforceable against
Seller in accordance with its terms except to the extent enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium, receivership,
conservatorship or similar laws affecting the rights of creditors generally or
equitable principles limiting the right to obtain specific performance or other
similar relief.
6.3 Consents and Defaults. Except as set forth on Schedule 6.3, neither
the execution and delivery of this Agreement by Seller nor the performance of
its obligations hereunder will (a) conflict with or result in any breach of any
provision of the certificate of incorporation or bylaws of Seller; (b) require
any consent or approval under, conflict with, result in the breach,
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termination or acceleration of, or constitute a default under any mortgage,
Lease, Operations Agreement, agreement, indenture, commitment, Customer Contract
or other instrument, oral or written, to which Seller or any Subsidiary is a
party or by which Seller, any Subsidiary or any of the properties of each are
bound; (c) constitute a violation of any law, regulation, order, writ, judgment,
injunction or decree applicable to Seller, any Subsidiary or any of its or their
properties; (d) violate, conflict with, constitute a default ( or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in termination of, or accelerate the performance required by, or
result in the creation of any lien or other encumbrance upon any of the
properties or assets of Seller or any Subsidiary under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the Seller
or such Subsidiary is a party or to which the Business or any Subject Assets are
subject, except for such violations, conflict breaches, defaults, terminations,
accelerations or creations of liens or then encumbrances, which will not have a
Material Adverse Effect; (e) require any consent, approval, authorization or
permit of or from, filing with or a notification to any court or Government
Authority, except (i) filings under the HSR Act or (ii) consents, approvals,
authorizations, permits, filings or notifications which, if not obtained or made
will not individually or in the aggregate, have a Material Adverse Effect or (f)
have any impact on Buyer's right to conduct the Business as currently being
conducted by the Seller and the Subsidiaries.
6.4 Absence of Certain Changes. Since December 31, 1998: (a) the Seller
has operated the Business in the ordinary and usual course; (b) there has not
been any change in the business, financial condition or results of operations of
the Business that has had or will have a Material Adverse Effect; (c) there has
not been any damage, destruction or loss (whether or not covered by insurance)
to the Subject Assets that has had or could reasonably be expected to have a
Material Adverse Effect; (d) other than as listed on Schedule 6.4, no Customer
has canceled, discontinued, or given written or verbal notice of its intention
to cancel, discontinue or substantially reduce its relationship with Seller that
would have an adverse effect on the Business; (e) except as otherwise set forth
on Schedule 6.4, the Seller is not in default and, to the knowledge of the
Seller, no Customer or vendor is in default, under any Customer Contract, Lease
or Operations Agreement, and each such contract (whether written agreement or
outstanding purchase order) is in full force and effect on the date hereof; (f)
other than as listed on Schedule 6.4, each such Customer Contract contains no
material changes in Seller's standard form of agreement and specifically no
deviation in warranties or limitation of Seller's liability; and (g) other than
as listed on Schedule 6.4, Seller has not made any change to the Business that,
if done between the date hereof and the Closing Date, would constitute a breach
of Section 9.3 hereof.
6.5 Litigation. Except as set forth on Schedule 6.5: (a) there is no
judicial or administrative action, proceeding or investigation pending or, to
the
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knowledge of the Seller, threatened, that questions the validity of this
Agreement or any action taken or to be taken by the Seller in connection with
this Agreement, and (b) there is no claim, litigation, action, suit, proceeding,
inquiry (whether administrative or judicial at law or equity), or investigation
pending or, to the knowledge of the Seller, threatened against or affecting, or
any judgment, award, order, injunction or decree outstanding against the Seller,
or any Subsidiary, in each case relating to the Business, or any of the Subject
Assets that, if adversely determined, would individually or in the aggregate
have a Material Adverse Effect.
6.6 Compliance with Law. All Customer Contracts, Leases and Operations
Agreements have been entered into in the ordinary course of business and not in
violation of any applicable federal, state or local law, regulation, ordinance
or other requirement of any Governmental Authority, and no written notice has
been received by the Seller alleging any such violations.
6.7 Options to Purchase. Seller does not currently have outstanding, and
will not grant, any options, rights to purchase, contracts, or any other right
entitling anyone to acquire any of the Subject Assets or the Business except as
otherwise expressly contemplated herein.
6.8 Good Title. Except for those liabilities set forth in Schedule 6.8,
which shall be paid and discharged by Seller at or prior to Closing, Seller owns
and holds good and marketable title, including the power of conveyance, to all
of the Subject Assets, tangible and intangible, free and clear of all liens,
mortgages, pledges, encumbrances, security interests, income taxes, withholding
taxes, employment taxes, sales and property taxes, restrictions, defects of
title and other impairments of title. The Subject Assets constitute all of the
assets used by Seller and the Subsidiaries to conduct the Business and all of
the assets necessary to allow Buyer to conduct the Business as it is currently
conducted by Seller and the Subsidiaries and, if tangible, are in good repair
and operating condition for their intended use in the Business. At Closing,
Seller shall convey or caused to be conveyed to Buyer good and marketable title
to the Subject Assets free and clear of all liens, encumbrances or other
impairments of title, subject, however, to any continuing obligation of Buyer
under any Lease or Operations Agreement to satisfy any conditions precedent
contained in any such agreement as to any subsequent transfer or assignment
thereof.
6.9 Customer Contracts. Seller has delivered to Buyer true, complete and
accurate copies of Customer Contracts that are identified on Schedule 6.9.
Schedule 6.9 lists all Customers as of the date of this Agreement and identifies
all Customer Contracts, and also describes all Customers obtaining Services from
Seller or a Subsidiary without a current written agreement. Each of the Customer
Contracts listed on Schedule 6.9 is in full force and effect and is unimpaired
by any breach of the Seller or any Subsidiary, as applicable, that would give
any other party thereto the right to terminate such Customer
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Contract or receive damages from the Buyer after the Closing Date (except for
breaches that, individually or in the aggregate, would not have a Material
Adverse Effect). For each Customer for which Seller or any Subsidiary provides
Services without a current written agreement, Schedule 6.9 fully describes all
terms, practices and procedures governing Seller's or such Subsidiary's
relationship with such Customer. Neither Seller nor any Subsidiary has any
obligations, written or otherwise, to any Customer other than those set forth in
the Customer Contracts or, for Customers without agreements, those set forth on
Schedule 6.9. None of Seller's or any Subsidiary's obligations to Customers,
written or otherwise, include any performance-based or other monetary penalties,
other than those explicitly set forth in the Customer Contracts. Neither Seller
nor any Subsidiary is involved in any claim, dispute or controversy with any of
its Customers that, individually or in the aggregate, could reasonably be
anticipated to have a Material Adverse Effect. Except as set forth in Schedule
6.9, there exists no oral or written termination notice indicating, and Seller
has no reason to believe, that any Customer will terminate any Customer
Contract.
6.10 Operations Agreements. Schedule 6.10 contains a true, complete and
accurate list of all Operations Agreements used in or held for the Business.
Seller has delivered or caused to be delivered to Buyer true, complete and
accurate copies of all Operations Agreements, and all Operations Agreement are
enforceable according to their terms. Each of the Operations Agreements listed
on Schedule 6.10 is in full force and effect and is unimpaired by any breach of
the Seller that would give any other party thereto the right to terminate such
Operations Agreement or receive damages from the Buyer after the Closing Date
(except for breaches that, individually or in the aggregate, would not have a
Material Adverse Effect). To the knowledge of the Seller, no other party to any
of the Operations Agreements is in material default of its obligations under
such Operations Agreement. All Operations Agreements have been entered into in
the ordinary course of business at Sellers' usual and customary rates or
practice.
6.11 Intellectual Property. Schedule 6.11 sets forth a true, complete and
accurate list of all Intellectual Property. Except as set forth in Schedule
6.11, without payment of any license fee, relicensing fee, royalty or similar
charge, Seller owns (and, after the Closing, Buyer will own) the entire right,
title and interest in and to the Intellectual Property and the trade secrets,
know-how and technology used in the operation of the Business, and Seller has
the right to use and license the same without infringement or violation of the
rights of others. To the knowledge of Seller, there are no pending or threatened
proceedings or litigation or other adverse patents, inventions, trademarks,
trade names, service marks, or claims affecting or challenging the Intellectual
Property. To the knowledge of Seller, no Person is infringing on or threatening
to infringe the Intellectual Property. Except as set forth on Schedule 6.11,
Seller has not taken or omitted to take any action that would have the effect of
waiving any rights to the Intellectual Property, the waiver of
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which would have the effect of making Buyer unable to operate the Business as
currently conducted by Seller or of allowing any other Person to compete more
effectively with Buyer than it now does with Seller.
6.12 Non-Compete, Non-Hire and Non-Disclosure Agreements. Schedule 6.12
sets forth a true, complete and accurate list of all non-compete, non-hire and
non-disclosure agreements related to the Business. Seller has delivered or
caused to be delivered to Buyer true, complete and accurate copies of all such
documents and all such documents are enforceable according to their terms.
6.13 Permits, Licenses and Other Authorizations. Schedule 6.13 sets forth
a true, complete and accurate list and description of all permits, licenses, and
other authorizations held by Seller or any Subsidiary and used in or held for
the conducting of the Business. Seller or such Subsidiary is in compliance with
the terms of such permits, licenses, and authorizations, and there are no
pending or, to the knowledge of the Seller, threatened terminations, expirations
or revocations thereof. Except for the permits, licenses, and authorizations
described in Schedule 6.13 or that, individually or in the aggregate, do not,
and, insofar as reasonably can be foreseen, in the future will not have a
Material Adverse Effect, there are no licenses, permits or other authorizations,
whether written or oral necessary or required for the use of the Subject Assets
or the conducting of the Business.
6.14 Accounts Receivable. Schedule 6.14 reflects a true, complete and
accurate aging of all accounts receivable of Seller (with total amounts for each
account), the name and last known address of the Person from whom such Account
Receivable is owing, any security that Seller claims collateralizes such Account
Receivable and the age of such Account Receivable, as of January 31, 1999. All
Accounts Receivable have arisen in the ordinary course of business and represent
valid obligations due the Seller. Seller has no knowledge of any facts or
circumstances generally (other than general economic conditions) that would
result in any material increase in the uncollectability of such receivables as a
class in excess of the reserves therefor set forth on the December 31, 1998
balance sheet contained in the Financial Statements. Seller has delivered to
Purchaser complete and correct copies of all instruments, documents and
agreements evidencing such receivables and of all instruments, documents or
agreements creating security therefor. Seller has valid and perfected security
interests in such security (to the extent such priority may be obtained under
applicable law by possession of such security or the filing of financing
statements or similar documents with respect thereto).
6.15 Freight Payment Accounts. Schedule 6.15 lists all Freight Payment
Accounts of Seller.
6.16 Bank Accounts. Schedule 6.16 lists all Bank Accounts used by Seller
in connection with the Business, including a list of all Persons with
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signature authority with respect thereto, and such Bank Accounts constitute all
the Bank Accounts.
6.17 Premises. Schedule 6.17 lists all Leases and Seller has delivered to
Buyer true, complete, and accurate copies of all such Leases. All Leases are in
full force and effect and are legal, valid and binding obligations of Seller and
each party thereto, and to the knowledge of the Seller, enforceable in
accordance with their terms. To the knowledge of the Seller, none of the
buildings and structures located on real property used in or held for the
Business violate any restrictive covenants or any terms of any of the Leases, or
encroach on any property owned by others which violation or encroachment has or
may have a Material Adverse Effect at the relevant location. To Seller's
knowledge, no condemnation proceeding is pending, or threatened, that would
preclude or impair in any material respect the use of the real property for the
uses for which it is currently being used.
6.18 Books and Records.
6.18.1 Financial Statements. Schedule 6.18 contains correct and
complete copies of (a) the unaudited balance sheets of the Business as of
December 31, 1997, and December 31, 1998, and the related unaudited statement of
income and cash flows for the years then ended and the reports thereon, and the
other financial information included therewith (collectively, the "Financial
Statements").
6.18.2 Accuracy of Financial Statements. The Financial Statements
(a) are accurate and complete in all material respects and are consistent with
the books and records of Seller (which are accurate and complete in all material
respects), (b) have been prepared in accordance with GAAP applied on an
historically consistent basis, and (c) fairly present the financial position,
results of operations and cash flows of the Business at the respective dates
thereof and for the periods therein indicated.
6.18.3 Records. Seller has delivered, or will deliver at Closing,
true, complete and accurate copies (or originals, where necessary or reasonably
requested by Buyer) of all records, files and other information used in
connection with or required to continue the Business as it is presently
conducted by Seller and the Subsidiaries other than minute books of the Seller.
6.18.4 No Undisclosed Liabilities. Except as and to the extent
reflected or reserved against on the face of the balance sheet as of December
31, 1998, contained in the Financial Statements, as of such date Seller had no
(i) debts, liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature whatsoever arising out of or relating to the Business
or (ii) any other debt, liabilities or operations relating to or arising out of
any act, omission, transaction, circumstance, sale of goods or services, state
of facts or
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other condition that occurred or existed on or before such date, whether or not
then known, due or payable, in each case in excess of $25,000.
6.19 Environmental Matters. To Seller's knowledge:
(i) The Business is not in violation of, nor has any liability,
absolute or contingent, in connection with or under any
Environmental Law or Local Law, except any such violations or
liabilities that, individually or in the aggregate, do not
have a Material Adverse Effect. To the knowledge of the
Seller, the Business is owned and operated in compliance with
all Environmental Laws;
(ii) None of the Subject Assets is in violation of any
Environmental Law or Local Law, nor is there any liability,
absolute or contingent, under any such law with respect to any
of the Subject Assets, except any such violations or
liabilities that, individually or in the aggregate, would not
have a Material Adverse Effect; and
(iii) There are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating
to any of the Subject Assets, including any notices, demand
letters or requests for information from any Governmental
Authority, relating to any such liability under or violation
of Environmental Law or Local Law, which would impose a
liability upon Seller pursuant to any Environmental Law or
Local Law, except such as would not, individually or in the
aggregate, have a Material Adverse Effect.
6.20 Taxes.
(i) Except as set forth in Schedule 6.20, all of the Tax
Returns for all Prior Periods required to be filed by the
Seller or any Subsidiary have been duly and timely filed,
the Tax Returns are accurate and complete in all respects,
and the Tax shown in the Tax Return filed for each Prior
Period constitutes the full amount of the Tax that is owed
or may become owed by the Seller or any Subsidiary for any
such Prior Period and all such Taxes have been paid in full
on a timely basis;
(ii) There are not currently in force any extensions of time with
respect to the dates on which any Tax Return was or is due to
be filed by the Seller or any Subsidiary, or any waivers or
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agreements for the extension of time for the assessment or
collection of any Tax due therefrom;
(iii) There are no liens on any of the assets or properties of the
Seller or any Subsidiary that arose in connection with any
failure or alleged failure on the part of any Person to pay
any Tax;
(iv) Seller and the Subsidiaries have each withheld or paid to the
proper Governmental Authority all Taxes required to have been
withheld and paid in connection with amounts paid or owing to
any employee, independent contractor, creditor or other party;
(v) Each estimated payment for Current Period Taxes payable by
Seller or any Subsidiary has been made on or before the date
on which the payment is required under applicable law to be
made in an amount sufficient to avoid the imposition of a
penalty;
(vi) Schedule 6.20 lists each state and local jurisdiction in which
Seller or any Subsidiary has filed any income or franchise Tax
Return. No claim has ever been made by a Governmental
Authority where the Seller or the Subsidiaries do not file Tax
Returns that the Seller or any Subsidiary is or may be subject
to taxation by the Governmental Authority.
6.21 Misstatements or Omissions of Facts. No representation or warranty by
Seller in this Agreement (including the Schedules attached hereto), nor any
other certificate or document furnished by Seller, contains or will contain as
of the date hereof or as of the Closing Date any untrue statement of a fact, or
omits or will omit to state as of the date hereof or as of the Closing Date any
fact necessary to make the statements contained herein or therein not
misleading.
6.22 Commissions to Third Parties. Except for fees paid and payable to
Salomon Smith Barney, Seller has neither paid nor will become obligated to pay
any fee or commission to any broker, finder or intermediary in connection with
the transactions contemplated by this Agreement.
6.23. Insolvency Proceedings. None of the Seller or any Subsidiary is the
subject of any pending or, to Seller's knowledge, threatened, insolvency
proceedings of any character, including bankruptcy, receivership,
reorganization, composition or arrangement with creditors, voluntary or
involuntary. Neither the Seller nor any Subsidiary has made an assignment for
the benefit of creditors or taken any action in contemplation of or which would
constitute a valid basis for the institution of any such insolvency proceedings.
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To Seller's knowledge, as of the date hereof, no other Person that is a party to
any Customer Contract, Lease or Operations Agreement is the subject of any such
pending or threatened insolvency proceeding. The parties hereto agree and
acknowledge that, while Seller shall be obligated to give prompt notice to Buyer
of any knowledge it may obtain prior to the Closing Date about the institution
or threatened institution of such insolvency proceedings against any such
Person, the immediately preceding sentence shall not be deemed repeated as a
representation or warranty as of Closing.
6.24. Employment Matters. Schedule 6.24 sets forth all of the full time
and part time Employees of Seller and each Subsidiary, subject to changes
between the date hereof and the Closing Date (a) in the ordinary course of
business or (b) resulting from any reduction in force or facility closing
consistent with plans previously discussed by Seller and Buyer. Seller and each
Subsidiary has complied in all material respects with all applicable laws, rules
and regulations relating to the employment and termination of Employees and
former employees, including those relating to (y) the Worker Adjustment and
Retraining Notification Act, 29 U.S.C. ss.ss. 2101-09, as amended, and any
similar Local Law, and (z) wages, hours, collective bargaining and the payment
and withholding of Taxes, and have withheld all amounts required by law or
agreement to be withheld from the wages or salaries of its employees and is not
liable for any arrears of wages or other taxes or penalties for failure to
comply with any of the foregoing, except where the failure to so withhold would
not have a Material Adverse Effect. Except as set forth on Schedule 6.24, there
are no legal actions or proceeding pending or, to the knowledge of Seller,
threatened between the Seller and the Subsidiaries, on one hand, and any of its
Employees (or former Employees) on the other.
6.25. Insurance. Seller has in force adequate insurance covering the full
replacement value of the tangible personal property that is part of the Subject
Assets and shall cause such insurance to be maintained in full force until the
Closing Date. Seller also has in force adequate workers compensation insurance,
errors and omissions insurance and general liability insurance covering the
Business and the Subject Assets in amounts at least equal to and pursuant to
policies consistent with its industry standards for similar businesses.
6.26. Employee Benefit Plans. Schedule 6.26 sets forth a true and complete
list of each Employee Benefit Plan, including each Multiemployer Plan, if any,
under which any Employee or former Employee has any present or future right to
benefits or under which Seller or any of its Affiliates may have any present or
future liability. Seller has not incurred, and does not reasonably expect to
incur (either directly or indirectly, including as a result of any
indemnification obligation) any liability that could become a liability of Buyer
or, following the Closing, remain a liability of the Business under or pursuant
to ERISA or the penalty, excise tax or joint and several liability provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), relating to Employee
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Benefit Plans, and no event, transaction or condition has occurred or exists
that could result in any such liability. To the best of Seller's knowledge, each
Employee Benefit Plan has been operated and administered in all material
respects in accordance with all requirements of law, including but not limited
to ERISA and the Code.
6.27 Year 2000 Except as set forth on Schedule 6.27, Seller has not made
any statement (written or oral) to any Customer or supplier regarding Year 2000
Compliance by any System created by or used by Seller with respect to the
Business. Seller has or uses Systems that are potentially subject to Year 2000
Compliance issues with respect to those vendors, suppliers, licensors, Customers
or other Persons identified on Schedule 6.27 (indicating which System is
associated with which Person). Seller has obtained such certifications from such
Persons with respect to such Systems as are indicated on Schedule 6.27. Copies
of all such certifications are attached to such schedule.
7. Representations and Warranties of Buyer.
7.1 Organization. Buyer is a limited liability company duly organized,
validly existing and in good standing under the laws of the District of
Columbia. Buyer is duly qualified to do business as a foreign entity in each
jurisdiction in which its ownership or lease of property or the nature of the
business conducted by it makes such qualification necessary, except for such
jurisdictions in which the failure to be so qualified would not have a Material
Adverse Effect.
7.2 Authorization. Buyer has full power and authority to execute and
perform fully its obligations hereunder this Agreement. The execution, delivery
and performance of this Agreement by Buyer has been duly authorized by all
necessary action of Buyer. This Agreement has been duly executed and delivered
by Buyer, and this Agreement constitutes a legal, valid and binding obligation
of Buyer, enforceable against Buyer in accordance with its terms, except to the
extent enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship or similar laws affecting the rights
of creditors generally or equitable principles limiting the right to obtain
specific performance or other similar relief.
7.3 Consents. The consummation by Buyer of the transactions contemplated
by this Agreement shall not require the consent, approval, authorization or
permit of or from, filings with or notifications to any court or Governmental
Authority except (i) filings under the HSR Act or (ii) consents, approvals,
authorizations, permits, filings or notifications which, if not obtained or made
will not, individually or in the aggregate, have a Material Adverse Effect.
Subject to the foregoing, neither the execution and delivery of this Agreement
by Buyer nor the performance of its obligations hereunder will (a) violate or
conflict with the charter documents of Buyer; or (b) constitute a
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violation of any law, regulation, order, writ, judgment, injunction or decree
applicable to Buyer or any of its properties.
7.4 Litigation. There is no judicial or administrative action, proceeding
or investigation pending or, to the knowledge of Buyer, threatened, that
questions the validity of this Agreement or any action taken or to be taken by
the Buyer in connection with this Agreement. There is no litigation, proceeding
or governmental investigation pending or, to the knowledge of Buyer, threatened,
or any order, injunction or decree outstanding, against the Buyer that, if
adversely determined, would have a Material Adverse Effect upon the Buyer's
ability to perform its obligations under this Agreement.
7.5 Fund Availability. Buyer currently has and will have at closing
adequate funding sources to pay Seller the Cash at Closing.
7.6 Commissions to Third Parties. Buyer has neither paid nor will become
obligated to pay any fee or commission to any broker, finder or intermediary in
connection with the transactions contemplated by this Agreement.
8. Indemnifications.
8.1 Seller's Indemnification of Buyer.
8.1.1 Basic Seller Indemnity. Seller shall, on Buyer's demand,
defend, indemnify and hold harmless Buyer and its Affiliates, successors and
assigns and their respective directors, officers, employees, shareholders,
representatives and agents, against and in respect of any and all assessments,
claims, demands, losses, damages, expenses (including the reasonable fees and
disbursements of legal counsel and other professionals), liabilities and
judgments resulting from (a) any misrepresentation, any inaccuracy in or breach
or other violation of any of the Seller's warranties or representations, or any
nonfulfillment of any agreement on the part of Seller under this Agreement
(ignoring, for these purposes only, the parenthetical expressions set forth in
each of Section 6.9 and 6.10) except for those warranties and representations
contained in Section 6.27; (b) any obligation incurred by Seller, any Subsidiary
or any prior party in interest which is not expressly assumed by Buyer hereunder
or (c) any Excluded Asset or other businesses of Seller not being purchased as
part of the Business, provided, however, that Seller's obligation under this
Section 8.1.1 hereunder shall only arise if and when the aggregate amount of all
claims arising under this Section 8.1.l shall exceed $25,000, in which event
such obligation shall apply from the first dollar.
8.1.2 Year 2000 Indemnity. Seller shall:
(a) indemnify and hold harmless Buyer with respect to all
documented additional expenditures incurred after the Closing Date that are
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necessary, in Buyer's reasonable judgment, to render any of Buyer's Systems Year
2000 Compliant, including testing of such Systems, but only to the extent such
expenses are in excess of $50,000; and
(b) indemnify, defend and hold harmless Buyer with respect to
any loss, liability, cost or expense (including the fees and expenses of counsel
and other professionals) suffered or incurred by Buyer as a result of or with
respect to third-party claims by any Person against Buyer resulting from or
relating to any failure of any System or System interface acquired, modified,
upgraded, revised or customized by Seller on or prior to the Closing Date,
provided, however, that Seller's obligations under this Section 8.1.2(b) shall
be payable solely out of and only to the extent of the Escrow Funds.
8.1.3 Special Remedies. No obligation of Seller under this Agreement
shall be excused by reason of the failure of a System, or any portion thereof,
to be Year 2000 Compliant, nor shall any such failure be deemed to be a force
majeure event. Any statute of limitation applicable to Seller's Year 2000
Compliance warranties, representation or covenants shall not accrue or begin to
run until the later of January 1, 2000, or the time when such statute of
limitations would otherwise accrue or begin to run, and Seller shall not assert,
and expressly waives, any defense based upon laches. Seller further agrees to
provide Buyer at Closing with any methodology that Seller has used to access,
test and remediate or replace (as necessary) any of the Systems, or portions
thereof, and the results of such tests, to the extent completed.
8.2 Buyer's Indemnification of Seller. Buyer shall, on Seller's demand,
defend, indemnify and hold harmless Seller against and in respect of any and all
claims, demands, losses, damages, expenses (including the reasonable fees and
disbursements of legal counsel and other professionals), liabilities and
judgments resulting from (a) any misrepresentation, any inaccuracy in or breach
of any warranty or representation, or any nonfulfillment of any agreement on the
part of Buyer under this Agreement; or (b) any failure by Buyer after Closing to
pay or perform any liability or obligation of Seller which has been specifically
assumed by Buyer pursuant to this Agreement, provided, however, that Buyer's
obligation under this Section 8.2 shall only arise if and when the aggregate
amount of all claims arising under this Section 8.2 shall exceed $25,000, in
which event such obligation shall apply from the first dollar. .
8.3 Notice of Claims. If any Claim is instituted or asserted by any Person
in respect to which any party to this Agreement is entitled to indemnification
pursuant to this Agreement the indemnified party, after receipt by it of written
notice of the commencement or assertion of such Claim, shall promptly cause a
written notice of such Claim to be made to the party required to furnish such
indemnity; provided that failure to give such notice shall not (a) relieve the
indemnifying party of its indemnification obligations hereunder, unless and to
the extent such failure to provide notice shall have materially
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and substantially prejudiced the rights of the indemnifying party, or (b) result
in any liability of the indemnified party to the indemnifying party.
8.4 Defense of Claims. Subject to the next sentence, the indemnifying
party shall have the right, at its option and expense, to assume any Defense of
any Claim, provided that within thirty (30) days of receiving the notice with
respect to such Claim pursuant to the above notice provision (of which such
shorter period of time as an answer to or other responsive action may be
required), the indemnifying party, by notice delivered to the indemnified party,
elects to assume such Defense and the indemnifying party acknowledges in writing
its obligation hereunder to indemnify the indemnified party with respect to such
Claim and periodically thereafter provide the indemnified party with reasonably
sufficient evidence of the ability of the indemnifying party to satisfy such
claim. Notwithstanding the foregoing, the indemnifying party shall not have the
right to assume the Defense of any Claim if (a) representation of both the
indemnified party and indemnifying party by the same counsel would be prohibited
by rules or regulations governing the professional conduct of such counsel due
to actual or potential differing interests between them; (b) the indemnified
party determines in good faith that there is a significant possibility that such
Claim may materially and adversely affect it or its Affiliates other than as a
result of monetary damages; or (c) the indemnified party determines in good
faith that the indemnifying party has insufficient financial resources to
satisfy any monetary damages reasonably likely to result from such Claim.
If the indemnifying party has assumed the Defense of a Claim in accordance with
Section 8.4 hereof, then the following shall apply:
(i) except as provided in clause (v) herein, the indemnified party
shall have the right to participate and assist in, but not
control, the Defense of such Claim and to employ its own
counsel in connection therewith;
(ii) except as provided in clause (v) herein, the indemnifying
party shall not be liable to the indemnified party for the
fees or expenses of the indemnified party's counsel or other
expenses incurred by the indemnified party in connection with
participating in the Defense of such Claim, except that the
indemnifying party shall be liable for any such fees and
expenses incurred prior to the time that the indemnifying
party assumed such Defense;
(iii) counsel used by the indemnifying party in connection with the
Defense of such Claim shall be reasonably satisfactory to the
indemnified party;
(iv) except as provided in clause (v) herein, the indemnifying
party shall have no liability with respect to any compromise
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or settlement of such Claim effected without its consent, such
consent not to be unreasonably withheld, conditioned or
delayed;
(v) if the indemnifying party shall fail or omit to diligently
prosecute the Defense of such Claim, then (a) the indemnified
party shall have the right to control the Defense of such
Claim, (b) the indemnifying party shall be liable to the
indemnified party for the fees and expenses of the indemnified
party's counsel and other expenses incurred by the indemnified
party in connection with the Defense of such Claim and (c) the
indemnifying party shall be liable for any settlement of such
Claim effected by the indemnified party; and
(vi) the indemnifying party shall not effect any compromise or
settlement of such Claim without the consent of the
indemnified party, which consent shall not be unreasonably
withheld, unless such compromise or settlement includes a full
release of the indemnified party, neither the indemnified
party's business nor its name nor the business or name of any
of its Affiliates will be damaged by such settlement, and such
settlement is limited strictly to monetary damages.
If the indemnifying party does not assume the Defense of a Claim (whether
because it elects not to or has no right to) the following shall apply:
(i) the indemnifying party shall have the right, as its sole cost
and expense, to participate in, but not control, the Defense
of such Claim and to employ its own counsel in connection
therewith; and
(ii) the indemnifying party shall have no liability with respect to
any compromise or settlement of such Claim effected without
its consent, which shall not be unreasonably withheld.
8.5 Cooperation of the Parties. The parties agree to cooperate to the
fullest extent possible in connection with any Claim in respect of which
indemnification is sought under this Agreement.
9. Conduct of Seller Pending Closing.
9.1 Material Breach. The Seller shall not take any action which would
cause it to be in material breach of any representation, warranty, covenant or
agreement contained in this Agreement. The Seller shall use commercially
reasonable efforts to perform and satisfy all conditions to Closing
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to be performed or satisfied by it under this Agreement as soon as reasonably
possible, but in no event later than Closing. The Seller shall not entertain or
enter into any discussions or negotiations with, nor provide confidential
information to, any other Person, except as required by law, regarding the
Services, the Subject Assets or the Business relating to any merger,
consolidation, acquisition of securities or assets or similar capital
transaction.
9.2 Consents, Waivers, Approvals and Authorizations. Seller shall use
commercially reasonable efforts to obtain all necessary consents, waivers,
approvals and authorizations required to be obtained by Seller in connection
with the execution, delivery and performance by Seller of this Agreement. Buyer
will use its commercially reasonable efforts to assist Seller with respect
thereto, provided, however, that Seller may not assert any breach of this
undertaking by Buyer as a waiver or other basis for avoiding any of Seller's
obligations hereunder or any adjustment to Cash at Closing pursuant to Section
4.2.
9.3 Material Changes. Without the prior written consent of the Buyer,
between the date of this Agreement and the Closing Date, the Seller shall not,
except as required or expressly permitted pursuant to the terms hereof, make any
material change in the conduct of the Business or enter into any transaction
other than in the ordinary course of business consistent with past practice and
shall continue to conduct the Business in the ordinary course of business
consistent with past practice. Seller shall use commercially reasonable efforts
to preserve substantially intact the Subject Assets and the Business, to keep
available the services of its current key officers and employees, and to
preserve the goodwill of all business relationships affecting the Business.
Without limiting the generality of the foregoing:
Seller shall not (nor shall it allow any Subsidiary to),
without the prior written consent of Buyer:
(i) discount any receivable, or accelerate the collection
of any accounts receivable, demand or accept
pre-payment or accelerated payment for Services by
any Customer under any Customer Contract or
Operations Agreement contrary to prior custom or
usage with such Customer, or defer payment of any
accounts payable out of the ordinary course of
business consistent with past practice, or enter into
any understanding or agreement to do any of the
foregoing;
(ii) enter into any collective bargaining agreements;
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(iii) grant any salary increase to any Employee, except for
the implementation of Seller's annual salary
administration program determined as of February 3,
1999, and effective as of March 1, 1999, the average
raise under which did not exceed 3.0%, and salary
increases totaling $ 12,500 to Barry LeMay and Susan
Stallings, effective as of March 1, 1999;
(iv) enter into any new, or amend or alter, any existing
Employee Benefit Plan or any employment or consulting
agreement (other than as may be required to comply with
applicable law);
(v) terminate any existing Employee Benefit Plan;
(vi) change its accounting methods, principles or practices
in any material respect;
(vii) pledge or use as a security interest any of the Subject
Assets as collateral for any indebtedness for borrowed
money; or
(viii) terminate, or agree to terminate, or fail to renew any
Customer Contract, Operations Agreement or Lease; and
the Seller shall (and shall cause each Subsidiary to):
(i) conduct the operations of the Business in the ordinary
course of business consistent with past practice;
(ii) keep and maintain the Subject Assets and all offices and
facilities of the Business in good condition, repair and
working order, reasonable wear and tear excepted;
(iii) use commercially reasonable efforts to maintain all
Customer Contracts, Leases, Operations Agreements,
Customers, prospect and supplier (of both goods and
services) relationships on terms and conditions not less
favorable to the Business or Buyer than those existing
prior to the execution hereof;
(iv) take no action which results in the modification of, or
the increase in benefits payable or provided under, any
Employee Benefit Plan, policy or practice maintained by
Seller or any Subsidiary;
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(v) use commercially reasonable efforts to retain the
service of its employees, agents and consultants
involved with the Business on terms and conditions not
less favorable to the Business or Buyer than those
existing prior to the execution hereof; and
(vi) conduct its activities in a manner consistent with this
Agreement.
Seller agrees to indemnify, defend, and hold Buyer harmless from and
against any claims, liabilities, losses, costs, or expenses, including
reasonable attorneys' and other professionals' fees and other expenses, that
Buyer may incur as a result of the failure of the parties to comply with the
bulk sales provisions of the Uniform Commercial Code or similar laws.
9.4 Access and Information. Seller shall deliver to Buyer promptly upon
receipt all management reports, financial reports, receivables aging reports,
new business reports and any other reports regularly prepared and delivered to
senior management of Seller with respect to the Business or the Services. Seller
will deliver to Buyer promptly upon receipt thereof copies of any written or
summaries of any oral reports made to senior management of Seller with respect
to material events occurring with respect to the Business or the Services. Upon
reasonable notice, Seller shall provide Buyer the opportunity to make or cause
to be made such investigation of the Subject Assets and their condition, the
Business and its financial and legal condition, and other access during normal
business hours throughout the period prior to the Closing Date to the books,
records, properties, personnel and to such other information as Buyer may
reasonably request; provided, however, that Seller shall not be required to
provide access to any such information if the providing of such access would be
reasonably likely to result in the loss or impairment of any privilege generally
recognized under law with respect to such information or would be precluded by
any law, ordinance, regulation, judgment, order, decree, license or permit of
any Governmental Authority.
9.5 HSR Act Notification. As promptly as practicable and no later than ten
(10) business days after the date hereof, the parties hereto shall prepare and
file all necessary notifications required to be filed pursuant to the HSR Act.
The filing fees in connection with such notifications shall be paid one-half by
Buyer and one-half by Seller. Each party shall otherwise bear its own expenses
in preparing and filing such form. The parties agree to diligently take and
fully cooperate in the taking of all reasonable and necessary steps and provide
any additional information reasonably requested in order to obtain promptly the
expiration or earlier termination of any required waiting period under the HSR
Act.
9.6 Publicity. Except as required by the laws of the United States,
neither Seller, nor Buyer shall furnish or disclose, either directly or
indirectly,
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any terms of this Agreement, not otherwise publicly announced, to any third
party without advance approval of the form and substance thereof by the other
party, which approval shall not be unreasonably withheld, conditioned or
delayed.
9.7 Cooperation and Standard of Performance. Seller and Buyer shall
cooperate with each other in reviewing facts and establishing implementing
procedures necessary to consummate the transactions contemplated by this
Agreement, including executing and delivering such documents as is necessary to
consummate the transactions contemplated herein. Seller and Buyer shall use
their commercially reasonable efforts to fulfill or obtain the fulfillment of
the conditions to the Closing and undertake and perform each obligation
hereunder in timely fashion and in good faith.
9.8 Notice. Seller shall promptly advise Buyer in writing of any adverse
changes in the Business's condition (financial and otherwise), business affairs,
operations, prospects or results from operations, provided, however, that no
such notice shall constitute a cure or waiver of any misrepresentation or breach
of any warranty made by Seller herein.
9.9 Powers of Attorney. Seller shall terminate at or prior to Closing all
powers of attorney granted by Seller which relate to the Subject Assets,
including signatory capacities on bank accounts, in each case other than with
respect to Employees who are continuing as employees of Buyer following the
Closing.
10. Conditions to Closing. Closing shall be subject to the following conditions.
10.1 Conditions to Buyer's Closing. The obligation of Buyer to consummate
and effect the Closing provided for herein shall be subject to the following
conditions, any of which may be waived in writing by Buyer:
10.1.1 Representations and Warranties; Covenants. The
representations and warranties of Seller set forth in this Agreement are true in
all material respects when made and as of the Closing Date as if made on and as
of such time, except as expressly contemplated or permitted by this Agreement
and except for representations and warranties relating to a time or times other
than the Closing Date, which representations and warranties shall have been true
in all material respects and will be true in all material respects at such time
or times. Seller shall have complied in all material respects with all of its
covenants, agreements and undertakings set forth herein.
10.1.2 Due Execution and Delivery. Seller duly executes and delivers
the Documents of Conveyance and any other document or instrument necessary or
advisable to vest in Buyer good and marketable title, free of lien,
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encumbrance or other impairment of title, to all of the Subject Assets, all in a
form and substance reasonably acceptable to Buyer and its counsel.
10.1.3 Opinion of Counsel. Counsel for Seller and the Subsidiaries
shall have delivered an opinion to the effect that (a) Seller is duly organized
and existing and in good standing in the Commonwealth of Kentucky, B.&L. is duly
organized and existing and in good standing in the Commonwealth of Massachusetts
and each of NTA and Associates is duly organized and existing and in good
standing in the State of Washington, (b) Seller and the Subsidiaries have full
power and authority to carry on the Business and to sell the property and assets
to be conveyed and assigned under this Agreement and to assign the liabilities
set forth in Section 3.1, (c) all corporate proceedings required to be taken by
Seller to authorize it to enter into this Agreement and any other instrument
evidencing such conveyance, assignment and assumption and to perform its
obligations hereunder have been duly and properly taken, and (d) this Agreement
and any related documents are binding obligations of Seller enforceable against
Seller in accordance with their respective terms, except as the same may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
10.1.4 Bank Accounts and Freight Payment Accounts. Seller shall have
arranged to the satisfaction of Buyer for the transfer of all funds (other than
a reserve for outstanding items) from each of the Bank Accounts and the Freight
Payment Accounts.
10.1.5 Officer's Certificate. The Seller shall have delivered to
Buyer a certificate signed by the President or an Executive Vice President and
the Secretary of Seller, dated as of the Closing Date, certifying that (a) all
the representations and warranties of the Seller are true, accurate and correct
on and as of the Closing Date; and (b) the Seller has satisfied and fully
complied with all conditions necessary to make this Agreement effective.
10.1.6 Third Party Notices and Consents. All notices to, filings
with and consents, permits and approvals from all Governmental Authorities
required by law to consummate the transactions contemplated hereunder shall have
been timely delivered, filed or obtained, as applicable. All notices to, filings
with and consents, permits and approvals required from all parties to (y)
Operations Agreements and (z) Leases that are material to the conduct of the
Business, the continuation of such agreements, the conveyance of the Subject
Assets, the financial condition or results of operations of the Business by
Buyer or the prospects of the Business shall have been timely delivered, filed
or obtained, as applicable.
10.1.7 Litigation. No action, suit or proceeding shall have been
instituted and be continuing before any court or any Governmental Authority
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to restrain, modify or prevent the carrying out of the transactions contemplated
hereby, or to seek damages in connection with such transactions.
10.1.8 HSR Act. Any applicable waiting period under the HSR Act
shall have expired or been earlier terminated.
10.1.9 Insolvency. No insolvency proceedings shall have been
initiated against any Person who is a party to any material Customer Contract,
Lease or Operations Agreement or whose insolvency would otherwise cause a
Material Adverse Effect.
10.1.10 Transition Services Agreement. The parties shall have
executed and delivered to one another a Transition Services Agreement
substantially in the form of Exhibit A attached hereto.
10.2 Conditions to Seller's Closing. The obligations of Seller to
consummate and effect the Closing provided for herein shall be subject to the
following conditions:
10.2.1 Representations and Warranties; Covenants. The
representations and warranties of Buyer set forth in this Agreement are true in
all material respects when made and as of the Closing Date as if made on and as
of such time, except as expressly contemplated or permitted by the Agreement and
except for representations and warranties relating to a time or times other than
the Closing Date, which representations and warranties shall have been and will
be true in all material respects at such time or times. Buyer shall have
complied in all material respects with all of its covenants, agreements and
undertakings set forth herein.
10.2.2 Cash at Closing. The Buyer shall have tendered the Cash at
Closing as provided in Section 4 hereof.
10.2.3 Opinion of Counsel. Counsel for Buyer shall have delivered an
opinion to the effect that (a) Buyer is duly organized and existing and in good
standing in the District of Columbia (b) Buyer has full power and authority to
buy the Subject Assets to be conveyed and assigned under this Agreement and to
assume the liabilities set forth in Section 3.1, (c) all proceedings required to
be taken by Buyer to authorize it to enter into this Agreement and any other
instrument evidencing such conveyance, assignment and assumption and to perform
its obligations hereunder have been duly and properly taken, and (d) this
Agreement and any related documents are binding obligations of Buyer enforceable
against Buyer in accordance with their respective terms, except as the same may
be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
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10.2.4 Transition Services Agreement. The parties shall have
executed and delivered to one another a Transition Services Agreement
substantially in the form of Exhibit A.
11. Post-Closing Covenants
11.1 Transition. As of the Closing Date, Buyer shall offer employment to
all Employees. The Buyer shall offer to each such Employee a package of
compensation and benefits at least equivalent to the package such Employee
currently enjoys. Buyer shall also offer severance benefits to such Employees
that are no less favorable than the Employees currently enjoy for six (6) months
following the Closing Date. Seller shall be available to consult with Buyer in
regard to the Subject Assets. Seller shall cause Seller's accounting staff to be
available as reasonably necessary to Buyer in regard to the books and records
and operations of the Business.
11.2 Sales/Transfer Taxes. Buyer and Seller agree to each pay one half of
all sales taxes, if any, due upon the transfer of the Subject Assets to Buyer.
When due, prorated as of the Effective Time, Buyer and Seller shall share the
payment of all foreign, state and local personal property taxes assessed on the
Subject Assets of Seller transferred to Buyer hereunder, except to the extent
the value of the Net Assets being acquired as of the Closing Balance Sheet
already has been reduced by an accrual therefor.
11.3 Transition Services Agreement. At Closing, the parties hereto shall
execute and delivery a transition services agreement (the "Transition Services
Agreement") in substantially the form of Exhibit A, providing for the rendition
by Seller of such transition services, including data entry and processing;
employee compensation and benefits; billing, subleasing space or personal
property; and the provision of building, computer, UPS and similar services with
respect to the Business as the Buyer may request. Such transition services shall
be provided at Seller's all-in cost, without profit. Any transition services
agreement shall allow the Buyer to terminate one or more services provided
thereunder at any time without affecting the provision of any other services by
Seller thereunder, provided, however, that in all events Seller's obligation to
provide any transition services pursuant to such transition services agreement
shall terminate not later than December 31, 1999.
12. Termination. This agreement may be terminated at any time prior to Closing:
(a) by the mutual written consent of the parties hereto; (b) by the Buyer, if
not in material default hereunder, if any of the conditions specified in Section
10.1 have not been satisfied or waived by Buyer at such time as such condition
can no longer be satisfied; (c) by the Seller, if not in material default
hereunder, if any of the conditions specified in Section 10.2 have not been
satisfied or waived by Seller at such time as such condition can no longer be
satisfied; or (d) by any party hereto not then in material default hereunder, if
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Closing shall not have occurred on or prior to June 30, 1999. In the event of
termination hereof, this Agreement shall become void and have no effect, except
that the provisions relating to confidentiality and dispute resolution shall
survive any such termination; provided, however, that no such termination shall
relieve any party from liability for the willful breach of this Agreement.
13. Miscellaneous.
13.1 Expenses.
13.1.1 Fees and Expenses. Each of the parties hereto shall pay all
of its own costs, fees and expenses relating to the acquisition, incurred prior
to Closing, including, but not limited to, costs of negotiations, legal and
accounting fees and other expenses.
13.1.2 Remedies. Notwithstanding anything contained in Section
13.1.1 to the contrary, if this Agreement is terminated by Buyer or Seller
pursuant to Section 12(b) or 12(c), respectively, because of a breach by the
other party of any representation, warranty, covenant, undertaking or
restriction contained in this Agreement, but only if the terminating party is
not itself in material breach of any representation, warranty, covenant,
undertaking or restriction contained in this Agreement, then, in the event of a
breach by the Buyer, the Buyer shall pay to the Seller an amount equal to ten
percent (10%) of the Cash at Closing as liquidated damages, which undertaking
shall be guaranteed by Cyrus A. Ansary, a principal investor in Buyer, by means
of a written guaranty in form and substance reasonably satisfactory to Seller
and delivered to Seller simultaneously with the execution and delivery of this
Agreement. In the event of a breach by the Seller, the Buyer shall be entitled,
at its election, either to provable monetary damages or to specific performance
of the terms and conditions of this Agreement, the parties agreeing that the
Business is unique and therefore monetary damages would be insufficient to
compensate Buyer fully in the event of Seller's breach. The rights and remedies
herein provided are exclusive of any rights and remedies that any party may
otherwise have at law or in equity.
13.2 Notices. All notices, demands, requests, or other communications
which may be or are required to be given, served, or sent by either party to the
other party pursuant to this Agreement shall be in writing and shall be hand
delivered (including delivery by courier so long as a receipt or confirmation of
delivery is obtained), sent by a recognized overnight delivery service, mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid or transmitted by facsimile transmission (followed by delivery of the
original of such document), addressed as follows:
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If to Buyer: If to Seller:
Investment Services National Processing Company
International Co., LLC Attention: President
Attention: Mr. Cyrus Ansary
1725 K Street, N.W. 1231 Durrett Lane
Washington, D.C. 20006 Louisville, KY 40285
Facsimile:(202) 457-9042 Facsimile: 502.326.7100
With a copy (which shall not With a copy (which shall not
constitute notice) to: constitute notice) to:
Attention: Mr. Jerry L. Shulman Attention: General Counsel
Title: Counsel National Processing Company
Williams & Connolly c/o National City Corporation
725 Twelfth Street, N.W. 17th Floor, Law Department
Washington, D.C. 20005 1900 East Ninth Street
(202) 434-5510 Cleveland, Ohio 44114
Either party hereto may designate by notice, in the manner herein above
provided, a new address to which any notice, demand, request or communication
may thereafter be so given, served or sent. Each notice, demand, request or
communication which shall be mailed, delivered, or transmitted in the manner
described above shall be deemed sufficiently given, served, sent and received
for all purposes at such time as it is delivered to the addressee (with the
return receipt, the delivery receipt, the affidavit of messenger, or, in the
case of facsimile, electronic confirmation of reception with verbal
confirmation, being deemed conclusive evidence of such delivery) or at such time
as delivery is refused by the addressee upon presentation. Any party may change
its designated recipient for notices, address and/or facsimile number upon
written notice to the other parties of this Agreement.
13.3 Confidentiality. Seller and Buyer will hold and will cause their
consultants and advisers to hold in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the opinion of their
counsel, by other requirements of law, all documents and information concerning
the other party furnished to them by the other party or their representatives in
connection with the Agreement or the transactions contemplated by this Agreement
(except to the extent that such information can be shown to have been (a) in the
public domain through no fault of the other party, (b) previously known by the
other party on a non-confidential basis from a source not known by such party to
be under any confidentiality restriction, (c) later lawfully acquired by the
other party from a source not known by such party to be under any
confidentiality restriction, or (d) independently developed by the
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other party without the use of information subject to this confidentiality
restriction) and neither party will release or disclose such information to any
other person, except its auditors, attorneys, financial advisers, bankers and
other consultants and advisers in connection with this Agreement. If the
transactions contemplated by this Agreement are not consummated, such confidence
will be maintained except to the extent that such information comes into the
public domain through no fault of either party and such information shall not be
used to the detriment of, or in relation to any investment in, the other party
and all such documents (including copies thereof) shall be returned to the other
party immediately on the request of either party. Both parties shall be deemed
to have satisfied their obligations to hold confidential information concerning
or supplied by the other party if it exercises the same care as it takes to
preserve confidentiality for their own similar information.
13.4 Survival. Each of the representations and warranties in this
Agreement shall be deemed represented and made at the Effective Time as if made
at such time and shall survive the Closing and the consummation of the
transactions contemplated hereby for a period of 18 months after Closing, except
that the representations and warranties made in Sections 6.8, 6.19, 6.20 and
6.26 (and any indemnity actions with respect thereto) shall survive for the
balance of any statute of limitations applicable thereto, Section 6.27 shall
survive for the term of the Escrow Agreement and any indemnity action that is
timely brought may be continued until finally concluded. All other terms and
provisions of this Agreement shall also survive the Closing and the consummation
of the transactions contemplated by this Agreement for a period of 18 months
after Closing with the exception of Sections 2.4, 2.8 and Article 13. Sections
2.4 and 2.8 shall survive for five years, and Article 13 shall survive
indefinitely.
13.5 Entire Agreement. This Agreement is the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings.
13.6 Assignment. This Agreement shall not be assigned by either party
without the express written consent of the other party; provided, however, that
Buyer may assign its respective rights and obligations hereunder to an Affiliate
with the consent of Seller, such consent not to be unreasonably withheld,
conditioned or delayed, in which event Buyer shall be released from all
obligations hereunder. Any attempted assignment of this Agreement, other than by
Buyer as allowed above, shall be null and void.
13.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, successors and
permitted assigns when executed by all parties. Nothing in this Agreement,
express or implied, shall be construed to confer any rights or remedies upon any
party other than the parties hereto and their respective successors and
permitted assigns.
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13.8 Severability. The parties agree that construction of this Agreement
shall be in favor of its reasonable nature, legality and enforceability, and
that any construction causing unenforceability shall yield to a construction
permitting enforceability. It is agreed that the noncompetition,
nonsolicitation, nondisclosure and nonhiring covenants and provisions of this
Agreement are severable, and that if any single covenant or provision or
multiple covenants or provisions should be found unenforceable, the entire
Agreement and remaining covenants and provisions shall not fail but shall be
construed and enforceable without any severed covenant or provision in
accordance with the tenor of this Agreement. The parties specifically agree that
no covenant or provision of this Agreement shall be invalidated because of
overbreadth insofar as the parties acknowledge the scope of the covenants and
provisions contained herein to be reasonable and necessary for the protection of
Buyer and not unduly restrictive upon Seller. However, should a court or any
other trier of fact or law determine not to enforce any covenant or provision of
this Agreement as written due to overbreadth, then the parties agree that said
covenant or provision shall be enforced to the extent reasonable, with the court
or such trier to make any necessary revisions to said covenant or provision to
permit its enforceability, whether said revisions be in time, territory, or
scope of prohibited activities.
13.9 Waiver. Any agreement on the part of either party hereto to any
extension or waiver shall be valid only if in writing signed by the party
granting such waiver or extension and shall be a one-time waiver or extension
only, and any such waiver or extension or any other failure to insist on strict
compliance with any duty or obligation or any representation, warranty or other
covenant herein shall not operate as a waiver or extension of, or estoppel with
respect to, any continuing, subsequent or other failure to comply with or
fulfill any duty or obligation or any representation, warranty or other covenant
herein.
13.10 Alternative Dispute Resolution.
13.10.1 Negotiations. In the event of any other dispute, controversy
or claim between the parties hereto arising out of or relating to this
Agreement, including any dispute as to the construction, validity,
enforceability or breach of this Agreement or the arbitrability of any issue
arising hereunder (each a "dispute"), representatives of the parties shall meet
at a place mutually agreed upon by such parties as soon as reasonably possible
(but not later than ten (10) days after notice from any party hereto to the
other that the party giving notice has such a dispute) and shall enter into good
faith negotiations aimed at resolving the dispute. If they are unable to resolve
the dispute in a mutually satisfactory manner within ten (10) days from the date
of such meeting, they shall proceed as set forth below.
13.10.2 ADR. First, the parties shall endeavor to: (i) choose a
mutually acceptable alternative dispute resolution ("ADR")
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mechanism, including choosing one or more third party arbitrators; and (ii) set
forth the general framework for the ADR process. If the parties are unable to
agree to a mutually acceptable ADR mechanism within ten (10) days from the date
of the initial proposal from any party with respect thereto, the parties shall
enter into binding arbitration as set forth below.
13.10.3 Arbitration. All disputes among the parties arising out of
or relating to this Agreement that are not resolved by good faith negotiations
between the parties or by an ADR mechanism as set forth above shall be resolved
solely by binding arbitration pursuant to the United States Arbitration Act, 9
U.S.C. Section 1 et seq. Either party may commence arbitration proceedings at
any time after the fifth day after delivery of notice from one party to the
other of the inability of the parties to agree upon a mutually acceptable ADR
mechanism as set forth above.
13.10.4 Selection of Arbitrators. Any arbitration shall be conducted
in the Louisville, KY metropolitan area (or such other area mutually agreeable
to all parties) before a single arbitrator mutually selected by the parties
thereto or, in the event the parties shall fail to agree, by a three-person
panel acting pursuant to the Commercial Arbitration Rules and, if applicable at
such time, the Streamlined Arbitration Rules and Procedures then in effect of
the American Arbitration Association ("AAA"). Any three person arbitration panel
shall consist of one arbitrator selected by each disputing party within ten (10)
days of the initiation of binding arbitration, as provided herein, and one
arbitrator (who shall become the presiding arbitrator) selected by the first two
arbitrators within ten (10) days of the latter of the first two arbitrators'
acceptances to act as arbitrators. In the event that any disputing party shall
fail to appoint timely an arbitrator, or in the event that the first two
arbitrators fail to reach agreement within 10 days as to the presiding
arbitrator, any disputing party may request the AAA to appoint such arbitrator.
Before submitting a list of potential arbitrators to the parties for their
consideration, the AAA shall consult with each party to discuss the applicable
qualifications for the proposed arbitrators. Each arbitrator shall be a
currently licensed lawyer in the United States of America with at least twenty
(20) years experience in merger and acquisition practice in the United States.
13.10.5 Rules of Arbitration. Unless otherwise agreed by the
disputing parties prior to the commencement of the arbitration:
(i) The parties shall commence arbitration proceedings within
thirty (30) days of the selection of the presiding arbitrator.
(ii) The presentation of evidence and all discovery shall be
controlled by the arbitrator/panel. The arbitrators shall have the right
to employ experts to assist them in any arbitration proceeding
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(iii) The arbitrator(s) shall be and remain at all times
wholly independent and neutral.
(iv) The decision of the arbitrator/panel shall be reduced to
writing; set forth the arbitrator/panel's findings of fact and conclusions
of law and afford any such remedy as is within the scope of the Agreement
(including equitable relief).
(v) The award shall be made on an expedited basis.
(vi) The award shall include as part of the arbitrator/panel's
determination the responsibility among the parties for payment of the
arbitrator/panel's fees and expenses, and the prevailing party on any
issue in dispute shall be entitled to recover from the other party all
fees and expenses (including reasonable attorneys' and other
professionals' fees and disbursements) incurred in pursuing such issue if
the arbitrator/panel, in its discretion, determines that such an award is
warranted, but in no event shall such recovery exceed the amount paid on
its own behalf by the losing party with respect to such issue.
(vii) The award shall be final and binding upon the parties,
without any further right of appeal absent fraud or intentional
malfeasance by the arbitrator/panel, and may be entered for enforcement in
any court of competent jurisdiction or an application may be made to any
such court for a judicial acceptance of such award and an order of
enforcement, as applicable. Any award shall be promptly paid by the losing
party to the prevailing party, free of deduction or offset except as
provided for in the award, with interest thereon at the rate of 8% per
annum from the date of any breach or violation of this Agreement (as
determined as part of the award) to but not including the date of payment.
To the extent allowed by applicable law, any losing party resisting
payment of any such award shall also be responsible for reimbursing the
prevailing party for any fees and expenses incurred by such prevailing
party incident to the enforcement thereof.
13.10.6 Confidential Proceedings. Each party will participate in any
such arbitration in good faith and will (and will cause its representatives,
employees and Affiliates to, and will request each participant in any ADR
mechanism and each arbitrator to) hold the existence, content and result of any
dispute in confidence except to the extent that disclosure of any such
information is required by law.
13.10.7 No Default Award. The arbitration will proceed in the
absence of a disputing party who, after due notice, fails to answer or appear.
An award shall not be made solely upon the default of any such party, but the
arbitrator/panel shall require each party that is present to submit such
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evidence as the arbitrator/panel may determine is reasonably necessary to make
an award.
13.10.8 Arbitrator Replacement. If an arbitrator, whether sole or
part of a panel, should withdraw, die or otherwise become incapable of serving,
or should such arbitrator refuse to serve, a successor arbitrator shall be
selected and appointed in the same manner as the original arbitrator and,
subject to the rules applicable to the ADR process or arbitration applicable in
such circumstances, the dispute resolution process shall continue.
13.10.9 Exceptions to Arbitration. This Section 13.10 shall be a
complete defense to any suit, action or proceeding instituted before any court
or agency with respect to any matter resolvable hereunder, provided, however,
that, notwithstanding this provision, any party may seek interim judicial relief
in aid of ADR or arbitration, to prevent a violation of this Agreement pending
ADR or arbitration or to enforce any ADR or arbitration award.
13.11 Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Kentucky (without giving effect to any otherwise applicable
conflict of laws provisions); provided that any arbitration conducted pursuant
to this Agreement shall be governed, to the extent applicable, by the Federal
Arbitration Act (or any successor thereto).
13.12 Captions; Construction. The captions contained in this Agreement are
for reference purposes only and shall not affect the meaning or interpretation
of this Agreement. Unless the context of this Agreement clearly requires
otherwise: (a) references to the plural include the singular, the singular the
plural, and the part the whole, (b) references to one gender include all
genders, (c) "or" has the inclusive meaning frequently identified with the
phrase "and/or," (d) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to" or "without limitation," (e) references to
"hereunder," "herein" or "hereof" relate to this Agreement as a whole, (f) the
terms "dollars" and "$" refer to United States dollars. Any reference herein to
any agreement, including this Agreement, shall be deemed to include such
agreement as it may be modified, varied, amended or supplemented from time to
time. Any reference herein to any Person or entity shall be deemed to include
the heirs, personal representatives, successors and permitted assigns of such
Person or entity. The parties have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any of the provisions of
this Agreement.
13.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument. This Agreement may be executed by
43
<PAGE> 49
the parties in counterparts, each of which shall be deemed an original hereof,
and all of which shall constitute one and the same Agreement.
13.14 Schedules. The Schedules and Exhibits to the Agreement are a part of
this Agreement as if set forth in full herein.
IN WITNESS WHEREOF, Buyer and Seller have duly executed and delivered this
Agreement as of the date and year first above written.
SELLER:
NATIONAL PROCESSING
COMPANY
By: /s/Donald J. Kenney
-------------------------------------
Name: Donald J. Kenney
-----------------------------
Its: Executive Vice President
------------------------------
[For purposes of Section 2.8 only]
NATIONAL CITY CORPORATION
By: /s/ Thomas A. Richlovsky
-------------------------------------
Name: Thomas A. Richlovsky
-----------------------------
Its: Senior Vice President and
Treasureer
------------------------------
BUYER:
INVESTMENT SERVICES INTERNATIONAL CO., LLC
By: /s/ Cyrus A. Ansary
-------------------------------------
Name: Cyrus A. Ansary
-----------------------------
Its: President
------------------------------
44
<PAGE> 1
EXHIBIT 21.1 - SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
State or Jurisdiction
% of Voting Securities Under the Law of
Name Owned Which Organized
<S> <C> <C>
Subsidiaries of National Processing, Inc.
National Processing Company, Inc. 100% Kentucky
NPC International S.A. de C.V. 99.6% Mexico
B&L Consultants, Inc. 100% Massachusettes
NPC Check Services, Inc. 100% Delaware
NPC Services, Inc. 100% Arizona
NTA, Inc. 100% Washington
FA Holdings Inc. 100% Delaware
Financial Alliance Processing Services, Inc. 100% Delaware
Caribbean Data Services, Ltd. 100% Delaware
JBH Travel Audit Inc. 100% Colorado
NPC International (Barbados) Holdings
Limited 100% Barbados
NPC International (Barbados) Limited 100% Barbados
NPC International (Jamaica) Limited 100% Jamaica
NPC International (Dominican Republic) S.A. 100% Dominican Republic
NPC International (Fiji) Limited 100% Fiji
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of National Processing, Inc. of our report dated February 1, 1999,
with respect to the consolidated financial statements of National Processing,
Inc. included in its Annual Report on Form 10-K for the year ended December 31,
1998.
<TABLE>
<CAPTION>
Registration Statement Description Shares Registered
- - ---------------------- ----------- -----------------
<S> <C> <C>
Form S-8 (33-53345) Nonemployee Directors Stock 200,000
Option Plan
Form S-8 (33-53347) 1996 Stock Option Plan 4,000,000
</TABLE>
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 30, 1999
<PAGE> 1
Exhibit 24.1
DIRECTORS AND OFFICERS OF
NATIONAL PROCESSING INC.
REGISTRATION STATEMENT ON FORM 10-K
POWER OF ATTORNEY
The undersigned Directors and Officers of National Processing, Inc., an
Ohio corporation (the "Corporation"), which anticipate filing a Form 10-K
annual report pursuant to Section 12(g) Securities and Exchange Commission Act
of 1934 for the Corporation's fiscal year ended December 31, 1998, with the
Securities and Exchange Commission hereby constitute and appoint Jim W. Cate,
Carlton E. Langer and Thomas A. Richlovsky, and each of them, with full power
of substitution and resubstitution, as attorneys or attorney to sign for us and
in our names, in the capacities indicated below, said Form 10-K, and any and
all amendments and exhibits thereto, or other documents to be filed with the
Securities and Exchange Commission pertaining thereto, with full power and
authority to do and perform any and all acts and things whatsoever required and
necessary to be done in the premises, as fully to all intents and purposes as
we could do if personally present, hereby ratifying and approving the acts of
said attorneys, and any of them, and any such substitute.
EXECUTED this 24th day of February, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ Robert G. Siefers Chairman of the Board and Director
- - ------------------------------------
Robert G. Siefers
Director
- - ------------------------------------
Aureliano Gonzalez-Baz
Director
- - ------------------------------------
Christos M. Cotsakos
/s/ Preston B. Heller Jr. Director
- - ------------------------------------
Preston B. Heller Jr.
/s/ James R. Bell III Director
- - ------------------------------------
James R. Bell III
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C>
/s/ Jeffrey D. Kelly Director
- - ------------------------------------
Jeffrey D. Kelly
/s/ Robert E. Showalter President, Chief Executive Officer and
- - ------------------------------------ Director
Robert E. Showalter
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,254
<SECURITIES> 0
<RECEIVABLES> 104,759
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 223,520
<PP&E> 170,801
<DEPRECIATION> 82,680
<TOTAL-ASSETS> 512,433
<CURRENT-LIABILITIES> 151,107
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 352,659
<TOTAL-LIABILITY-AND-EQUITY> 512,433
<SALES> 0
<TOTAL-REVENUES> 488,117
<CGS> 0
<TOTAL-COSTS> 463,029
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25,088
<INCOME-TAX> 9,838
<INCOME-CONTINUING> 15,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,250
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
