NATIONAL PROCESSING INC
10-Q, 2000-08-11
COMPUTER PROCESSING & DATA PREPARATION
Previous: MORGENS WATERFALL VINTIADIS & CO INC, 13F-HR, 2000-08-11
 Next: NATIONAL PROCESSING INC, 10-Q, EX-10.28, 2000-08-11

TABLE OF CONTENTS

INDEX
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II — Other Information
SIGNATURES
Exhibit 10.28
Exhibit 27.1

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange of 1934

For the quarterly period ended June 30, 2000

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
(State or other jurisdiction
of incorporation or organization)		 61-1303983
(I.R.S. Employer Identification No.)
 
1231 Durrett Lane
Louisville, Kentucky
(Address of principal executive offices)		 40213-2008
(Zip Code)

(502) 315-2000
(Registrant’s telephone number, including area code)

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   X   NO ____

The number of shares outstanding of the Registrant’s Common Stock as of July 31, 2000 was 50,825,653.

 

Table of Contents

NATIONAL PROCESSING, INC.

INDEX

             
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets – June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations –
Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statement of Changes in Shareholders’ Equity –
Six Months Ended June 30, 2000 5
Consolidated Statements of Cash Flows –
Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings (None)
Item 2. Changes in Securities and Use of Proceeds (None)
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information (None)
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19

2

Table of Contents

National Processing, Inc.
Consolidated Balance Sheets
Unaudited
(Dollars in thousands)
                   
June 30 December 31
2000 1999
Assets
Current assets:
Cash and cash equivalents $ 31,094 $ 32,042
Securities available for sale 96,000 60,000
Accounts receivable — trade 77,688 104,486
Restricted deposits — customer funds 29,445 22,177
Deferred tax assets 546 812
Other current assets 10,930 11,743
Total current assets 245,703 231,260
Property and equipment:
Furniture and equipment 81,192 81,439
Building and leasehold improvements 18,852 21,006
Software 20,913 18,027
Property leased from affiliate 4,173 4,173
Land and improvements 2,436 2,851
127,566 127,496
Accumulated depreciation and amortization 66,252 62,408
61,314 65,088
Other assets:
Goodwill, net of accumulated amortization of $6,209 in 2000 and $5,040 in 1999 87,262 88,431
Other intangible assets 32,102 34,628
Deferred tax assets 3,289 3,698
Other assets 6,315 6,109
Total other assets 128,968 132,866
Total assets $ 435,985 $ 429,214
Liabilities and shareholders’ equity
Current liabilities:
Restricted deposits — client funds $ 29,445 $ 22,177
Accounts payable — trade 9,024 12,262
Accrued bankcard assessments 18,802 20,122
Income tax payable 4,665 16,318
Other accrued liabilities 31,724 35,963
Total current liabilities 93,660 106,842
Obligation under property leased from affiliate 2,058 2,123
Other long-term liabilities 332 796
Deferred tax liabilities 3,164 3,047
Total liabilities 99,214 112,808
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; 50,820,653 and 50,644,651 shares issued and outstanding in 2000 and 1999, respectively 1 1
Contributed capital 177,305 176,964
Retained earnings 159,465 139,441
Total shareholders’ equity 336,771 316,406
Total liabilities and shareholders’ equity $ 435,985 $ 429,214

See notes to consolidated financial statements

3

Table of Contents

National Processing, Inc.
Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
                                 
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
Revenue $ 104,513 $ 109,813 $ 202,380 $ 234,276
Operating expenses 52,736 57,314 100,200 117,811
Wages and other personnel expenses 19,656 24,059 38,874 55,155
General and administrative expenses 9,940 12,672 22,121 29,479
Depreciation and amortization 5,325 4,746 10,698 11,832
Impairment, restructuring and related expenses (credits) 1,500 (6,500 ) 1,500 69,666
Operating profit (loss) 15,356 17,522 28,987 (49,667 )
Net interest income 1,878 566 3,693 584
Income (loss) before provision for income taxes 17,234 18,088 32,680 (49,083 )
Provision for income taxes 6,758 6,115 12,656 7,129
Net income (loss) $ 10,476 $ 11,973 $ 20,024 $ (56,212 )
Basic and diluted net income (loss) per common share $ 0.21 $ 0.24 $ 0.39 $ (1.11 )

See notes to consolidated financial statements

4

Table of Contents

National Processing, Inc.
Consolidated Statement of Changes in Shareholders’ Equity
Unaudited
(In thousands)
                                 
Common Contributed Retained
Stock Capital Earnings Total
Balance at January 1, 2000 $ 1 $ 176,964 $ 139,441 $ 316,406
Net income — — 20,024 20,024
Stock options exercised — 341 — 341
Balance at June 30, 2000 $ 1 $ 177,305 $ 159,465 $ 336,771

See notes to consolidated financial statements

5

Table of Contents

National Processing, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
                       
Six Months Ended
June 30
2000 1999
Operating activities
Net income (loss) $ 20,024 $ (56,212 )
Items not requiring cash currently:
Depreciation and amortization 10,698 11,832
Impairment, restructuring and related expenses 1,500 69,666
Deferred income taxes 792 (947 )
Loss on disposition of fixed assets 16 502
Change in current assets and liabilities:
Accounts receivable — trade 26,798 19,881
Accounts payable — trade (1,238 ) 1,113
Accrued bankcard assessments (1,320 ) (1,496 )
Income taxes payable (11,653 ) 39,979
Other current assets/liabilities (2,049 ) 2,624
Other, net (670 ) 340
Net cash provided by operating activities 42,898 87,282
Investing Activities
Capital expenditures (6,197 ) (5,896 )
Proceeds from sales of fixed assets 75 420
Purchases of securities available for sale (76,000 ) (60,000 )
Proceeds from maturities of securities available for sale 40,000 —
Proceeds from sale of business lines — 62,554
Other investing activities (2,000 ) —
Net cash used by investing activities (44,122 ) (2,922 )
Financing Activities
Principal payments under property leased from affiliate (65 ) (76 )
Exercise of stock options 341 —
Net cash provided by (used by) financing activities 276 (76 )
Net increase (decrease) in cash and cash equivalents (948 ) 84,284
Cash and cash equivalents, beginning of period 32,042 7,254
Cash and cash equivalents, end of period $ 31,094 $ 91,538
Supplemental cash flow information:
Taxes paid (refunded) $ 21,905 $ (32,626 )

See notes to consolidated financial statements

6

Table of Contents

NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
     
1. ACCOUNTING POLICIES
      The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, although the balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements at that date, the accompanying consolidated financial statements do not include all the information and footnotes required by generally accepted accounting principles. These financial statements should be read in conjunction with National Processing, Inc.’s (the “Company”) audited consolidated financial statements for the year ended December 31, 1999 which include full disclosure of relevant financial policies and information.
      In the opinion of management, the accompanying consolidated financial statements have been prepared on a basis consistent with accounting principles applied in the prior periods and include all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
2. IMPAIRMENT, RESTRUCTURING AND RELATED EXPENSES
      In the second quarter of 2000, a pre-tax charge of $1.5 million was recorded for site consolidation initiatives. The charge totaled $1.0 million after-tax, or $0.02 per share, and related primarily to the write-off of leasehold improvements and the accrual of future contractual rent payments on abandoned facilities.
      During the quarter ended March 31, 1999, the Company recorded nonrecurring restructuring charges of $2.2 million, including $1.9 million for severance pay for approximately 540 employees and $0.3 million for other costs. These charges related to two of the Company’s facilities which have been closed and consolidated into the Company’s other operating facilities. These charges decreased net income and earnings per share by approximately $1.8 million and $.04, respectively. At June 30, 2000, the remaining liability was $0.4 million and related primarily to future severance payments for approximately 80 employees.
      During the first quarter of 1999, the Company committed to a formal plan to dispose of its Freight, Payables, Remittance and Check Services business lines and recorded impairment losses and related expenses of $73.9 million related to the sale and wind-down of these business lines. The charges decreased first quarter 1999 net income and earnings per share by $72.0 million and $1.42, respectively. Effective April 1, 1999, the Company sold its Freight and Payables business lines for $18.3 million. Effective June 1, 1999, the Company sold its Remittance and Check business lines for $44.3 million. As a result of the final dispositions of these business lines, the Company recorded a pre-tax

7

Table of Contents

     
credit of $6.5 million to the impairment loss in the second quarter of 1999. At June 30, 2000, the Company had $2.7 million remaining related to the final obligations of these dispositions recorded in other accrued liabilities. The remaining obligations are primarily for future severance payments, rent subsidies and processing subsidies. For the six months ended June 30, 1999, these divested business units had revenues of $57.3 million.
3. RECLASSIFICATIONS
      Certain 1999 amounts have been reclassified to conform with the 2000 presentation.
4. COMMITMENTS AND CONTINGENCIES
      In the normal course of business, the Company is involved in litigation from time to time. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
5. NET INCOME PER COMMON SHARE
      The calculation of net income per common share follows (in thousands, except per share amounts):
                                           
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
BASIC
Net income (loss) $ 10,476 $ 11,973 $ 20,024 $ (56,212 )
Average common shares outstanding 50,799 50,645 50,792 50,645
Net income (loss) per common share — basic $ 0.21 $ 0.24 $ 0.39 $ (1.11 )
DILUTED
Net income (loss) $ 10,476 $ 11,973 $ 20,024 $ (56,212 )
Average common shares outstanding 50,799 50,645 50,792 50,645
Stock option adjustment 166 2 106 —
Average common shares outstanding — diluted 50,965 50,647 50,898 50,645
Net income (loss) per common share — diluted $ 0.21 $ 0.24 $ 0.39 $ (1.11 )
     
6. SEGMENT REPORTING
      National Processing, Inc. operates two business segments – Merchant Services and Corporate Outsourcing Solutions. Merchant Services authorizes, processes and settles credit and debit card transactions for a variety of merchants. Corporate Outsourcing Solutions provides a variety of financial and administrative processing solutions to large corporate customers. These solutions include financial settlement, image scanning, data capture, storage and retrieval, call center, and value-added customer reporting.

8

Table of Contents

     
      During the first half of 1999, the Company sold its Check business line (formerly part of the Merchant Services segment) and its Remittance, Payables and Freight business lines (all formerly part of the Corporate Outsourcing Solutions segment). The Company identifies business segments by the services they offer. The accounting policies of the reportable segments are the same as those of the Company. Prior period amounts were classified to conform to the current line of business reporting structure. The segment previously defined as Travel Services is now included in the Corporate Outsourcing Solutions segment.
      General and administrative expenses, other than direct Corporate expenses, are allocated to the segments based upon various methods determined by the nature of the expenses. There are no intersegment revenues. Impairment, restructuring and related expenses are reflected in the business segments to which they relate. Depreciation expense for corporate fixed assets is allocated to the segments. Corporate net operating assets are comprised primarily of cash, securities available for sale and income tax balances.
                                 
Corporate
Merchant Outsourcing Consolidated
(Dollars in thousands) Services Solutions Corporate Total
For the quarter ended June 30, 2000
Revenue $ 76,104 $ 28,409 $ — $ 104,513
Impairment, restructuring and related expenses — 1,500 — 1,500
Operating profit (loss) 13,450 3,623 (1,717 ) 15,356
Depreciation and amortization 3,564 1,761 — 5,325
Net interest income 1,364 514 — 1,878
Net operating assets 103,004 51,001 182,766 336,771
For the quarter ended June 30, 1999
Revenue $ 74,021 $ 35,792 $ — $ 109,813
Impairment, restructuring and related expenses (credits) (9,336 ) 2,836 — (6,500 )
Operating profit 17,384 1,654 (1,516 ) 17,522
Depreciation and amortization 2,921 1,825 — 4,746
Net interest income 358 208 — 566
Net operating assets 90,217 15,481 190,749 296,447
                                 
Corporate
Merchant Outsourcing Consolidated
(Dollars in thousands) Services Solutions Corporate Total
For the six months ended June 30, 2000
Revenue $ 147,015 $ 55,365 $ — $ 202,380
Impairment, restructuring loss and related expenses — 1,500 — 1,500
Operating profit (loss) 25,659 7,182 (3,854 ) 28,987
Depreciation and amortization 7,096 3,602 — 10,698
Net interest income 2,783 910 — 3,693
Net operating assets 103,004 51,001 182,766 336,771
For the six months ended June 30, 1999
Revenue $ 147,813 $ 86,463 $ — $ 234,276
Impairment, restructuring and related expenses 21,636 48,030 — 69,666
Operating loss (6,712 ) (39,689 ) (3,266 ) (49,667 )
Depreciation and amortization 6,226 5,606 — 11,832
Net interest income 387 197 — 584
Net operating assets 90,217 15,481 190,749 296,447

9

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Components of Revenue and Expenses

      Revenue. The Company’s Merchant Services revenue is primarily derived from fees paid by merchants for the authorization and settlement of credit and debit card transactions. Revenue is recorded net of interchange fees charged by the credit card associations. Corporate Outsourcing Solutions provides a variety of financial and administrative processing solutions to large corporate customers. These solutions include financial settlement, image scanning, data capture, storage and retrieval, call center, and value-added customer reporting. A portion of Corporate Outsourcing Solutions revenue is also derived from an exclusive long-term contract with the Airlines Reporting Corporation (ARC) under which the Company is compensated on a “cost plus” basis. A small portion of revenue is derived from earnings on cash balances, which are maintained by customers pursuant to contract terms.

      Expenses. Operating expenses include all direct costs of providing services to customers including wages and other personnel expenses. The most significant components of operating expenses are assessment fees, authorization fees, data processing expenses, wages and benefits, and general and administrative expenses.

Results of Operations

      The Company divested certain business units during 1999 in order to focus on its core business lines. Accordingly, the segment results presented below for the comparison of 2000 to 1999 segregate the operating performance for the remaining core business lines versus those that were divested. The segment profits as presented herein differ from the operating profits presented in Note 6 in the accompanying consolidated financial statements due to the segregation of nonrecurring items and divested business lines.

10

Table of Contents

Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999

                                                       
2000 1999 Change
(Dollars in thousands) % of % of
Amount Revenues Amount Revenues Amount %
Revenue:
Merchant Services $ 76,104 73 % $ 64,549 59 % $ 11,555 18 %
Corporate Outsourcing Solutions 28,409 27 27,678 25 731 3
Total Core Revenue 104,513 100 92,227 84 12,286 13
Divested Business Lines — — 17,586 16 (17,586 ) (100 )
Total Revenue 104,513 100 109,813 100 (5,300 ) (5 )
Operating Expenses:
Merchant Services 62,654 82 56,497 88 6,157 11
Corporate Outsourcing Solutions 23,286 82 22,951 83 335 1
Core Operating Expenses 85,940 82 79,448 86 6,492 8
Divested Business Lines — — 17,827 101 (17,827 ) (100 )
Total Operating Expenses 85,940 82 97,275 89 (11,335 ) (12 )
Segment Profit (Loss):
Merchant Services 13,450 18 8,052 12 5,398 67
Corporate Outsourcing Solutions 5,123 (2) 18 4,727 17 396 8
Total Core Segment Profit 18,573 18 12,779 14 5,794 45
Divested Business Lines — — (241 )(1) (1 ) 241 (100 )
Total Segment Profit 18,573 18 12,538 11 6,035 48
Other General and Administrative Expenses 1,717 2 1,516 1 201 13
Net Interest Income 1,878 2 566 1 1,312 232
Income Before Taxes and Nonrecurring Items 18,734 18 11,588 11 7,146 62
Nonrecurring Items:
Impairment, Restructuring and Related (Expenses) Credits (1,500 ) (1 ) 6,500 6 (8,000 ) NM
Income Before Taxes 17,234 16 18,088 16 (854 ) (5 )
Provision for Income Taxes 6,758 6 6,115 6 643 11
Net Income $ 10,476 10 $ 11,973 11 $ (1,497 ) (13 )

NM – Not meaningful

(1)   Excludes $6.5 million impairment credit for the business lines divested in the first half of 1999 (Freight, Payables, Remittance and Check Services).
(2)   Excludes $1.5 million charge for site consolidation initiatives.

                                                                               
2000 1999 Change
(Dollars in thousands,
except per share amounts) Amount % Amount % Amount %
Excluding Nonrecurring Items:
Pre-Tax Income $ 18,734 100 % $ 11,588 100 % $ 7,146 62 %
Taxes 7,283 39 3,336 29 3,947 118
Net Income $ 11,451 61 $ 8,252 71 $ 3,199 39
Per Share — Diluted $ 0.22 $ 0.16 $ 0.06 38
Nonrecurring Items:
Pre-Tax Income (Loss) $ (1,500 ) 100 % $ 6,500 100 % $ (8,000 ) NM
Taxes (525 ) 35 2,779 43 (3,304 ) NM
Net Income (Loss) $ (975 ) 65 $ 3,721 57 $ (4,696 ) NM
Per Share — Diluted $ (0.02 ) $ 0.08 $ (0.10 ) NM
Total:
Pre-Tax Income $ 17,234 100 % $ 18,088 100 % $ (854 ) (5 )
Taxes 6,758 39 6,115 34 643 11
Net Income $ 10,476 61 $ 11,973 66 $ (1,497 ) (13 )
Per Share — Diluted $ 0.21 $ 0.24 $ (0.03 ) (13 )

NM — Not meaningful

11

Table of Contents

Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999

Merchant Services

      Revenue for the core business line increased 18% to $76.1 million from $64.5 million. Transaction and dollar volume processed increased 27% and 21%, respectively, primarily due to new customer accounts, including the acquisition of a merchant processing portfolio on December 31, 1999, and increased volume from existing customers. Operating expenses for the core business line increased 11% to $62.7 million from $56.5 million primarily due to the customer base expansion and increased volume. Operating margins as a percentage of revenue increased to 18% from 12%, primarily due to increased revenue from higher-margin regional merchants, improved pricing related to vendor renegotiations, and economies of scale based on increased volumes. In addition, the 1999 period contained Year 2000 testing and remedition expenses that did not recur in 2000. Due primarily to the factors outlined above, segment profit for the quarter ended June 30, 2000 increased 67% to $13.5 million in 2000 from $8.1 million in 1999.

Corporate Outsourcing Solutions

      Revenue for the core business lines increased 3% to $28.4 million from $27.7 million. Revenue increased due to volume growth and pricing adjustments in certain products within the Travel business line and volume growth in the Healthcare Claims Processing Services business line. These increases were partially offset by decreases in revenues resulting from the continuing conversion from paper to electronic ticketing and reporting. Operating expenses for the core business lines increased 1% to $23.3 million from $23.0 million due primarily to increased volumes. As a result of the items discussed above, segment profit for the quarter ended June 30, 2000 increased 8% to $5.1 million from $4.7 million in 1999.

Other General and Administrative Expenses

      Other general and administrative expenses are comprised of corporate expenses that are not included in the determination of segment profit for the business segments. For the quarter ended June 30, 2000, these expenses increased 13% to $1.7 million from $1.5 million in 1999, due primarily to a new performance incentive program instituted for certain exempt employees who were not previously included under the Company’s other performance incentive programs.

Divested Business Lines

      Divested business lines are comprised of the Remittance, Payables, Freight (all formerly part of the Corporate Outsourcing Solutions segment) and Check Services (formerly part of the Merchant Services segment) business lines that were sold by the Company in the first half of 1999. Segment loss for the divested business lines was $0.2 million in the second quarter of 1999.

12

Table of Contents

Net Interest Income

      Net interest income for the second quarter increased to $1.9 million from $0.6 million for the same period of 1999 due to the increased level of cash and investments as well as rising interest rates. The increased levels of cash and investments were due primarily to the receipt of sale proceeds from the business lines that were divested in the second quarter of 1999, as well as internal cash flow.

Nonrecurring Items

      In the second quarter of 2000, a pre-tax charge of $1.5 million was recorded related to site consolidation initiatives. The charge totaled $1.0 million after-tax, or $0.02 per share.

      In the second quarter of 1999, a pre-tax credit of $6.5 million was recorded related to the dispositions of the Freight, Payables, Remittance and Check business lines. The credit, which totaled $3.7 million after-tax, or $0.08 per share, represents favorable adjustments to the first quarter estimated impairment loss for the disposition of these business lines, which were completed during the second quarter of 1999.

Provision for Income Taxes

      Excluding the impact of nonrecurring items, the effective tax rate was 38.9% for the second quarter of 2000 compared to 28.8% for the same period a year ago. This increase was due primarily to recording income tax on all foreign income at its U.S. statutory rate in 2000, as well as an increase in U.S. income versus offshore income, which is additionally subject to state and local taxation. The increase in the effective tax rate in the second quarter of 2000 was partially offset by $0.3 million due to a reduction in the state net operating loss carryforward valuation allowance.

13

Table of Contents

Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

                                                       
2000 1999 Change
(Dollars in thousands) % of % of
Amount Revenues Amount Revenues Amount %
Revenue:
Merchant Services $ 147,015 73 % $ 123,519 53 % $ 23,496 19 %
Corporate Outsourcing Solutions 55,365 27 53,422 23 1,943 4
Total Core Revenue 202,380 100 176,941 76 25,439 14
Divested Business Lines — — 57,335 24 (57,335 ) (100 )
Total Revenue 202,380 234,276 100 (31,896 ) (14 )
Operating Expenses:
Merchant Services 121,356 83 109,165 88 12,191 11
Corporate Outsourcing Solutions 46,683 84 44,184 83 2,499 6
Core Operating Expenses 168,039 83 153,349 87 14,690 10
Divested Business Lines — — 57,662 101 (57,662 ) (100 )
Total Operating Expenses 168,039 83 211,011 90 (42,972 ) (20 )
Segment Profit (Loss):
Merchant Services 25,659 17 14,354 (1) 12 11,305 79
Corporate Outsourcing Solutions 8,682 (4) 16 9,238 (2) 17 (556 ) (6 )
Total Core Segment Profit 34,341 17 23,592 13 10,749 46
Divested Business Lines — — (327 )(3) (1 ) 327 (100 )
Total Segment Profit 34,341 17 23,265 10 11,076 48
Other General and Administrative Expenses 3,854 2 3,266 1 588 18
Net Interest Income 3,693 2 584 — 3,109 532
Income Before Taxes and Nonrecurring Items 34,180 17 20,583 9 13,597 66
Nonrecurring Items:
Impairment, Restructuring and Related Expenses (1,500 ) (1 ) (69,666 ) (30 ) 68,166 NM
Income (Loss) Before Taxes 32,680 16 (49,083 ) (21 ) 81,763 NM
Provision for Income Taxes 12,656 6 7,129 3 5,527 NM
Net Income (Loss) $ 20,024 10 $ (56,212 ) (24 ) $ 76,236 NM

NM – Not meaningful

(1)   Excludes $0.5 million of restructuring charges related to facility closing.
(2)   Excludes $1.7 million of restructuring charges related to facility closing.
(3)   Excludes $67.4 million of impairment and related expenses for the business lines divested in the first half of 1999 (Freight, Payables, Remittance and Check Services).
(4)   Excludes $1.5 million charge for site consolidation initiatives.

                                                       
2000 1999 Change
(Dollars in thousands,
except per share amounts) Amount % Amount % Amount %
Excluding Nonrecurring Items:
Pre-Tax Income $ 34,180 100 % $ 20,583 100 % $ 13,597 66 %
Taxes 13,181 39 6,657 32 6,524 98
Net Income $ 20,999 61 $ 13,926 68 $ 7,073 51
Per Share — Diluted $ 0.41 $ 0.27 $ 0.14 50
Nonrecurring Items:
Pre-Tax Income (Loss) $ (1,500 ) 100 $ (69,666 ) 100 % $ 68,166 NM
Taxes (525 ) 35 472 (1 ) (997 ) NM
Net Income (Loss) $ (975 ) 65 $ (70,138 ) 101 $ 69,163 NM
Per Share — Diluted $ (0.02 ) $ (1.38 ) $ 1.36 NM
Total:
Pre-Tax Income (Loss) $ 32,680 100 % $ (49,083 ) 100 % $ 81,763 NM
Taxes 12,656 39 7,129 (15 ) 5,527 NM
Net Income (Loss) $ 20,024 61 $ (56,212 ) 115 $ 76,236 NM
Per Share — Diluted $ 0.39 $ (1.11 ) $ 1.50 NM

NM — Not meaningful

14

Table of Contents

Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

Merchant Services

      Revenue for the core business line increased 19% to $147.0 million from $123.5 million. Transaction and dollar volume increased 27% and 21%, respectively, primarily due to new customer accounts, including the acquisition of a merchant processing portfolio on December 31, 1999, and increased volume from existing customers. Operating expenses for the core business line increased 11% to $121.4 million from $109.2 million primarily due to the customer base expansion and increased volume. Operating margins as a percentage of revenue increased to 17% from 12%, primarily due to increased revenue from higher-margin regional merchants, improved pricing related to vendor renegotiations, and economies of scale based on increased volumes. In addition, the 1999 period contained Year 2000 testing and remedition expenses that did not recur in 2000. Due primarily to the factors outlined above, segment profit for the six months ended June 30, 2000, increased 79% to $25.7 million in 2000 from $14.4 million in 1999.

Corporate Outsourcing Solutions

      Revenue for the core business lines increased 4% to $55.4 million from $53.4 million. This increase was principally related to volume growth in the Healthcare Claims Processing Services business line and certain products within the Travel business line. These increases were partially offset by decreases in revenue resulting from the continuing conversion from paper to electronic ticketing and reporting. Operating expenses for the core business lines increased 6% to $46.7 million from $44.2 million due primarily to increased volumes, as well as severance expense of $0.5 million recorded in the first quarter of 2000. As a result of the items discussed above, segment profit for the six months ended June 30, 2000 decreased 6% to $8.7 million in 2000 from $9.2 million in 1999.

Other General and Administrative Expenses

      Other general and administrative expenses are comprised of corporate expenses that are not included in the determination of segment profit for the business segments. For the six months ended June 30, 2000, these expenses increased 18% to $3.9 million in 2000 from $3.3 million in 1999, due primarily to a new performance incentive program instituted for certain exempt employees who were not previously included under the Company’s other performance incentive program.

Divested Business Lines

      Divested business lines are comprised of the Remittance, Payables, Freight (all formerly part of the Corporate Outsourcing Solutions segment) and Check Services (formerly part of the Merchant Services segment) business lines that were sold by the Company in the first half of 1999. Segment loss for the divested business lines was $0.3 million in the six months ended June 30, 1999.

15

Table of Contents

Net Interest Income

      Net interest income for the six months ended June 30, 2000 increased to $3.7 from $0.6 million for the same period in 1999 due to the increased level of cash and investments as well as rising interest rates. The increased levels of cash and investments were due primarily to the receipt of sale proceeds from the business lines that were divested in the second quarter of 1999, as well as internal cash flow.

Nonrecurring Items

      In the second quarter of 2000, a pre-tax charge of $1.5 million was recorded related to site consolidation initiatives. The charge totaled $1.0 million after-tax, or $0.02 per share.

      During the quarter ended March 31, 1999, the Company recorded nonrecurring restructuring charges of $2.2 million, including $1.9 million for severance pay for approximately 540 employees and $0.3 million for other costs. These charges related to two of the Company’s facilities which have been closed and consolidated into the Company’s other operating facilities. These charges decreased net income and earnings per share by approximately $1.8 million and $.04, respectively. At June 30, 2000, the remaining liability was $0.4 million and related primarily to future severance payments for approximately 80 employees.

      During the first half of 1999, the Company committed to a formal plan to dispose of its Freight, Payables, Remittance and Check Services business lines and recorded impairment losses and related expenses of $67.4 million related to the sale and wind-down of these business lines. The charges decreased net income and earnings per share for the six months ended June 30, 1999 by $68.3 million and $1.35, respectively. Effective April 1, 1999, the Company sold its Freight and Payables business lines for $18.3 million. Effective June 1, 1999, the Company sold its Remittance and Check business lines for $44.3 million. At March 31, 2000, the Company had $2.7 million remaining related to the final obligations of these dispositions recorded in other accrued liabilities. The remaining obligations are primarily for future severance payments, rent subsidies and processing subsidies. For the six months ended June 30, 1999, these divested business units had revenues of $57.3 million.

Provision for Income Taxes

      Excluding the impact of nonrecurring items, the effective tax rate was 38.6% for the six months ended June 30, 2000 compared to 32.3% for the same period a year ago. This increase was due primarily to recording income tax on all foreign income at its U.S. statutory tax rate in 2000, as well as an increase in U.S. income versus offshore income, which is additionally subject to state and local taxation. The increase in the effective tax rate in the first six months of 2000 was partially offset by $0.6 million due to a reduction in the state net operating loss carryforward valuation allowance.

      The overall effective tax rate for 1999 included the effect of the write-off of $65.7 million of nondeductible goodwill related to the divested business lines.

16

Table of Contents

Seasonality

      The Company experiences seasonality in its businesses. 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 decreased transaction volume during the quarter immediately following the holiday season.

Liquidity and Capital Resources

      The Company’s primary uses of capital include capital expenditures, working capital and acquisitions. Future business acquisitions may be funded through current liquidity, borrowed funds, and/or issuances of common stock.

      The Company’s capital expenditures include amounts for computer hardware and software, scanning and other document processing equipment as well as leasehold improvements to operating facilities. During the six month period ended June 30, 2000, the Company’s capital expenditures totaled $6.2 million. Such expenditures were principally financed from operating cash flow, which totaled approximately $42.9 million for the six month period. Operating cash flow during the six month period ended June 30, 1999 totaled $87.3 million and capital expenditures were $5.9 million. It is anticipated that future expenditures will be funded with operating cash flow.

      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 balances.

      The Company maintains restricted cash balances held on behalf of clients pending distribution to vendors which are shown on the balance sheet as assets and equivalent offsetting liabilities. These cash balances totaled approximately $29.4 million and $22.2 million as of June 30, 2000 and December 31, 1999, respectively.

Forward Looking Statements

      The section entitled “Business Segment Review” contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements involve significant risks and uncertainties, including changes in general economic and financial market conditions and the Company’s ability to execute its business plans. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

      There have been no material changes in market risk as disclosed in the Company’s 1999 Form 10-K.

17

Table of Contents

Part II — Other Information

Item 1. Legal Proceedings (None)

Item 2. Changes in Securities and Use of Proceeds (None)

Item 3. Defaults Upon Senior Securities (None)

Item 4. Submission of Matters to a Vote of Security Holders

        On May 5, 2000, at the Annual Stockholders Meeting of the Registrant, the shareholders took the following actions:

        1. Elected as directors all nominees designated in the proxy statement of March 28, 2000 as follows:

                 
Number of Votes
For Withheld
Jon L. Gorney 50,640,315 41,227
Jeffrey P. Gotschall 50,641,715 39,827
Jeffrey D. Kelly 50,643,797 37,745
J. Armando Ramirez 50,642,815 38,727

        2. Approved the National Processing, Inc. 2000 Stock Option Plan: 47,416,339 votes cast for 1,963,685, votes cast against, and 4,800 votes withheld.

        3. Approved the selection of Ernst & Young LLP as independent auditors for the Registrant for 2000: 50,655,142 votes cast for, 25,600 votes cast against, and 800 votes withheld.

Item 5. Other Information (None)

Item 6. Exhibits and Reports on Form 8-K:

a. Exhibits

10.28 National Processing, Inc. 2000 Stock Option Plan

27.1 Financial Data Schedule

b. Reports on Form 8-K

      April 17, 2000: On April 17, 2000, the Registrant issued a press release reporting earnings for the quarter ended March 31, 2000.

18

Table of Contents

SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
NATIONAL PROCESSING, INC.
 
Date: August 11, 2000 By: /s/ Thomas A. Wimsett
 
Thomas A. Wimsett
President and Chief Executive Officer
(Duly Authorized Signer)
 
By: /s/ David E. Fountain
 
David E. Fountain
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

19



© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission