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 March 31, 1999
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from________________to___________
COMMISSION FILE NUMBER: 1-11905
NATIONAL PROCESSING, INC.
(Exact name of Registrant as specified in its charter)
OHIO 61-1303983
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1231 DURRETT LANE
LOUISVILLE, KENTUCKY 40285-0001
(Address of principal executive offices) (Zip Code)
(502) 315-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
The number of shares outstanding of the Registrant's Common Stock as of May 11,
1999 was 50,644,651.
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NATIONAL PROCESSING, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
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Item 1. Condensed Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows - Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
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NATIONAL PROCESSING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
Unaudited
March 31 December 31
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 41,313 $ 7,254
Accounts receivable-trade 83,360 104,759
Check inventory 4,882 2,901
Restricted deposits-client funds 107,046 91,484
Deferred tax assets 3,614 3,688
Other current assets 12,357 13,434
-------- --------
Total current assets 252,572 223,520
Property and equipment:
Furniture and equipment 118,240 116,420
Building and leasehold improvements 24,355 23,843
Software 23,551 23,537
Property leased from affiliate 4,173 4,173
Land and improvements 2,847 2,828
-------- --------
173,166 170,801
Accumulated depreciation and amortization 87,015 82,680
-------- --------
86,151 88,121
Other assets:
Goodwill, net of accumulated amortization of
$15,384 in 1999 and $14,202 in 1998 103,895 171,489
Acquired merchant portfolios 17,581 18,255
Deferred tax assets 2,764 2,764
Other assets 7,939 8,284
-------- --------
Total other assets 132,179 200,792
-------- --------
TOTAL ASSETS $470,902 $512,433
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Restricted deposits-client funds $107,046 $ 91,484
Accounts payable-trade 3,313 3,075
Merchant payable-check services 6,120 3,690
Accrued bankcard assessments 14,491 17,753
Income tax payable to NCC 4,173 4,376
Other accrued liabilities 43,208 30,729
-------- --------
Total current liabilities 178,351 151,107
Obligation under property leased from affiliate 2,221 2,264
Other long-term liabilities 796 796
Deferred tax liabilities 5,060 5,607
-------- --------
Total liabilities 186,428 159,774
Shareholders' equity:
Preferred stock, without par value; 5,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, without par value; 95,000,000 shares authorized; 1 1
50,644,651 shares issued and outstanding in 1999 and 1998
Contributed capital 175,799 175,799
Retained earnings 108,674 176,859
-------- --------
Total shareholders' equity 284,474 352,659
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $470,902 $512,433
======== ========
See notes to condensed consolidated financial statements
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NATIONAL PROCESSING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)
Three Months Ended
March 31
1999 1998
--------- ---------
Revenues $ 124,463 $ 113,649
Operating expenses 60,497 52,432
Wages and other personnel expenses 31,096 32,023
General and administrative expenses 16,807 14,701
Restructuring charges 2,234 --
Impairment loss and related expenses 73,932 --
Depreciation and amortization 7,086 6,250
--------- ---------
OPERATING (LOSS) PROFIT (67,189) 8,243
Net interest income 18 341
--------- ---------
(Loss) income before income taxes (67,171) 8,584
Provision for income taxes 1,014 3,676
--------- ---------
NET (LOSS) INCOME $ (68,185) $ 4,908
========= =========
BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE $ (1.35) $ .10
========= =========
See notes to condensed consolidated financial statements
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NATIONAL PROCESSING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Three Months Ended
March 31
1999 1998
--------- --------
OPERATING ACTIVITIES
Net (loss) income $(68,185) $ 4,908
Items not requiring cash currently:
Depreciation and amortization 7,086 6,250
Restructuring charge 2,234 --
Impairment loss and related expenses 73,932 --
Gain on disposition of fixed assets (8) --
Deferred income taxes 845 1,996
Change in current assets and liabilities:
Accounts receivable 21,399 37,490
Check inventory (1,981) 218
Accounts payable-trade 238 (2,106)
Merchant payable-check services 2,430 (1,128)
Accrued bankcard assessments (3,262) (4,509)
Income taxes payable (203) (605)
Other current assets/liabilities 2,492 (6,863)
Other, net 154 (3,577)
-------- --------
Net cash provided by operating activities 37,171 32,074
-------- --------
INVESTING ACTIVITIES
Capital expenditures (3,219) (13,613)
Proceeds from sale of fixed assets 150 --
Purchases of securities available for sale -- (735)
Acquisitions, net of cash acquired -- (32,797)
-------- --------
Net cash used by investing activities (3,069) (47,145)
-------- --------
FINANCING ACTIVITIES
Principal payments under property leased from affiliate (43) (73)
-------- --------
Net cash used by financing activities (43) (73)
-------- --------
Net increase (decrease) in cash and cash equivalents 34,059 (15,144)
Cash and cash equivalents, beginning of period 7,254 38,887
-------- --------
Cash and cash equivalents, end of period $ 41,313 $ 23,743
======== ========
Supplemental cash flow information:
Taxes paid $ 2,364 $ 5,160
See notes to condensed consolidated financial statements
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NATIONAL PROCESSING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim information and with the instructions
to Form 10-Q and Article 10 of regulation S-X. Accordingly, although
the balance sheet at December 31, 1998 has been derived from the
audited consolidated financial statements at that date, the
accompanying condensed consolidated financial statements do not include
all the information and footnotes required by generally accepted
accounting principles. These financial statements should be read in
conjunction with National Processing Inc.'s (the "Company") audited
consolidated financial statements for the year ended December 31, 1998
which include full disclosure of relevant financial policies and
information.
In the opinion of management, the accompanying condensed
consolidated financial statements have been prepared on a basis
consistent with accounting principles applied in the prior periods and
include all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation of the financial position,
results of operations and cash flows for the interim periods presented.
The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year or any
other interim period.
The Company adopted the provisions of FASB Statement 130, Reporting
Comprehensive Income, in 1998. Any differences between net income and
comprehensive income are insignificant.
2. RESTRUCTURING CHARGES
During the three month period ended March 31, 1999, the Company
recorded non-recurring restructuring charges of $2.2 million, including
$1.9 million for severance pay for approximately 540 employees and $.3
million for other costs. These charges related to several of the
Company's operating facilities which have been or are in the process of
being closed and consolidated into the Company's other current
facilities. These charges decreased net income and earnings per share
by approximately $1.8 million and $.04, respectively.
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3. IMPAIRMENT LOSS AND RELATED EXPENSES
During the quarter, the Company entered into an agreement with
Investment Services International Co., LLC to sell its payables and
freight business lines. The Company also adopted a formal plan to exit
the check and remittance business lines. These actions will allow the
Company to focus more closely on its core business lines which include
merchant card processing, outsourcing services and travel services. A
$73.9 million pre-tax impairment loss, which included certain related
expenses, was recorded related to these planned dispositions. The loss
was recorded in accordance with the provisions of FASB Statement 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. On an after-tax basis, the loss totaled $72.0
million and reduced earnings per share by $1.42. The pre-tax loss is
shown on the Balance Sheet as a reduction in the carrying value of
long-lived assets of $66.4 million and as an increase in other accrued
liabilities of $7.5 million.
The business lines being exited incurred declines in revenue of $.5
million, or 1.3%, from $41.1 million in the first quarter of 1998 to
$40.6 million for the same period in 1999. Operating profit (loss) for
the four businesses declined $1.3 million from a profit of $.8 million
for the first quarter of 1998 to a loss of $.5 million for the same
period in 1999.
Further discussion of recent developments related to these divestitures
is included in Note 9, Subsequent Events.
4. RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform with the
1999 presentation.
5. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in
litigation from time to time. In the opinion of management, the
ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
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6. NET INCOME PER COMMON SHARE
The calculation of net income per common share follows (in
thousands except per share amounts):
Three Months
Ended March 31
--------------
1999 1998
---- ----
BASIC
Net (loss) income $ (68,185) $ 4,908
Average common shares outstanding 50,645 50,575
Net (loss) income per common share - basic $ (1.35) $ .10
DILUTED
Net (loss) income $ (68,185) $ 4,908
Average common shares outstanding 50,645 50,575
Stock option adjustment - 258
Average common shares outstanding - diluted 50,645 50,833
Net (loss) income per common share - diluted $ (1.35) $ .10
7. SEGMENT REPORTING
National Processing, Inc. operates three business segments -
merchant services, travel services and corporate services. Merchant
services authorizes, processes and settles credit and debit card
transactions and authorizes and collects checks for a variety of
merchants. Travel services principally settles airline ticket purchases
made through travel agents on behalf of airlines and thus derives a
substantial portion of its revenues from an exclusive contract with the
Airlines Reporting Corporation ("ARC"). The Company is compensated on a
"cost plus" basis under this contract which expires in December 2001.
Revenues from corporate services are derived from transaction fees for
the processing of remittances, accounts payable and freight bills and
for providing integrated document solutions involving electronic
imaging, archival, processing and payment settlement. The business
segments are identified by the services they offer. The accounting
policies of the reportable segments are the same as those described in
Note 1.
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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.
(Dollars in thousands) MERCHANT TRAVEL CORPORATE CONSOLIDATED
SERVICES SERVICES SERVICES CORPORATE TOTAL
-------- -------- -------- --------- -----
FOR THE QUARTER ENDED MARCH 31, 1999
Revenues from external customers $ 73,792 $ 11,139 $ 39,532 $ - $ 124,463
Impairment loss and related expenses 30,450 - 43,482 73,932
Operating (loss) profit (24,124) 2,121 (43,436) - (65,439)
Depreciation and amortization 3,305 966 2,815 - 7,086
Net interest income (expense) 29 (2) (9) - 18
Net operating assets 141,033 12,999 66,450 22,651 243,133
Expenditures for long-lived assets $ 217 $ 430 $ 891 $ 1,681 $ 3,219
FOR THE QUARTER ENDED MARCH 31, 1998
Revenues from external customers $ 63,617 $ 12,670 $ 37,362 $ - $ 113,649
Impairment loss and related expenses - - - - -
Operating profit 5,831 2,445 1,796 - 10,072
Depreciation and amortization 2,932 908 2,410 - 6,250
Net interest income (expense) 341 (30) 30 - 341
Net operating assets 174,819 22,978 97,457 23,431 318,685
Expenditures for long-lived assets $ 1,756 $ 803 $ 269 $ 10,351 $ 13,179
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.
(Dollars in thousands) FOR THE QUARTER ENDED MARCH 31,
1999 1998
---- ----
Operating (loss) profit:
Total operating profit for reportable segments $(65,439) $ 10,072
General and administrative expenses - non-operating 1,750 1,829
--------- ---------
Consolidated operating profit $(67,189) $ 8,243
========= =========
AS OF
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Net operating assets:
Total net operating assets for reportable segments $ 243,133 $ 349,805
Cash 41,313 7,254
Other 28 (4,400)
--------- ---------
Consolidated net operating assets $ 284,474 $ 352,659
========= =========
Depreciation expense for certain corporate fixed assets is
allocated to the three segments.
Corporate assets at March 31, 1999 were reduced by the liability
related to the impairment loss and related expenses of $73.9 million and
the restructuring related liabilities of $ 2.2 million.
Revenues from foreign operations, primarily Barbados, for the first
quarters of 1999 and 1998 were approximately $13.7 million and $12.3
million, respectively. The net book value of foreign long-lived assets,
primarily in Juarez, Mexico, was approximately $13.0 million at March
31, 1999 and $12.1 million at December 31, 1998.
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8. RECENT ACCOUNTING PRONOUNCEMENTS
Internal Use Software
In March 1998, the Accounting Standards Executive committee issued
Statement of Position, 98-1 Internal Use Software. This statement
requires the capitalization of costs to acquire or develop internal use
software after certain conditions are met. The Company adopted the
provisions of this Statement effective January 1, 1999. Because the
Company's previous policy was not significantly different from the
requirements of this statement, the adoption of this statement had no
significant impact on the financial position or results of operations
of the Company.
9. SUBSEQUENT EVENTS
Effective as of April 1, 1999, the Company sold its freight and
payables business lines to Investment Services International Co.,
LLC. As the result of final negotiations prior to closing, the
Company received $18 million in cash for the net assets of both
business lines, lower than the $37 million previously discussed in
the Company's 1998 Form 10-K. An additional cash premium of up to
$7 million could be received from the buyer provided certain
conditions related to revenue levels and offshore processing are
met by September 29, 2000.
In April 1999, the Company entered into a definitive agreement with
International Payment Services, Inc. to sell its check services
business line for approximately $38 million in cash.
In May 1999, the Company also reached a definitive agreement to sell
its remittance processing business line to First Tennessee National
Association, a subsidiary of First Tennessee National Corporation, for
approximately $6 million in cash.
The sale of the check services and remittance processing business lines
are expected to close in the second quarter of 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL STATEMENT
National Processing, Inc. (the "Company"), through its wholly owned
operating subsidiary National Processing Company ("NPC"), provides low-cost,
high-volume transaction processing services and customized processing solutions.
The Company deploys technology and applications software primarily to merchants
and other commercial businesses, corporations and providers of travel-related
services.
The Company is an Ohio corporation that was formerly a wholly owned
subsidiary of National City Corporation, an Ohio-headquartered bank holding
company. Following the completion of the Company's initial public offering in
August 1996, National City Corporation continued to own 85% of the Company's
outstanding common stock. In May 1997, National City Corporation purchased
1,265,400 shares of the Company's common stock in the open market and currently
owns 88% of the Company's outstanding common stock.
The financial information and related discussion included herein
reflect the results of operations of the following acquisition from its
respective acquisition date: on January 15, 1998 the Company acquired JBH Travel
Audit, Inc., a company which audits fees payable to travel agencies.
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 other personnel expenses include
wages and benefits for hourly employees. General and administrative expenses
include management salaries and benefits, facilities maintenance and software
applications programming.
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RESULTS OF OPERATIONS
The Company's operating results with and without the first quarter
restructuring charges and impairment loss and related expenses is presented
below:
Three Months Ended
March 31
---------------------------- Percent
(In thousands, except per share amounts) 1999 1998 Change
--------- ------- ------
Excluding restructuring charges and impairment loss:
Pre-tax earnings $ 8,995 $ 8,584 5%
Taxes 3,321 3,676 (10)
--------- -------
Net income 5,674 4,908 16
========= =======
Per share 0.11 0.10 16
========= =======
Restructuring charges and impairment loss:
Pre-tax (loss) (76,166) -
Tax (benefit) (2,307) -
--------- -------
After-tax (loss) (73,859) -
========= =======
Per share (1.46) -
========= =======
Total:
Pre-tax (loss) earnings (67,171) 8,584 -
Taxes 1,014 3,676 (72)
--------- -------
After-tax (loss) earnings (68,185) 4,908 -
========= =======
Per share ($1.35) $ 0.10 -
========= =======
The following table summarizes the Company's operating results as a
percentage of revenues:
Three Months Ended
March 31
------------------------
1999 1998
---------- ----------
Revenues 100.0% 100.0%
Operating expenses 48.6% 46.1%
Wages and other personnel expenses 25.0% 28.2%
General and administrative expenses 13.5% 12.9%
Restructuring charges 1.8% -
Impairment loss and related expenses 59.4% -
Depreciation and amortization 5.7% 5.5%
------- -------
Operating (loss) profit (54.0)% 7.3%
Net interest income 0.0% 0.3%
------- -------
(Loss) income before income taxes (54.0)% 7.6%
Provision for income taxes 0.8% 3.2%
------- -------
Net (loss) income (54.8)% 4.3%
====== =======
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THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues. Consolidated revenues increased $10.8 million, or 9.5%, to
$124.5 million for the quarter ended March 31, 1999, from $113.7 million for the
comparable 1998 period. The business lines being exited (freight, payables,
remittance and check) had revenues of $40.6 million in the first quarter of 1999
compared to $41.1 million for the same period in 1998. Revenues for the
Company's core business segments (merchant card services, travel services and
outsourcing services) increased 15% year-over-year to $83.9 million in the first
quarter of 1999 from $72.6 million in the first quarter of 1998.
Costs and Expenses. Excluding nonrecurring restructuring charges and
the impairment loss recorded in the first quarter of 1999, total costs and
expenses increased $10.1 million, or 9.6%, to $115.5 million for the first
quarter of 1999 compared to $105.4 million for the same period in 1998.
In the first quarter of 1999, a pre-tax loss of $73.9 million was recorded
related to the planned dispositions of the freight, payables, remittance and
check business lines. The loss totaled $72.0 million after-tax, or $1.42 per
share. Further discussion regarding the planned divestitures is included in Note
3 - Impairment Loss and Related Expenses and Note 9 - Subsequent Events. The
divestitures will allow the Company to focus more closely on its core business
segments.
Restructuring charges totaling $2.2 million pre-tax, or $1.8 million after-tax,
were also recorded in the first quarter of 1999 in conjunction with the planned
closing of several of the Company's operating facilities. The charges include
$1.9 million for severance pay for certain employees and $.3 million for other
related costs.
Operating expenses increased $8.1 million, or 15.4%, to $60.5 million
for the quarter ended March 31, 1999 from $52.5 million for the same period in
1998. The increase was due to increases in purchased services in the Merchant
Services segment, additional information technology expenses and higher
uncollectible check expense as a result of increases in guarantee volume and
guarantee mix changes. The Company's payables, travel and freight operations
also experienced increases in operating expenses. Operating expenses for the
business lines being exited increased 2.9% from $16.7 million for the first
quarter of 1998 to $17.2 million for the same period in 1999. The core business
segments had an increase of 21.2% from $35.8 million in 1998 to $43.3 million in
1999.
Wages and other personnel expenses decreased $.9 million, or 2.9%, to
$31.1 million for the quarter ended March 31, 1999, from $32.0 million in 1998.
This decrease is due primarily to attrition and personnel cost reductions
efforts put in place during the quarter. The business lines being exited had no
change in wages and other personnel expenses with $14.4 million of expenses for
the first quarters of 1998 and 1999. These expenses for the core business
segments decreased 5.4% from $17.6 million for the three months ended
March 31, 1998 to $16.7 million for the same period in 1999.
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General and administrative expenses increased $2.1 million, or 14.3%,
to $16.8 million for the quarter ended March 31, 1999, from $14.7 million in
1998. This increase resulted principally from increases in information
technology expenses, including $1.4 million for Year 2000 expenses and increases
in sales and support services related to the merchant card, remittance and
outsourced services operations. The business lines being exited had an increase
in general and administrative expenses of 6.0% from $6.5 million for the first
quarter of 1998 to $6.9 million for the same period of 1999. These expenses for
the core business segments increased 20.9% from $8.2 million in 1998 to
$9.9 million in 1999.
Depreciation and amortization increased $.8 million, or 13.4%, to $7.1
million for the quarter ended March 31, 1999, from $6.3 million in 1998. The
increase was primarily due to additions of fixed assets in the Company's core
businesses lines.
Net Interest Income. The Company earned net interest of $.3 million for
the quarter ended March 31, 1998 compared to a negligible amount in 1999. This
decrease resulted from decreased investment balances.
Tax Provision. Excluding the impact of the restructuring charges and
the impairment loss recorded in the first quarter of 1999, the effective tax
rate was 36.9% for the first quarter of 1999 compared to 42.8% for the same
period a year ago. The decrease was due primarily to lower tax rates on foreign
income.
The effective tax rate associated with the nonrecurring restructuring charges
and impairment loss was impacted by the write off of $65.7 million of
nondeductible goodwill related to the business lines being exited.
Net (Loss) Income. A net loss of $68.2 million, or $1.35 per share, was
incurred during the first quarter of 1999 compared with net income of $4.9
million, or $.10 per share, for the first quarter of 1998. Excluding the
one-time restructuring charges and impairment loss, net income was $5.7 million,
or $.11 per share for the first quarter of 1999, compared to $4.9 million, or
$.10 per share, for the corresponding period in 1998. Net income for the
Company's core businesses increased 50% to $6.2 million in the first quarter of
1999 up from $4.1 million in the first quarter of 1998.
BUSINESS SEGMENT REVIEW
Selected financial information for the Company's three business
segments, Merchant Services, Travel Services and Corporate Services, is
presented in Note 7, Segment Reporting. The following is an analysis of the
Company's operations by business segment.
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Merchant Services
Revenues for the three month period ended March 31, 1999 increased
16.0%, or $10.2 million due primarily to increases in the merchant card
operations caused by increases in volumes, new accounts and price increases.
This revenue increase was partially offset by lower merchant check revenues.
Operating (loss) profit includes an impairment and related expenses charge of
$30.5 million due to the expected sale of the check services business line and
restructuring charges of $.5 million due to the closing and relocation of a
portion of merchant card operating facilities. Excluding the check services
business line, revenues and operating profit for the first quarter of 1999 were
up 23.8%, or $11.3 million, and 99.2%, or $2.7 million, respectively over the
same quarter in 1998.
Travel Services
Revenues for the quarter ended March 31, 1999 decreased 12.1%, or
$1.5 million, due to a decline in volume and a reduction in expenses,
primarily related to processing under the contract with Airlines Reporting
Corporation (ARC). This decline was caused by the conversion to electronic
reporting during mid-1998. Since the Company is compensated by ARC on a
cost plus basis, volume declined as a result of a decline in general and
administrative expenses and wages and other personnel expenses. Operating
profit declined $.3 million, or 13.3%, from $2.4 million for the first
quarter of 1998 to $2.1 million for the comparable period in 1999. The
contract with ARC, which expires in December 2001, is currently being
renegotiated, and, as a result, is expected to be extended through December
2005.
Corporate Services
Revenues for the three months ended March 31, 1999 were up 5.8%, or
$2.2 million compared to the same period in 1998. Operating (loss) profit
includes an impairment and related expenses charge of $43.4 million due to the
expected divestiture of the freight, payables and remittance business lines and
restructuring charges of $1.7 million due to the closing and relocation of a
portion of the outsourced services operations. Excluding the business lines
being exited, revenues and operating profit for the quarter ended March
31, 1999 were up 12.5%, or $1.5 million, and 82.4%, or $.9 million, over the
same quarter in 1998 as a result of increased volume and pricing. 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.
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SEASONALITY
The Company experiences seasonality in its businesses, particularly in
its Merchant Services and Travel Services segments. The Company typically
realizes higher revenues in the third and fourth calendar quarters and lower
revenues in the first calendar quarter, reflecting increased transaction volumes
and travel in the summer and holiday months and a decrease in transaction volume
during the quarter immediately following the holiday season.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of capital include acquisitions, capital
expenditures and working capital. Future business acquisitions may be funded
through current liquidity, borrowed funds, and/or issuances of common stock.
The Company's capital expenditures include amounts for computer systems
hardware and software, scanning and other document processing equipment as well
as buildings and leasehold improvements to the Juarez, Mexico and Louisville
operation facilities. During the three month period ended March 31, l999, the
Company's capital expenditures totaled $3.2 million. Such expenditures were
principally financed from operating cash flow, which totaled approximately $37.2
million for the three month period. Operating cash flow during the three month
period ended March 31, 1998 totaled $32.1 million and capital expenditures were
$13.6 million. The Company expects capital expenditures for the remainder of
1999 to be approximately $13 million principally to enhance processing
capabilities in Merchant Services and Corporate Services. It is anticipated that
these expenditures will be funded with operating cash flows.
As the Company does not carry significant amounts of inventory and
historically has experienced short collection periods for its accounts
receivable, it does not require substantial working capital to support its
revenue growth. Working capital requirements will vary depending upon future
acquisition activity. Increases in working capital needs are expected to be
financed through operating cash 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 $107.0 million and $91.5 million as of March 31, 1999 and December
31, 1998, respectively.
YEAR 2000
Management initiated the process of preparing its computer systems and
applications for the Year 2000 in February 1996. This process involves
identifying and remediating date recognition problems in computer systems and
software and other operating equipment that could be caused by the date change
from December 31, 1999 to January 1, 2000.
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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, all of the work necessary to complete
the assessment, remediation and testing of those business processes determined
to be "mission critical" has been completed.
Management is currently performing end-to-end testing with customers
and event planning, or, contingency planning. 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 estimate of the total cost of the Year 2000 project is
approximately $8.5 million. Approximately 20% of this estimate represents costs
related to internal personnel working on the project and certain capitalizable
costs related to replacing non-compliant hardware and software. To date, $6.2
million of the total project costs have been incurred. During the first quarter
of 1999, incremental costs associated with the project totaled approximately
$1.5 million.
FORWARD LOOKING STATEMENT
The sections entitled "Business Segment Review" and "Year 2000" contain
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements involve risks
and uncertainties, including changes in general economic conditions, 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 check, payables, freight 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no material changes to the market risk disclosures included
in the Company's 1998 Form 10-K.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
A. EXHIBITS
10.41 Asset purchase agreement between National Processing Company (Seller)
and International Payment Services, Inc. (Buyer), dated April 13, 1999
(filed as Exhibit 10.41).
27.1 Financial Data Schedule.
B. REPORTS ON FORM 8-K
None.
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: May 11, 1999 By:
Jim W. Cate
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By:
David E. Fountain
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
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