National Processing's Profits Plunge 94% Amid Shake-UpAnd Exodus of

National Processing Inc. earned 94% less in the first quarter than a year earlier.

The company, 85% owned by National City Corp., announced Monday that it earned $370,000, or about 1 cent a share.

Net income was affected by a one-time charge related to severance liabilities sparked by the sudden departures of senior executives last month, the consolidation of the merchant and check-processing parts of the business, and the departures of executives from those units.

Without the charge, net income would have been about 9 cents a share, down from 14 cents in the comparable quarter last year.

Last month the Louisville, Ky.-based merchant transaction processing company said its earnings for the first quarter would be down as much as one-third.

Industry observers said poor earnings were expected because of the loss of Wal-Mart's business last fall, the resignations of key executives last month, and the company's consolidation of units. But they said they expect National Processing's performance to improve in subsequent quarters.

"Logically, when you have a problem, you take a bulk of the hit up front and guide the Street to low numbers" in the first quarter, said Richard K. Weingarten, principal, Montgomery Securities. "This was clearly not a good quarter for them, but I expect improvement."

As the primary reason for the losses National Processing cited lower profitability in its merchant services division resulting from "severe pricing on the renewal of contracts."

"Pricing in the merchant services division has deteriorated," said Thomas A. Richlovsky, senior vice president, investor relations. "As contracts came up for renewal, they were renewing at prices substantially below the prior contract." There are "competitive alternatives" in the market, he noted.

National Processing suffered a major blow last October when it lost a contract for a part of business with Wal-Mart to First Data Corp. Experts estimate the contract was worth about 4% of National Processing's revenues.

In March, National Processing's executive vice president of the merchant services division, Kurt S. Knipp, and executive vice president of merchant check services, Richard A. Alston, resigned unexpectedly. Their departures sparked speculation they had been fired because of the company's poor performance.

The following week chief executive officer Tony G. Holcombe stepped down and the company said first-quarter earnings would be lower than had been estimated.

Mr. Holcombe was succeeded by Robert E. Showalter, a longtime executive from Cleveland-based National City.

Mr. Holcombe's departure and National Processing's announcement about lower earnings caused its stock to plummet 26% in one day. The processor went public last August at $16.50. It had traded as high as $21, but cost $7.75 a share at midday Tuesday.

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