TABLE OF CONTENTS




|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Consolidated Financial Statements (unaudited)                                        
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|Part II  Other Information  
|SIGNATURES                   



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##### Table of Contents



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, 2001

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 April
30, 2001 was 51,231,387.





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##### Table of Contents



NATIONAL PROCESSING, INC.

INDEX

Part I. Financial Information

|           |                   |                                                                                       |                                                                                               |  |          |   | 
|---------- | ----------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  | -------- | - | 
|           |                   |                                                                                       |                                                                                               |  | Page No.
|           |                   |                                                                                       |                                                                                               |  |         
|           | Item 1.           | Consolidated Financial Statements (unaudited)                                        
|          
|           |                   |                                                                                       | Consolidated Balance Sheets  March 31, 2001 and
December 31, 2000                            |  |          | 3 | 
|          
|           |                   |                                                                                       | Consolidated Statements of Income  Three Months
Ended March 31, 2001 and 2000                |  |          | 4 | 
|          
|           |                   |                                                                                       | Consolidated Statement of Changes in
Shareholders Equity  Three Months Ended March 31, 2001 |  |          | 5 | 
|          
|           |                   |                                                                                       | Consolidated Statements of Cash Flows
 Three Months Ended March 31, 2001 and 2000            |  |          | 6 | 
|          
|           |                   |                                                                                       | Notes to Consolidated Financial Statements                                                    |  |          | 7 | 
|          
|           | Item 2.           | Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                                                               |  | 9        |  
|          
|           | Item 3.           | Quantitative and Qualitative Disclosure About Market Risk                             |                                                                                               |  | 11       |  
|          
|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 (None)                           
|          
|           | Item 5.           | Other Information (None)                                                             
|          
|           | Item 6.           | Exhibits and Reports on Form 8-K                                                      |                                                                                               |  | 12       |  
|          
|Signatures |                   |                                                                                       | 12                                                                                            | 

2



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##### Table of Contents













National Processing, Inc.
Consolidated Balance Sheets
Unaudited
(Dollars in thousands)

|                                                |                                                                                                                                                           |   |          |         |             |   |         |         | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------- | ------- | ----------- | - | ------- | ------- | 
|                                                |                                                                                                                                                           |   | March 31 |         | December 31
|                                                |                                                                                                                                                           |   | 2001     |         | 2000       
|                                                |                                                                                                                                                           |   |          |         |            
|Assets                                         
|                                               
|                                               
|                                               
|                                               
|Current assets:                                
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                                                                 |   | $        | 70,875  |             |   | $       | 68,590  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Eurodollar deposits                                                                                                                                       |   |          | 56,000  |             |   |         | 56,000  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable  trade                                                                                                                               |   |          | 89,750  |             |   |         | 128,627 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                      |   |          | 31,362  |             |   |         | 31,543  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                       |   |          | 1,392   |             |   |         | 2,283   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other current assets                                                                                                                                      |   |          | 11,671  |             |   |         | 9,901   | 
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Total current assets                            |                                                                                                                                                           |   | 261,050  |         |             |   | 296,944 |        
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                        
|                                               
|                                               
|                                               
|                                               
|                                                | Furniture and equipment                                                                                                                                   |   |          | 71,088  |             |   |         | 69,417  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Building and leasehold improvements                                                                                                                       |   |          | 19,580  |             |   |         | 19,231  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Software                                                                                                                                                  |   |          | 25,518  |             |   |         | 24,418  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Property leased from affiliate                                                                                                                            |   |          | 4,173   |             |   |         | 4,173   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Land and improvements                                                                                                                                     |   |          | 2,390   |             |   |         | 2,390   | 
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|                                                |                                                                                                                                                           |   | 122,749  |         |             |   | 119,629 |        
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated depreciation and amortization |                                                                                                                                                           |   | 60,499   |         |             |   | 58,675  |        
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Property and equipment, net                     |                                                                                                                                                           |   | 62,250   |         |             |   | 60,954  |        
|                                               
|                                               
|                                               
|                                               
|Other assets:                                  
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill, net of accumulated amortization of
$7,479 in 2001
  and $6,939 in 2000                                                                          |   |          | 78,859  |             |   |         | 79,399  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets                                                                                                                                   |   |          | 27,403  |             |   |         | 29,697  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                       |   |          | 19,145  |             |   |         | 4,149   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                              |   |          | 6,234   |             |   |         | 6,328   | 
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Total other assets                              |                                                                                                                                                           |   | 131,641  |         |             |   | 119,573 |        
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Total assets                                    |                                                                                                                                                           | $ | 454,941  |         |             | $ | 477,471 |        
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Liabilities and shareholders equity           
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                           
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                      |   | $        | 31,362  |             |   | $       | 31,543  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable  trade                                                                                                                                  |   |          | 12,553  |             |   |         | 15,243  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued bankcard assessments                                                                                                                              |   |          | 21,015  |             |   |         | 24,458  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax payable                                                                                                                                        |   |          | 12,275  |             |   |         | 7,865   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other accrued liabilities                                                                                                                                 |   |          | 26,957  |             |   |         | 33,630  | 
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Total current liabilities                       |                                                                                                                                                           |   | 104,162  |         |             |   | 112,739 |        
|                                               
|                                               
|                                               
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                           |   | 1,960    |         |             |   | 1,993   |        
|                                               
|                                               
|                                               
|                                               
|Deferred tax liabilities                        |                                                                                                                                                           |   | 307      |         |             |   | 1,181   |        
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Total liabilities                               |                                                                                                                                                           |   | 106,429  |         |             |   | 115,913 |        
|                                               
|                                               
|                                               
|                                               
|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; 51,214,393 and 50,935,460 shares issued
and
  outstanding in 2001 and 2000, respectively |   |          | 1       |             |   |         | 1       | 
|                                               
|                                               
|                                               
|                                               
|                                                | Contributed capital                                                                                                                                       |   |          | 182,744 |             |   |         | 178,729 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                                                                                                                                         |   |          | 165,767 |             |   |         | 182,828 | 
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Total shareholders equity                      |                                                                                                                                                           |   | 348,512  |         |             |   | 361,558 |        
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        
|Total liabilities and shareholders equity      |                                                                                                                                                           | $ | 454,941  |         |             | $ | 477,471 |        
|                                                |                                                                                                                                                           |   |          |         |             |   |         |        

See notes to consolidated financial statements

3



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National Processing, Inc.
Consolidated Statements of Income
Unaudited
(In thousands, except per share amounts)

|                                         |  |                    |         |      |  |   |        | 
|---------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------ | 
|                                         |  | Three Months Ended
|                                         |  | March 31          
|                                         |  |                   
|                                         |  | 2001               |         | 2000
|                                         |  |                    |         |     
|Revenue                                  |  | $                  | 109,045 |      |  | $ | 97,867 | 
|                                        
|                                        
|                                        
|                                        
|Operating expense                        |  |                    | 81,858  |      |  |   | 71,109 | 
|                                        
|                                        
|                                        
|                                        
|General and administrative expense       |  |                    | 5,575   |      |  |   | 7,752  | 
|                                        
|                                        
|                                        
|                                        
|Depreciation and amortization            |  |                    | 5,180   |      |  |   | 5,375  | 
|                                         |  |                    |         |      |  |   |        | 
|Operating profit                         |  |                    | 16,432  |      |  |   | 13,631 | 
|                                        
|                                        
|                                        
|                                        
|Net interest income                      |  |                    | 2,220   |      |  |   | 1,815  | 
|                                         |  |                    |         |      |  |   |        | 
|Income before provision for income taxes |  |                    | 18,652  |      |  |   | 15,446 | 
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |  |                    | 7,113   |      |  |   | 5,898  | 
|                                         |  |                    |         |      |  |   |        | 
|Net income                               |  | $                  | 11,539  |      |  | $ | 9,548  | 
|                                         |  |                    |         |      |  |   |        | 
|Basic income per common share            |  | $                  | 0.226   |      |  | $ | 0.188  | 
|                                         |  |                    |         |      |  |   |        | 
|Diluted income per common share          |  | $                  | 0.223   |      |  | $ | 0.188  | 
|                                         |  |                    |         |      |  |   |        | 

See notes to consolidated financial statements

4



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National Processing, Inc.
Consolidated Statement of Changes in Shareholders Equity
Unaudited
(In thousands)

|                                                                                              |  |        |   |             |  |          |         |       |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------ | - | ----------- |  | -------- | ------- | ----- |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  | Common |   | Contributed |  | Retained
|                                                                                              |  | Stock  |   | Capital     |  | Earnings |         | Total
|                                                                                              |  |        |   |             |  |          |         |      
|Balance at January 1, 2001                                                                    |  | $      | 1 |             |  | $        | 178,729 |       |  | $ | 182,828 |   |  | $ | 361,558 |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net income                                                                                    |  |        |  |             |  |          |        |       |  |   | 11,539  |   |  |   | 11,539  |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Common control business unit purchase (Note 3)                                                |  |        |  |             |  |          |        |       |  |   | (28,600 | ) |  |   | (28,600 | )
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Issuance of common shares under stock-based
compensation plans, including related tax
effects |  |        |  |             |  |          | 4,015   |       |  |   |        |   |  |   | 4,015   |  
|                                                                                              |  |        |   |             |  |          |         |       |  |   |         |   |  |   |         |  
|Balance at March 31, 2001                                                                     |  | $      | 1 |             |  | $        | 182,744 |       |  | $ | 165,767 |   |  | $ | 348,512 |  
|                                                                                              |  |        |   |             |  |          |         |       |  |   |         |   |  |   |         |  

See notes to consolidated financial statements

5



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National Processing, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)

|                                               |                                                         |            |                                     |         |                    |        |        |         |       |        |  
|---------------------------------------------- | ------------------------------------------------------- | ---------- | ----------------------------------- | ------- | ------------------ | ------ | ------ | ------- | ----- | ------ | -
|                                               |                                                         |            |                                     |         | Three Months Ended
|                                               |                                                         |            |                                     |         | March 31          
|                                               |                                                         |            |                                     |         |                   
|                                               |                                                         |            |                                     |         | 2001               |        | 2000  
|                                               |                                                         |            |                                     |         |                    |        |       
|Operating Activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Net income                                              |            | $                                   | 11,539  |                    |        | $      | 9,548   |      
|                                              
|                                              
|                                              
|                                              
|                                               | Items not requiring cash currently:                    
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Depreciation and amortization       |         |                    | 5,180  |        |         |       | 5,375  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Deferred income taxes               |         |                    | 421    |        |         |       | 107    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Loss on disposition of fixed assets |         |                    | 32     |        |         |       | 5      |  
|                                              
|                                              
|                                              
|                                              
|                                               | Change in current assets and liabilities:              
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Accounts receivable  trade         |         |                    | 38,877 |        |         |       | 30,960 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Accounts payable  trade            |         |                    | (2,690 | )      |         |       | (1,565 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Accrued bankcard assessments        |         |                    | (3,443 | )      |         |       | (3,241 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Income taxes payable                |         |                    | 4,929  |        |         |       | (3,482 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Other current assets/liabilities    |         |                    | (8,443 | )      |         |       | (3,016 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         |            | Other, net                          |         |                    | 1,194  |        |         |       | (547   | )
|                                               |                                                         |            |                                     |         |                    |        |        |        
|                                               | Net cash provided by operating activities               |            |                                     | 47,596  |                    |        |        | 34,144  |      
|                                               |                                                         |            |                                     |         |                    |        |        |        
|Investing Activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Capital expenditures                                    |            |                                     | (4,778  | )                  |        |        | (3,249  | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sales of fixed assets                     |            |                                     | 4       |                    |        |        | 36      |      
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of Eurodollar deposits                        |            |                                     |        |                    |        |        | (20,000 | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from maturities of Eurodollar deposits         |            |                                     |        |                    |        |        | 20,000  |      
|                                              
|                                              
|                                              
|                                              
|                                               | Common control business unit purchase                   |            |                                     | (44,000 | )                  |        |        |        |      
|                                              
|                                              
|                                              
|                                              
|                                               | Acquisitions, net of cash acquired                      |            |                                     |        |                    |        |        | (2,000  | )    
|                                               |                                                         |            |                                     |         |                    |        |        |         |      
|                                               | Net cash used in investing activities                   |            |                                     | (48,774 | )                  |        |        | (5,213  | )    
|                                               |                                                         |            |                                     |         |                    |        |        |        
|Financing Activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments under property leased from affiliate |            |                                     | (33     | )                  |        |        | (33     | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Issuance of common stock                                |            |                                     | 3,496   |                    |        |        | 12      |      
|                                               |                                                         |            |                                     |         |                    |        |        |        
|                                               | Net cash provided by financing activities               |            |                                     | 3,463   |                    |        |        | (21     | )    
|                                               |                                                         |            |                                     |         |                    |        |        |        
|Net increase in cash and cash equivalents      |                                                         |            | 2,285                               |         |                    |        | 28,910 |        
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                         |            | 68,590                              |         |                    |        | 32,042 |        
|                                               |                                                         |            |                                     |         |                    |        |        |        
|Cash and cash equivalents, end of period       |                                                         | $          | 70,875                              |         |                    | $      | 60,952 |        
|                                               |                                                         |            |                                     |         |                    |        |        |        
|Supplemental cash flow information:           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                         | Taxes paid |                                     | $       | 1,621              |        |        | $       | 7,735 |       

See notes to consolidated financial statements

6



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##### Table of Contents



NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the accounts of
National Processing, Inc. and its subsidiaries (the Company). All
significant intercompany transactions and balances have been eliminated.
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates. For the interim periods presented, management
believes the unaudited consolidated financial statements reflect all
adjustments of a normal recurring nature and disclosures which are
necessary for a fair presentation of the results 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.
|
| | Although the balance sheet at December 31, 2000 has been derived from
the audited consolidated financial statements at that date, the
accompanying interim consolidated financial statements do not include all
of the information and footnotes required by generally accepted accounting
principles. These interim financial statements should be read in
conjunction with the Companys 2000 Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Certain 2000 amounts have been reclassified to conform with the 2001
presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

2. 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.

3. ACQUISITIONS



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 8, 2001, the Company purchased the merchant services
business units from several of National City Corporations (National City)
banking subsidiaries for $44.0 million in cash. This acquisition included
merchant contracts and additional sales personnel. National Processing
also assumed responsibility for all merchant processing sales efforts
throughout National Citys 1,200 branch network via an exclusive
multi-year marketing agreement. The Company already provided the
authorization and settlement processing for these merchants via a third
party processing contract with National City. During the first quarter of
2001, the Company recorded $4.0 million of incremental revenue as a result
of this acquisition.
|
| | The acquisition was accounted for as a transaction among entities
under common control and was recorded at the historical cost bases of
National City. The excess of the cash paid over the historical cost bases
was recorded as a reduction in equity, net of income taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

7



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##### Table of Contents



4. 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          
|        |                                             |  | 2001               |        | 2000
|        |                                             |  |                    |        |     
|BASIC  
|       
|       
|       
|       
|        | Net income                                  |  | $                  | 11,539 |      |  | $ | 9,548  | 
|        |                                             |  |                    |        |      |  |   |       
|       
|       
|       
|       
|        | Average common shares outstanding           |  |                    | 51,060 |      |  |   | 50,786 | 
|        |                                             |  |                    |        |      |  |   |       
|       
|       
|       
|       
|        | Net income per common share  basic         |  | $                  | 0.226  |      |  | $ | 0.188  | 
|        |                                             |  |                    |        |      |  |   |       
|DILUTED
|       
|       
|       
|       
|        | Net income                                  |  | $                  | 11,539 |      |  | $ | 9,548  | 
|        |                                             |  |                    |        |      |  |   |       
|       
|       
|       
|       
|        | Average common shares outstanding           |  |                    | 51,060 |      |  |   | 50,786 | 
|       
|       
|       
|       
|        | Stock option adjustment                     |  |                    | 591    |      |  |   | 58     | 
|        |                                             |  |                    |        |      |  |   |       
|        | Average common shares outstanding  diluted |  |                    | 51,651 |      |  |   | 50,844 | 
|        |                                             |  |                    |        |      |  |   |       
|        | Net income per common share  diluted       |  | $                  | 0.223  |      |  | $ | 0.188  | 
|        |                                             |  |                    |        |      |  |   |       

5. SEGMENT REPORTING



| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates
two business segments  Merchant Card Services
and Corporate Outsourcing Solutions. Merchant Card Services authorizes,
processes and settles credit and debit card transactions. Corporate
Outsourcing Solutions provides financial settlement, image scanning, data
capture, storage and retrieval, and value-added customer reporting
services.                
|
| | The accounting policies of the reportable segments are the same as
those of the Company. Prior period amounts have been classified to
conform to the current line of business reporting structure.                                                                                                                                                                                    
|
| | 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. Depreciation and amortization expense
for corporate fixed assets is allocated to the segments. Corporate net
operating assets are comprised primarily of cash, Eurodollar deposits and
income tax balances.

|                                          |  |          |         |             |  |           |        |       |  |              |         |  |  |   |         | 
|----------------------------------------- |  | -------- | ------- | ----------- |  | --------- | ------ | ----- |  | ------------ | ------- |  |  | - | ------- | 
|(Dollars in thousands)                    |  | Merchant |         | Corporate  
|                                          |  | Card     |         | Outsourcing |  |           |        |       |  | Consolidated
|                                          |  | Services |         | Solutions   |  | Corporate |        | Total
|                                          |  |          |         |             |  |           |        |      
|For the three months ended March 31, 2001
|                                         
|                                         
|                                         
|                                         
|Revenue                                   |  | $        | 85,340  |             |  | $         | 23,705 |       |  | $            |        |  |  | $ | 109,045 | 
|                                         
|                                         
|                                         
|                                         
|Operating profit                          |  |          | 13,603  |             |  |           | 2,829  |       |  |              |        |  |  |   | 16,432  | 
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 3,492   |             |  |           | 1,688  |       |  |              |        |  |  |   | 5,180   | 
|                                         
|                                         
|                                         
|                                         
|Net interest income                       |  |          | 1,817   |             |  |           | 403    |       |  |              |        |  |  |   | 2,220   | 
|                                         
|                                         
|                                         
|                                         
|Net operating assets                      |  |          | 124,026 |             |  |           | 52,049 |       |  |              | 172,437 |  |  |   | 348,512 | 
|                                         
|                                         
|                                         
|                                         
|For the three months ended March 31, 2000
|                                         
|                                         
|                                         
|                                         
|Revenue                                   |  | $        | 70,911  |             |  | $         | 26,956 |       |  | $            |        |  |  | $ | 97,867  | 
|                                         
|                                         
|                                         
|                                         
|Operating profit                          |  |          | 10,661  |             |  |           | 2,970  |       |  |              |        |  |  |   | 13,631  | 
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 3,371   |             |  |           | 2,004  |       |  |              |        |  |  |   | 5,375   | 
|                                         
|                                         
|                                         
|                                         
|Net interest income                       |  |          | 1,419   |             |  |           | 396    |       |  |              |        |  |  |   | 1,815   | 
|                                         
|                                         
|                                         
|                                         
|Net operating assets                      |  |          | 106,338 |             |  |           | 48,959 |       |  |              | 170,669 |  |  |   | 325,966 | 

8



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##### 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 Card Services revenue is primarily derived from
fees paid by merchants for the authorization, processing and settlement of
credit and debit card transactions. Fees are earned either on a per
transaction basis or on a discount basis, which is a percent of dollar
volume processed. Revenue is recorded net of interchange fees charged by the
credit card associations as such costs are not controlled by the Company.

Corporate Outsourcing Solutions revenue is generated from a variety of
financial and administrative processing solutions provided to customers. These
solutions include financial settlement, image scanning, data capture, storage
and retrieval, and value-added customer reporting. A portion of Corporate
Outsourcing Solutions revenue is earned from an exclusive long-term contract
with the Airlines Reporting Corporation under which the Company is compensated
on a cost-plus basis.

A small portion of revenue is derived from earnings on customer cash
balances, which are maintained pursuant to contract terms.

Expenses.

Expenses include costs of providing services to customers including wages
and personnel costs, assessment fees, authorization fees, data processing
costs, and general and administrative expenses.

Results of Operations

Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

|                           |                                 |                |                        |          |         |        |      |          |        |        |        |        |        |        |      |    |     |    |       |        |        |       |    |     |    |    | 
|-------------------------- | ------------------------------- | -------------- | ---------------------- | -------- | ------- | ------ | ---- | -------- | ------ | ------ | ------ | ------ | ------ | ------ | ---- | -- | --- | -- | ----- | ------ | ------ | ----- | -- | --- | -- | -- | 
|                           |                                 |                |                        |          | 2001    |        | 2000 |          | Change
|                           |                                 |                |                        |          |         |        |      |          |       
|                           |                                 |                |                        |          |         |        |      |          | % of   |        |        |        |        |        | % of
|(Dollars in thousands)     |                                 | Amount         |                        | Revenues |         | Amount |      | Revenues |        | Amount |        | %     
|                           |                                 |                |                        |          |         |        |      |          |        |        |        |       
|Revenue:                  
|                          
|                          
|                          
|                          
|                           | Merchant Card Services          |                | $                      | 85,340   |         |        |      | 78       |        |        | $      | 70,911 |        |        |      | 72 |     |    | $     | 14,429 |        |       |    | 20  |   
|                          
|                          
|                          
|                          
|                           | Corporate Outsourcing Solutions |                |                        | 23,705   |         |        |      | 22       |        |        |        | 26,956 |        |        |      | 28 |     |    |       | (3,251 | )      |       |    | (12 | ) 
|                           |                                 |                |                        |          |         |        |      |          |        |        |        |        |        |        |      |    |     |    |       |       
|                           |                                 | Total Revenue  |                        |          | 109,045 |        |      |          | 100    |        |        |        | 97,867 |        |      |    | 100 |    |       |        | 11,178 |       |    |     | 11 |   
|                          
|Expenses:                 
|                          
|                          
|                          
|                          
|                           | Merchant Card Services          |                |                        | 71,737   |         |        |      | 84       |        |        |        | 60,250 |        |        |      | 85 |     |    |       | 11,487 |        |       |    | 19  |   
|                          
|                          
|                          
|                          
|                           | Corporate Outsourcing Solutions |                |                        | 20,876   |         |        |      | 88       |        |        |        | 23,986 |        |        |      | 89 |     |    |       | (3,110 | )      |       |    | (13 | ) 
|                           |                                 |                |                        |          |         |        |      |          |        |        |        |        |        |        |      |    |     |    |       |       
|                           |                                 | Total Expenses |                        |          | 92,613  |        |      |          | 85     |        |        |        | 84,236 |        |      |    | 86  |    |       |        | 8,377  |       |    |     | 10 |   
|                          
|Operating Profit:         
|                          
|                          
|                          
|                          
|                           | Merchant Card Services          |                |                        | 13,603   |         |        |      | 16       |        |        |        | 10,661 |        |        |      | 15 |     |    |       | 2,942  |        |       |    | 28  |   
|                          
|                          
|                          
|                          
|                           | Corporate Outsourcing Solutions |                |                        | 2,829    |         |        |      | 12       |        |        |        | 2,970  |        |        |      | 11 |     |    |       | (141   | )      |       |    | (5  | ) 
|                           |                                 |                |                        |          |         |        |      |          |        |        |        |        |        |        |      |    |     |    |       |       
|                           |                                 |                | Total Operating Profit |          |         | 16,432 |      |          |        | 15     |        |        |        | 13,631 |      |    |     | 14 |       |        |        | 2,801 |    |     |    | 21 | 
|                          
|                          
|                          
|                          
|Net Interest Income        |                                 |                | 2,220                  |          |         |        | 2    |          |        |        | 1,815  |        |        |        | 2    |    |     |    | 405   |        |        |       | 22 |    
|                           |                                 |                |                        |          |         |        |      |          |        |        |        |        |        |        |      |    |     |    |       |       
|Income Before Taxes        |                                 |                | 18,652                 |          |         |        | 17   |          |        |        | 15,446 |        |        |        | 16   |    |     |    | 3,206 |        |        |       | 21 |    
|                          
|                          
|                          
|                          
|Provision for Income Taxes |                                 |                | 7,113                  |          |         |        | 7    |          |        |        | 5,898  |        |        |        | 6    |    |     |    | 1,215 |        |        |       | 21 |    
|                           |                                 |                |                        |          |         |        |      |          |        |        |        |        |        |        |      |    |     |    |       |       
|Net Income                 |                                 | $              | 11,539                 |          |         |        | 11   |          |        | $      | 9,548  |        |        |        | 10   |    |     | $  | 1,991 |        |        |       | 21 |    
|                           |                                 |                |                        |          |         |        |      |          |        |        |        |        |        |        |      |    |     |    |       |       

9



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##### Table of Contents



Merchant Card Services

Revenue for the three months ended March 31, 2001 increased 20% to $85.3
million from $70.9 million in 2000. Revenue increased primarily due to
increases in transaction and dollar volume processed of 28% and 26%,
respectively, as well as the acquisition from National Citys banking
subsidiaries of their merchant business units which occurred on January 8,
2001. This acquisition contributed $4.0 million of incremental revenue in the
first quarter of 2001. The volume increases were primarily due to the addition
of new national customers, strong execution in the regional sales channels, and
continued expansion in new vertical markets.

Expenses for the three months ended March 31, 2001 increased 19% to $71.7
million from $60.3 million in 2000 primarily due to increased processing
volume. Operating margins as a percentage of revenue increased to 16% from
15%, primarily due to economies of scale from increased volume, the addition of
National Citys merchant business units, and lower general and administrative
expenses. Operating profit for the quarter ended March 31, 2001 increased 28%
to $13.6 million from $10.7 million in the 2000 first quarter due primarily to
the factors outlined above.

Corporate Outsourcing Solutions

Revenue for the three months ended March 31, 2001 decreased 12% to $23.7
million from $27.0 million in 2000. Three key factors contributed to this
decline. First, during 2000, initiatives were implemented to either re-price
or terminate certain contracts that did not meet the Companys core
competencies and/or profit objectives. Most of these contracts were terminated
during 2000. Second, conversion from paper to electronic ticketing and
reporting is continuing in the airline industry, which reduced demand for
the Companys data capture services. Third, during the first quarter of 2001,
the Company exited a small collections business located in Denver, Colorado. These
declines were partially offset by revenue growth in the Companys healthcare
claims processing business and electronic-based settlement businesses.

Expenses for the three months ended March 31, 2001 decreased 13% to $20.9
million from $24.0 million in 2000 due primarily to decreased volume, planned
staff reductions, and other cost savings initiatives. Operating profit for the
quarter ended March 31, 2001 decreased 5% to $2.8 million from $3.0 million in
the 2000 first quarter as a result of the items discussed above.

Net Interest Income

Net interest income for the three months ending March 31, 2001, increased
22% to $2.2 million due to higher average interest rates and higher average
cash and Eurodollar deposit balances.

Provision for Income Taxes

The effective tax rate was 38.1% for the first quarter of 2001 compared to
38.2% for the same period a year ago.

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##### Table of Contents



Seasonality

The Company experiences seasonality in its businesses and typically
realizes higher revenue in the third and fourth calendar quarters, reflecting
increased transaction volume in the summer and holiday months.

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 paid for computers,
external and internally developed software, scanning and other document
processing equipment as well as improvements to operating facilities. During
the three month period ended March 31, 2001, the Companys capital expenditures
totaled $4.8 million. Such expenditures were financed from operating cash
flow, which totaled $47.6 million for the three month period. Operating cash
flow during the three month period ended March 31, 2000 totaled $34.1 million
and capital expenditures were $3.2 million. Operating cash flow increased in
the 2001 period compared to 2000 due to strong operating results from the
Merchant Card Services business segment. It is anticipated future capital
expenditures will be funded with operating cash flow.

On January 8, 2001, the Company acquired the merchant services business
units from several National City banking subsidiaries for $44.0 million.

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 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 $31.4
million and $31.5 million as of March 31, 2001 and December 31, 2000,
respectively.

Forward Looking Statements and Risk Factors

The section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of
1995). Although management believes the expectations reflected in such
forward-looking statements are reasonable, actual results may differ
materially. Please refer to the Companys Annual Report on Form 10-K for the
year ended December 31, 2000 for risks and uncertainties that could cause
actual results to 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 2000 Annual Report on Form 10-K.

11



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##### 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 (None)

Item 5. Other Information (None)

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

a. Exhibits (None)

b. Reports on Form 8-K

January 9, 2001: On January 8, 2001, the Registrant issued a press
release announcing the purchase of the merchant services business units from
National City Corporations banking subsidiaries.

January 22, 2001: On January 22, 2001, the Registrant issued a press
release reporting earnings for the quarter and year ended December 31, 2000.




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 14, 2001 |  | 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)                    

12