TABLE OF CONTENTS




|                                                                                     |                                                                                               |                        |  |  |  |  |  | 
|------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------- |  |  |  |  |  | 
|INDEX                                                                               
|National Processing, Inc.
Consolidated Balance Sheets                               
|National Processing, Inc.
Consolidated Statements of Operations                     
|National Processing, Inc.
Consolidated Statements of Changes in Shareholders Equity
|National Processing, Inc.
Consolidated Statements of Cash Flows                     
|NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                                                     | Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
|Part II  Other Information                                                         
|                                                                                     | Item 1. Legal Proceedings                                                                    
|                                                                                     | 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           
|                                                                                     |                                                                                               | b. Reports on Form 8-K
|SIGNATURES                                                                          



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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, 2000
|                                             
|                                             
|                                             
|                                             
|or                                           
|                                             
|                                             
|                                             
|                                             
|/ /                                           |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|                                             
|                                             
|                                             
|                                             
|                                              |  | For the transition period from________________to___________                             

Commission File Number: 1-11905

National Processing, Inc.
(Exact name of Registrant as specified in its charter)

|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|Ohio                                     |  | 61-1303983                          
|                                        
|                                        
|                                        
|                                        
|(State or other jurisdiction             |  | (I.R.S. Employer Identification No.)
|                                        
|                                        
|                                        
|                                        
|of incorporation or organization)       
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|1231 Durrett Lane                       
|                                        
|                                        
|                                        
|                                        
|Louisville, Kentucky                     |  | 40213-2008                          
|                                        
|                                        
|                                        
|                                        
|(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 April
30, 2000 was 50,786,986.



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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, 2000 and            
|          
|          
|          
|          
|           |  | December 31, 1999                                            |  |          | 3  | 
|          
|          
|          
|          
|           |  | Consolidated Statements of Operations                      
|          
|          
|          
|          
|           |  | Three Months Ended March 31, 2000 and 1999                   |  |          | 4  | 
|          
|          
|          
|          
|           |  | Consolidated Statements of Changes in Shareholders Equity 
|          
|          
|          
|          
|           |  | Three Months Ended March 31, 2000                            |  |          | 5  | 
|          
|          
|          
|          
|           |  | Consolidated Statements of Cash Flows                      
|          
|          
|          
|          
|           |  | Three Months Ended March 31, 2000 and 1999                   |  |          | 6  | 
|          
|          
|          
|          
|           |  | Notes to Consolidated Financial Statements                   |  |          | 7  | 
|          
|          
|          
|          
|Item 2.    |  | Managements Discussion and Analysis of                     
|          
|          
|          
|          
|           |  | Financial Condition and Results of Operations                |  |          | 10 | 
|          
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosure About Market Risk    |  |          | 14 | 
|          
|          
|          
|          
|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                             |  |          | 15 | 
|          
|          
|          
|          
|Signatures |  |                                                              |  |          | 15 | 

2



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##### Table of Contents






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

|                                                |                                                                                                                                                       |   |          |         |             |   |         |         | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------- | ------- | ----------- | - | ------- | ------- | 
|                                                |                                                                                                                                                       |   | March 31 |         | December 31
|                                                |                                                                                                                                                       |   | 2000     |         | 1999       
|                                                |                                                                                                                                                       |   |          |         |            
|Assets                                         
|                                               
|                                               
|                                               
|                                               
|Current assets:                                
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                                                             |   | $        | 60,952  |             |   | $       | 32,042  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Securities available for sale                                                                                                                         |   |          | 60,000  |             |   |         | 60,000  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable  trade                                                                                                                           |   |          | 73,526  |             |   |         | 104,486 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                  |   |          | 23,066  |             |   |         | 22,177  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |          | 546     |             |   |         | 812     | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other current assets                                                                                                                                  |   |          | 10,370  |             |   |         | 11,743  | 
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Total current assets                            |                                                                                                                                                       |   | 228,460  |         |             |   | 231,260 |        
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                        
|                                               
|                                               
|                                               
|                                               
|                                                | Furniture and equipment                                                                                                                               |   |          | 81,009  |             |   |         | 81,439  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Building and leasehold improvements                                                                                                                   |   |          | 21,377  |             |   |         | 21,006  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Software                                                                                                                                              |   |          | 19,237  |             |   |         | 18,027  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Property leased from affiliate                                                                                                                        |   |          | 4,173   |             |   |         | 4,173   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Land and improvements                                                                                                                                 |   |          | 2,859   |             |   |         | 2,851   | 
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|                                                |                                                                                                                                                       |   | 128,655  |         |             |   | 127,496 |        
|                                               
|                                               
|                                               
|                                               
|Accumulated depreciation and amortization       |                                                                                                                                                       |   | 64,377   |         |             |   | 62,408  |        
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|                                                |                                                                                                                                                       |   | 64,278   |         |             |   | 65,088  |        
|                                               
|                                               
|                                               
|                                               
|Other assets:                                  
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill, net of accumulated amortization of
$5,624 in 2000 and $5,040 in 1999                                                                        |   |          | 87,847  |             |   |         | 88,431  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets                                                                                                                               |   |          | 33,304  |             |   |         | 34,628  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |          | 4,126   |             |   |         | 3,698   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                          |   |          | 6,421   |             |   |         | 6,109   | 
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Total other assets                              |                                                                                                                                                       |   | 131,698  |         |             |   | 132,866 |        
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Total assets                                    |                                                                                                                                                       | $ | 424,436  |         |             | $ | 429,214 |        
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Liabilities and shareholders equity           
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                           
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  client funds                                                                                                                    |   | $        | 23,066  |             |   | $       | 22,177  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable  trade                                                                                                                              |   |          | 8,697   |             |   |         | 12,262  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued bankcard assessments                                                                                                                          |   |          | 16,881  |             |   |         | 20,122  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax payable                                                                                                                                    |   |          | 12,836  |             |   |         | 16,318  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other accrued liabilities                                                                                                                             |   |          | 31,021  |             |   |         | 35,963  | 
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Total current liabilities                       |                                                                                                                                                       |   | 92,501   |         |             |   | 106,842 |        
|                                               
|                                               
|                                               
|                                               
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                       |   | 2,090    |         |             |   | 2,123   |        
|                                               
|                                               
|                                               
|                                               
|Other long-term liabilities                     |                                                                                                                                                       |   | 563      |         |             |   | 796     |        
|                                               
|                                               
|                                               
|                                               
|Deferred tax liabilities                        |                                                                                                                                                       |   | 3,316    |         |             |   | 3,047   |        
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Total liabilities                               |                                                                                                                                                       |   | 98,470   |         |             |   | 112,808 |        
|                                               
|                                               
|                                               
|                                               
|Shareholders equity:                          
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, without par value; 5,000,000 shares
authorized; no shares issued or outstanding                                                      |   |          |        |             |   |         |        | 
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, without par value; 95,000,000 shares
authorized; 50,786,986 and 50,644,651 shares issued and
outstanding in 2000 and 1999, respectively |   |          | 1       |             |   |         | 1       | 
|                                               
|                                               
|                                               
|                                               
|                                                | Contributed capital                                                                                                                                   |   |          | 176,976 |             |   |         | 176,964 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                                                                                                                                     |   |          | 148,989 |             |   |         | 139,441 | 
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Total shareholders equity                      |                                                                                                                                                       |   | 325,966  |         |             |   | 316,406 |        
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        
|Total liabilities and shareholders equity      |                                                                                                                                                       | $ | 424,436  |         |             | $ | 429,214 |        
|                                                |                                                                                                                                                       |   |          |         |             |   |         |        

See notes to consolidated financial statements

3



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##### Table of Contents






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

|                                                     |  |                    |        |      |  |   |         |  
|---------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------- | -
|                                                     |  | Three Months Ended
|                                                     |  | March 31          
|                                                     |  |                   
|                                                     |  | 2000               |        | 1999
|                                                     |  |                    |        |     
|Revenue                                              |  | $                  | 97,867 |      |  | $ | 124,463 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Operating expenses                                   |  |                    | 47,464 |      |  |   | 60,497  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Wages and other personnel expenses                   |  |                    | 19,218 |      |  |   | 31,096  |  
|                                                    
|                                                    
|                                                    
|                                                    
|General and administrative expenses                  |  |                    | 12,181 |      |  |   | 16,807  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Depreciation and amortization                        |  |                    | 5,373  |      |  |   | 7,086   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Impairment, restructuring and related expenses       |  |                    |       |      |  |   | 76,166  |  
|                                                     |  |                    |        |      |  |   |         |  
|Operating profit (loss)                              |  |                    | 13,631 |      |  |   | (67,189 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Net interest income                                  |  |                    | 1,815  |      |  |   | 18      |  
|                                                     |  |                    |        |      |  |   |         |  
|Income (loss) before provision for income taxes      |  |                    | 15,446 |      |  |   | (67,171 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Provision for income taxes                           |  |                    | 5,898  |      |  |   | 1,014   |  
|                                                     |  |                    |        |      |  |   |         |  
|Net income (loss)                                    |  | $                  | 9,548  |      |  | $ | (68,185 | )
|                                                     |  |                    |        |      |  |   |         |  
|Basic and diluted net income (loss) per common share |  | $                  | 0.19   |      |  | $ | (1.35   | )
|                                                     |  |                    |        |      |  |   |         |  

See notes to consolidated financial statements

4



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##### Table of Contents






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

|                           |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 
|-------------------------- |  | ------ | - | ----------- |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                           |  | Common |   | Contributed |  | Retained
|                           |  | Stock  |   | Capital     |  | Earnings |         | Total
|                           |  |        |   |             |  |          |         |      
|Balance at January 1, 2000 |  | $      | 1 |             |  | $        | 176,964 |       |  | $ | 139,441 |  |  | $ | 316,406 | 
|                          
|                          
|                          
|                          
|Net income                 |  |        |  |             |  |          |        |       |  |   | 9,548   |  |  |   | 9,548   | 
|                          
|                          
|                          
|                          
|Stock options exercised    |  |        |  |             |  |          | 12      |       |  |   |        |  |  |   | 12      | 
|                           |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 
|Balance at March 31, 2000  |  | $      | 1 |             |  | $        | 176,976 |       |  | $ | 148,989 |  |  | $ | 325,966 | 
|                           |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

5



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##### Table of Contents






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

|                                               |                                                           |            |                                                |         |                    |        |        |         |       |        |  
|---------------------------------------------- | --------------------------------------------------------- | ---------- | ---------------------------------------------- | ------- | ------------------ | ------ | ------ | ------- | ----- | ------ | -
|                                               |                                                           |            |                                                |         | Three Months Ended
|                                               |                                                           |            |                                                |         | March 31          
|                                               |                                                           |            |                                                |         |                   
|                                               |                                                           |            |                                                |         | 2000               |        | 1999  
|                                               |                                                           |            |                                                |         |                    |        |       
|Operating activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Net income (loss)                                         |            | $                                              | 9,548   |                    |        | $      | (68,185 | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Items not requiring cash currently:                      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Depreciation and amortization                  |         |                    | 5,373  |        |         |       | 7,086  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Impairment, restructuring and related expenses |         |                    |       |        |         |       | 76,166 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Deferred income taxes                          |         |                    | 107    |        |         |       | 845    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Loss (gain) on disposition of fixed assets     |         |                    | 5      |        |         |       | (8     | )
|                                              
|                                              
|                                              
|                                              
|                                               | Change in current assets and liabilities:                
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Accounts receivable  trade                    |         |                    | 30,960 |        |         |       | 21,399 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Accounts payable  trade                       |         |                    | (1,565 | )      |         |       | 238    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Accrued bankcard assessments                   |         |                    | (3,241 | )      |         |       | (3,262 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Income taxes payable                           |         |                    | (3,482 | )      |         |       | (203   | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Other current assets/liabilities               |         |                    | (3,016 | )      |         |       | 2,941  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           |            | Other, net                                     |         |                    | (545   | )      |         |       | 154    |  
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|                                               | Net cash provided by operating activities                 |            |                                                | 34,144  |                    |        |        | 37,171  |      
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|Investing Activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Capital expenditures                                      |            |                                                | (3,249  | )                  |        |        | (3,219  | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sale of fixed assets                        |            |                                                | 36      |                    |        |        | 150     |      
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of securities available for sale                 |            |                                                | (20,000 | )                  |        |        |        |      
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from maturities of securities
available for sale |            |                                                | 20,000  |                    |        |        |        |      
|                                              
|                                              
|                                              
|                                              
|                                               | Other investing activities                                |            |                                                | (2,000  | )                  |        |        |        |      
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|                                               | Net cash used by investing activities                     |            |                                                | (5,213  | )                  |        |        | (3,069  | )    
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|Financing Activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments under property leased from affiliate   |            |                                                | (33     | )                  |        |        | (43     | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Exercise of stock options                                 |            |                                                | 12      |                    |        |        |        |      
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|                                               | Net cash used by financing activities                     |            |                                                | (21     | )                  |        |        | (43     | )    
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|Net increase in cash and cash equivalents      |                                                           |            | 28,910                                         |         |                    |        | 34,059 |        
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                           |            | 32,042                                         |         |                    |        | 7,254  |        
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|Cash and cash equivalents, end of period       |                                                           | $          | 60,952                                         |         |                    | $      | 41,313 |        
|                                               |                                                           |            |                                                |         |                    |        |        |         |      
|Supplemental cash flow information:           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                           | Taxes paid |                                                | $       | 7,735              |        |        | $       | 2,364 |       

See notes to consolidated financial statements

6



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##### Table of Contents






NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited



|1. |  | ACCOUNTING POLICIES
|-- |  | -------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, although the balance sheet at
December 31, 1999 has been derived from the audited consolidated
financial statements at that date, the accompanying consolidated
financial statements do not include all the information and footnotes
required by generally accepted accounting principles. These financial
statements should be read in conjunction with National Processing, Inc.s
(the Company) audited consolidated financial statements for the year
ended December 31, 1999 which include full disclosure of relevant
financial policies and information.
|
| | In the opinion of management, the accompanying consolidated
financial statements have been prepared on a basis consistent with
accounting principles applied in the prior periods and include all
adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results
of operations for the interim periods are not necessarily indicative of
the results that may be expected for the full year or any other interim
period.                                                                                                                                                                                                                                                   



|2. |  | IMPAIRMENT, RESTRUCTURING AND RELATED EXPENSES
|-- |  | ----------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the quarter ended March 31, 1999, the Company recorded
nonrecurring restructuring charges of $2.2 million, including $1.9
million for severance pay for approximately 540 employees and $0.3
million for other costs. These charges related to two of the Companys
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. At March 31, 2000,
the remaining liability was $0.6 million and related primarily to future
severance payments for approximately 90 remaining employees.                                                                                                                                                                                                                                                                                                
|
| | During the first quarter of 1999, the Company committed to a formal
plan to dispose of its Freight, Payables, Remittance and Check Services
business lines and recorded impairment losses and related expenses of
$73.9 million related to the sale and wind-down of these business lines.
The charges decreased first quarter 1999 net income and earnings per
share by $72.0 million and $1.42, respectively. Effective April 1, 1999,
the Company sold its Freight and Payables business lines for $18.3
million. Effective June 1, 1999, the Company sold its Remittance and
Check business lines for $44.3 million. At March 31, 2000, the Company
had $3.2 million remaining related to the final obligations of these
dispositions recorded in other accrued liabilities. The remaining
obligations are primarily for future severance payments, rent subsidies
and processing subsidies. For the first quarter of 1999, these divested
business units had revenues of $39.7 million.

7



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##### Table of Contents





|3. |  | RECLASSIFICATIONS
|-- |  | -----------------



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Certain 1999 amounts have been reclassified to conform with the 2000
presentation.



|4. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------



| |                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the normal course of business, the Company is involved in
litigation from time to time. In the opinion of management, the ultimate
liability, if any, arising from this litigation is not expected to have a
material adverse effect on the Companys financial condition, results of
operations or liquidity.



|5. |  | NET INCOME PER COMMON SHARE
|-- |  | ---------------------------



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | The calculation of net income per common share follows (in
thousands, except per share amounts):

|        |  |                                              |  |                    |        |      |  |   |         |  
|------- |  | -------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------- | -
|        |  |                                              |  | Three Months Ended
|        |  |                                              |  | March 31          
|        |  |                                              |  |                   
|        |  |                                              |  | 2000               |        | 1999
|        |  |                                              |  |                    |        |     
|BASIC  
|       
|       
|       
|       
|        |  | Net income (loss)                            |  | $                  | 9,548  |      |  | $ | (68,185 | )
|       
|       
|       
|       
|        |  | Average common shares outstanding            |  |                    | 50,786 |      |  |   | 50,645  |  
|       
|       
|       
|       
|        |  | Net income (loss) per common share  basic   |  | $                  | 0.19   |      |  | $ | (1.35   | )
|       
|       
|       
|       
|DILUTED
|       
|       
|       
|       
|        |  | Net income (loss)                            |  | $                  | 9,548  |      |  | $ | (68,185 | )
|       
|       
|       
|       
|        |  | Average common shares outstanding            |  |                    | 50,786 |      |  |   | 50,645  |  
|       
|       
|       
|       
|        |  | Stock option adjustment                      |  |                    | 58     |      |  |   |        |  
|       
|       
|       
|       
|        |  | Average common shares outstanding -
diluted  |  |                    | 50,844 |      |  |   | 50,645  |  
|       
|       
|       
|       
|        |  | Net income (loss) per common share -
diluted |  | $                  | 0.19   |      |  | $ | (1.35   | )



|6. |  | SEGMENT REPORTING
|-- |  | -----------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | National Processing, Inc. operates two business segments  Merchant
Services and Corporate Services. Merchant Services authorizes, processes
and settles credit and debit card transactions for a variety of
merchants. Revenues from Corporate Services are derived from corporate
outsourcing, transaction processing and settlement services, as well as
other customized processing solutions. Corporate Services also settles
airline ticket purchases made through travel agents on behalf of airlines
and derives a portion of its revenue from an exclusive contract with the
Airlines Reporting Corporation (ARC). The Company is compensated on a
cost plus basis under this contract.
|
| | During the first half of 1999, the Company sold its Check business
line (formerly part of the Merchant Services segment) and its Remittance,
Payables and Freight business lines (all formerly part of the Corporate
Services segment). The Company identifies business segments by the
services they offer. The accounting policies of the reportable segments
are the same as those of the Company. Prior period amounts were
classified to conform to the current line of business reporting
structure. The segment previously defined as Travel Services is now
included in the Corporate Services segment.                                                                                     

8



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The reported results reflect the underlying economics of the
segments. General and administrative expenses, other than direct
Corporate expenses, are allocated to the segments based upon various
methods determined by the nature of the expenses. There are no
intersegment revenues. Impairment, restructuring and related expenses
are reflected in the business segments to which they relate.
Depreciation expense for corporate fixed assets is allocated to the
segments. Corporate net operating assets are comprised primarily of
cash, securities available for sale and income tax balances.

|                                     |  |          |         |           |  |           |         |       |  |              |         |   |  |   |         |  
|------------------------------------ |  | -------- | ------- | --------- |  | --------- | ------- | ----- |  | ------------ | ------- | - |  | - | ------- | -
|                                     |  | Merchant |         | Corporate |  |           |         |       |  | Consolidated
|(Dollars in thousands)               |  | Services |         | Services  |  | Corporate |         | Total
|                                     |  |          |         |           |  |           |         |      
|For the quarter ended March 31, 2000
|                                    
|                                    
|                                    
|                                    
|Revenue from external customers      |  | $        | 70,911  |           |  | $         | 26,956  |       |  | $            |        |   |  | $ | 97,867  |  
|                                    
|                                    
|                                    
|                                    
|Operating profit (loss)              |  |          | 12,209  |           |  |           | 3,559   |       |  |              | (2,137  | ) |  |   | 13,631  |  
|                                    
|                                    
|                                    
|                                    
|Depreciation and amortization        |  |          | 3,532   |           |  |           | 1,841   |       |  |              |        |   |  |   | 5,373   |  
|                                    
|                                    
|                                    
|                                    
|Net interest income                  |  |          | 1,419   |           |  |           | 396     |       |  |              |        |   |  |   | 1,815   |  
|                                    
|                                    
|                                    
|                                    
|Net operating assets                 |  |          | 106,338 |           |  |           | 48,959  |       |  |              | 170,619 |   |  |   | 325,966 |  
|                                    
|                                    
|                                    
|                                    
|For the quarter ended March 31, 1999
|                                    
|                                    
|                                    
|                                    
|Revenue from external customers      |  | $        | 73,792  |           |  | $         | 50,671  |       |  | $            |        |   |  | $ | 124,463 |  
|                                    
|                                    
|                                    
|                                    
|Impairment loss and related
expenses |  |          | 30,450  |           |  |           | 43,482  |       |  |              |         |   |  |   | 73,932  |  
|                                    
|                                    
|                                    
|                                    
|Operating loss                       |  |          | (24,124 | )         |  |           | (41,315 | )     |  |              | (1,750  | ) |  |   | (67,189 | )
|                                    
|                                    
|                                    
|                                    
|Depreciation and amortization        |  |          | 3,305   |           |  |           | 3,781   |       |  |              |        |   |  |   | 7,086   |  
|                                    
|                                    
|                                    
|                                    
|Net interest income (expense)        |  |          | 29      |           |  |           | (11     | )     |  |              |        |   |  |   | 18      |  
|                                    
|                                    
|                                    
|                                    
|Net operating assets                 |  |          | 141,033 |           |  |           | 79,449  |       |  |              | 63,992  |   |  |   | 284,474 |  

9



---



##### Table of Contents






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

Components of Revenue and Expenses

Revenues.The Companys Merchant Services revenue is primarily derived
from fees paid by merchants for the authorization and settlement of credit and
debit card transactions. Revenue is recorded net of interchange fees charged
by the credit card associations. Corporate Services revenue is derived from
corporate outsourcing, transaction processing and settlement services, as well
as other customized processing solutions. A portion of Corporate Services
revenue is also derived from an exclusive long-term contract with the Airlines
Reporting Corporation (ARC) under which the Company is compensated on a cost
plus basis. A small portion of revenue is derived from earnings on cash
balances, which are maintained by customers pursuant to contract terms.
Revenue derived from services provided to affiliates is immaterial.

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

Results of Operations

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

10



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##### Table of Contents



Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999

|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |   |         |        |         |   |      |    |     |  
|------------------------------------------ |  | ----------------------- | ---------------------------------------------- | ------------------------- | ------ | ------ | ------ | -------- | -- | ------ | ------- | - | ------ | ------- | ------- | ---- | --- | --- | ------ | - | ------- | ------ | ------- | - | ---- | -- | --- | -
|                                           |  | 2000                    |                                                | 1999                      |        | Change
|                                           |  |                         |                                                |                           |        |       
|                                           |  |                         |                                                |                           |        |        |        |          |    | % of   |         |   |        |         |         | % of
|(Dollars in thousands)                     |  | Amount                  |                                                | Revenues                  |        | Amount |        | Revenues |    | Amount |         | %
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |  
|Revenue:                                  
|                                          
|                                          
|                                          
|                                          
|                                           |  | Merchant Services       |                                                | $                         | 70,911 |        |        |          | 72 | %      |         | $ | 58,970 |         |         |      | 47  | %   |        | $ | 11,941  |        |         |   | 20   | % 
|                                          
|                                          
|                                          
|                                          
|                                           |  | Corporate Services      |                                                |                           | 26,956 |        |        |          | 28 |        |         |   | 25,744 |         |         |      | 21  |     |        |   | 1,212   |        |         |   | 5    |   
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|                                           |  |                         |                                                | Total Core Revenue        |        |        | 97,867 |          |    |        | 100     |   |        |         | 84,714  |      |     |     | 68     |   |         |        | 13,153  |   |      |    | 16  |  
|                                          
|                                          
|                                          
|                                          
|                                           |  | Divested Business Lines |                                                |                           |       |        |        |          |   |        |         |   | 39,749 |         |         |      | 32  |     |        |   | (39,749 | )      |         |   | (100 | ) 
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|                                           |  |                         |                                                | Total Revenue             |        |        | 97,867 |          |    |        | 100     |   |        |         | 124,463 |      |     |     | 100    |   |         |        | (26,596 | ) |      |    | (21 | )
|                                          
|                                          
|                                          
|                                          
|Operating Expenses:                       
|                                          
|                                          
|                                          
|                                          
|                                           |  | Merchant Services       |                                                |                           | 58,702 |        |        |          | 83 |        |         |   | 52,668 |         |         |      | 89  |     |        |   | 6,034   |        |         |   | 11   |   
|                                          
|                                          
|                                          
|                                          
|                                           |  | Corporate Services      |                                                |                           | 23,397 |        |        |          | 87 |        |         |   | 21,233 |         |         |      | 82  |     |        |   | 2,164   |        |         |   | 10   |   
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|                                           |  |                         |                                                | Core Operating Expenses   |        |        | 82,099 |          |    |        | 84      |   |        |         | 73,901  |      |     |     | 87     |   |         |        | 8,198   |   |      |    | 11  |  
|                                          
|                                          
|                                          
|                                          
|                                           |  | Divested Business Lines |                                                |                           |       |        |        |          |   |        |         |   | 39,835 |         |         |      | 100 |     |        |   | (39,835 | )      |         |   | (100 | ) 
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|                                           |  |                         |                                                | Total Operating Expenses  |        |        | 82,099 |          |    |        | 84      |   |        |         | 113,736 |      |     |     | 91     |   |         |        | (31,637 | ) |      |    | (28 | )
|                                          
|                                          
|                                          
|                                          
|Segment Profit (Loss):                    
|                                          
|                                          
|                                          
|                                          
|                                           |  | Merchant Services       |                                                |                           | 12,209 |        |        |          | 17 |        |         |   | 6,302  | (1)     |         |      | 11  |     |        |   | 5,907   |        |         |   | 94   |   
|                                          
|                                          
|                                          
|                                          
|                                           |  | Corporate Services      |                                                |                           | 3,559  |        |        |          | 13 |        |         |   | 4,511  | (2)     |         |      | 18  |     |        |   | (952    | )      |         |   | (21  | ) 
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|                                           |  |                         |                                                | Total Core Segment Profit |        |        | 15,768 |          |    |        | 16      |   |        |         | 10,813  |      |     |     | 13     |   |         |        | 4,955   |   |      |    | 46  |  
|                                          
|                                          
|                                          
|                                          
|                                           |  | Divested Business Lines |                                                |                           |       |        |        |          |   |        |         |   | (86    | )(3)    |         |      |    |     |        |   | 86      |        |         |   | (100 | ) 
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|Total Segment Profit                       |  |                         | 15,768                                         |                           |        |        | 16     |          |    |        | 10,727  |   |        |         | 9       |      |     |     | 5,041  |   |         |        | 47      |  
|                                          
|                                          
|                                          
|                                          
|Other General and
Administrative Expenses  |  |                         | 2,137                                          |                           |        |        | 2      |          |    |        | 1,750   |   |        |         | 1       |      |     |     | 387    |   |         |        | 22      |  
|                                          
|                                          
|                                          
|                                          
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|                                          
|                                          
|                                          
|                                          
|Net Interest Income                        |  |                         | 1,815                                          |                           |        |        | 2      |          |    |        | 18      |   |        |         |        |      |     |     | 1,797  |   |         |        | NM      |  
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|Income Before Taxes and
Nonrecurring Items |  |                         | 15,446                                         |                           |        |        | 16     |          |    |        | 8,995   |   |        |         | 7       |      |     |     | 6,451  |   |         |        | 36      |  
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|Nonrecurring Items:                       
|                                          
|                                          
|                                          
|                                          
|                                           |  |                         | Impairment, Restructuring and Related
Expenses |                           |        |       |        |          |    |       |         |   |        | (76,166 | )       |      |     | (61 | )      |   |         | 76,166 |         |   |      | NM |    
|                                          
|                                          
|                                          
|                                          
|Income (Loss) Before Taxes                 |  |                         | 15,446                                         |                           |        |        | 16     |          |    |        | (67,171 | ) |        |         | (54     | )    |     |     | 82,617 |   |         |        | NM      |  
|                                          
|                                          
|                                          
|                                          
|Provision for Income Taxes                 |  |                         | 5,898                                          |                           |        |        | 6      |          |    |        | 1,014   |   |        |         | 1       |      |     |     | 4,884  |   |         |        | NM      |  
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|Net Income (Loss)                          |  | $                       | 9,548                                          |                           |        |        | 10     |          |    | $      | (68,185 | ) |        |         | (55     | )    |     | $   | 77,733 |   |         |        | NM      |  
|                                           |  |                         |                                                |                           |        |        |        |          |    |        |         |   |        |         |         |      |     |     |        |  
|NM  Not meaningful                       



|(1) |  | Excludes $0.5 million of restructuring charges related to facility
closing.                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes $1.7 million of restructuring charges related to facility
closing.                                                                                            
|   
|   
|   
|   
|(3) |  | Excludes $73.9 million of impairment and related expenses for the
business lines divested in the first half of 1999
(Freight, Payables, Remittance and Check Services).

|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |        |        |  |  |    |    |  | 
|------------------------------------------------ | --------------------- | ------------------- |  | ---- | ------ | ------ |  | - | --- | ------ |  | - | ------- | ------- | - |  | --- | --- |  | - | ------ | ------ |  |  | -- | -- |  | 
|                                                 |                       | 2000                |  | 1999 |        | Change
|                                                 |                       |                     |  |      |        |       
|(Dollars in thousands, except per share amounts) |                       | Amount              |  | %    |        | Amount |  | % |     | Amount |  | %
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |  
|Excluding Nonrecurring Items:                   
|                                                
|                                                
|                                                
|                                                
|                                                 | Pre-Tax Income        |                     |  | $    | 15,446 |        |  |   | 100 | %      |  | $ | 8,995   |         |   |  | 100 | %   |  | $ | 6,451  |        |  |  | 72 | % 
|                                                
|                                                
|                                                
|                                                
|                                                 | Taxes                 |                     |  |      | 5,898  |        |  |   | 38  |        |  |   | 3,321   |         |   |  | 37  |     |  |   | 2,577  |        |  |  | 78 |   
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Net Income          |  |      | $      | 9,548  |  |   |     | 62     |  |   | $       | 5,674   |   |  |     | 63  |  |   | $      | 3,874  |  |  |    | 68 | 
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|                                                 |                       | Per Share  Diluted |  |      | $      | 0.19   |  |   |     |        |  |   | $       | 0.11    |   |  |     |     |  |   | $      | 0.08   |  |  |    | 68 | 
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|Nonrecurring Items:                             
|                                                
|                                                
|                                                
|                                                
|                                                 | Pre-Tax Income (Loss) |                     |  | $    |       |        |  |   |    |        |  | $ | (76,166 | )       |   |  | 100 | %   |  | $ | 76,166 |        |  |  | NM |   
|                                                
|                                                
|                                                
|                                                
|                                                 | Taxes                 |                     |  |      |       |        |  |   |    |        |  |   | (2,307  | )       |   |  | 3   |     |  |   | 2,307  |        |  |  | NM |   
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|
|                                                 |                       | Net Income (Loss)   |  |      | $      |       |  |   |     |       |  |   | $       | (73,859 | ) |  |     | 97  |  |   | $      | 73,859 |  |  |    | NM | 
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|                                                 |                       | Per Share  Diluted |  |      | $      |       |  |   |     |       |  |   | $       | (1.46   | ) |  |     | 97  |  |   | $      | 1.46   |  |  |    | NM | 
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|Total:                                          
|                                                
|                                                
|                                                
|                                                
|                                                 | Pre-Tax Income (Loss) |                     |  | $    | 15,446 |        |  |   | 100 | %      |  | $ | (67,171 | )       |   |  | 100 | %   |  | $ | 82,617 |        |  |  | NM |   
|                                                
|                                                
|                                                
|                                                
|                                                 | Taxes                 |                     |  |      | 5,898  |        |  |   | 38  |        |  |   | 1,014   |         |   |  | (2  | )   |  |   | 4,884  |        |  |  | NM |   
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|                                                 |                       | Net Income (Loss)   |  |      | $      | 9,548  |  |   |     | 62     |  |   | $       | (68,185 | ) |  |     | 102 |  |   | $      | 77,733 |  |  |    | NM | 
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|                                                 |                       | Per Share  Diluted |  |      | $      | 0.19   |  |   |     |        |  |   | $       | (1.35   | ) |  |     |     |  |   | $      | 1.54   |  |  |    | NM | 
|                                                 |                       |                     |  |      |        |        |  |   |     |        |  |   |         |         |   |  |     |     |  |   |       
|NM  Not meaningful                             

11



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##### Table of Contents



Merchant Services

Revenue for the core business line increased 20% to $70.9 million from
$59.0 million. Processing volume increased 27% primarily due to new customer
accounts, including the acquisition of a merchant processing portfolio from
Heartland Payment Systems LLC on December 31, 1999, and increased volumes from
existing customers. Operating expenses for the core business line increased
11% to $58.7 million from $52.7 million primarily due to the customer base
expansion and increased volumes. Operating margins as a percentage of revenue
increased to 17% from 11% as a result of improved efficiencies and operating
leverage. Segment profits increased 94% to $12.2 million in 2000 from $6.3
million in 1999.

Corporate Services

Revenue for the core business lines increased 5% to $27.0 million from
$25.7 million. This increase was due to volume growth in the Financial
Services and Healthcare Claims Processing Services business lines. These
increases were offset primarily by decreases in the Travel business line
resulting from the continuing conversion from paper to electronic ticketing and
reporting. This conversion decreases the need for the Companys data capture
services and thus decreases the revenue generated under the cost plus ARC
contract and various other processing contracts. Operating expenses for the
core business lines increased 10% to $23.4 million from $21.2 million due
primarily to increased volumes, as well as severance expense of $0.5 million
recorded in the first quarter of 2000. Exclusive of severance expense,
operating expenses increased 8%. As a result of the items discussed above,
segment profit decreased 21% to $3.6 million in 2000 from $4.5 million in 1999.

Other General and Administrative Expense

Other general and administrative expenses are comprised of corporate
charges that are not included in the determination of segment profit for the
business segments. These expenses increased 22%, to $2.1 million in 2000 from
$1.8 million in 1999, due primarily to a new performance incentive program
instituted for certain exempt employees who were not previously included under
the Companys other performance incentive programs.

Divested Business Lines

Divested business lines are comprised of the Remittance, Payables, Freight
(all formerly part of the Corporate Services segment) and Check Services
(formerly part of the Merchant Services segment) business lines that were sold
by the Company in the first half of 1999. Segment loss for the divested
business lines was $0.1 million in the first quarter of 1999.

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Net Interest Income

Net interest income increased $1.8 million due to the increased level of
cash and investments during the first quarter of 2000 compared to 1999. The
increased levels of cash and investments were due primarily to the receipt of
sale proceeds from the business lines that were divested in the second quarter
of 1999, as well as internal cash flow generated primarily from the Merchant
Services segment.

Nonrecurring Items

During the quarter ended March 31, 1999, the Company recorded nonrecurring
restructuring charges of $2.2 million, including $1.9 million for severance
pay for approximately 540 employees and $0.3 million for other costs. These
charges related to two of the Companys 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. At March 31, 2000, the
remaining liability was $0.6 million and related primarily to future severance
payments for approximately 90 remaining employees.

During the first quarter of 1999, the Company committed to a formal plan
to dispose of its Freight, Payables, Remittance and Check Services business
lines and recorded impairment losses and related expenses of $73.9 million
related to the sale and wind-down of these business lines. The charges
decreased first quarter 1999 net income and earnings per share by $72.0 million
and $1.42, respectively. Effective April 1, 1999, the Company sold its Freight
and Payables business lines for $18.3 million. Effective June 1, 1999, the
Company sold its Remittance and Check business lines for $44.3 million. At
March 31, 2000, the Company had $3.2 million remaining related to the final
obligations of these dispositions recorded in other accrued liabilities. The
remaining obligations are primarily for future severance payments, rent
subsidies and processing subsidies. For the first quarter of 1999, these
divested business units had revenues of $39.7 million.

Provision for Income Taxes

Excluding the impact of nonrecurring items, the effective tax rate was
38.2% for the first quarter of 2000 compared to 36.9% for the same period a
year ago. This increase was due primarily to an increase in U.S. income, which
is additionally subject to state and local taxation. The increase in the
effective tax rate in the first quarter of 2000 was partially offset by $0.3
million due to a reduction in the state net operating loss carry forward
valuation allowance.

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

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Seasonality

The Company experiences seasonality in its businesses. The Company
typically realizes higher revenues in the third and fourth calendar quarters
and lower revenues in the first calendar quarter, reflecting increased
transaction volumes and travel in the summer and holiday months and decreased
transaction volume during the quarter immediately following the holiday season.

Liquidity and Capital Resources

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

The Companys capital expenditures include amounts for computer systems
hardware and software, scanning and other document processing equipment as well
as buildings and leasehold improvements to its various operating facilities.
During the three month period ended March 31, 2000, the Companys capital
expenditures totaled $3.2 million. Such expenditures were principally financed
from operating cash flow, which totaled approximately $34.2 million for the
three month period. Operating cash flow during the three month period ended
March 31, 1999 totaled $37.2 million and capital expenditures were $3.2
million. The Company expects capital expenditures for the remainder of 2000 to
be approximately $16 million principally to enhance merchant card processing
capabilities. 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 $23.1 million and $22.2 million as of March 31, 2000 and December
31, 1999, respectively.

Forward Looking Statements

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

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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

27.1 Financial Data Schedule.




b. Reports on Form 8-K

January 20, 2000: On January 18, 2000, the Registrant issued a press
release reporting earnings for the quarter and year ended December 31, 1999.




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 8, 2000 |  | By: /s/ Thomas A. Wimsett                        
|                 
|                  |  | Thomas A. Wimsett                                
|                  |  | President and Chief Executive Officer            
|                  |  | (Duly Authorized Signer)                         
|                 
|                  |  | By: /s/ David E. Fountain                        
|                 
|                  |  | David E. Fountain                                
|                  |  | Senior Vice President and Chief Financial Officer
|                  |  | (Principal Financial Officer)                    

15