Annual Reports | Quarterly Filings | News | Prospectuses | Proxies | Mergers & Acquisitions | Initial Public Offerings

NATIONAL PROCESSING INC
10-Q, 2000-11-13
COMPUTER PROCESSING & DATA PREPARATION

Previous: LCC INTERNATIONAL INC, 10-Q, EX-27, 2000-11-13

Next: NATIONAL PROCESSING INC, 10-Q, EX-27, 2000-11-13

TABLE OF CONTENTS

National Processing, Inc. Consolidated Balance Sheets Unaudited
National Processing, Inc. Consolidated Statements of Operations Unaudited
National Processing, Inc. Consolidated Statement of Changes in Shareholders’ Equity Unaudited
National Processing, Inc. Consolidated Statements of Cash Flows Unaudited
NATIONAL PROCESSING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II — Other Information
	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:
SIGNATURES
EXHIBIT 27

---

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 September 30, 2000

or

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

For the transition period from________________to___________

Commission File Number: 1-11905

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

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

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

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

The number of shares outstanding of the Registrant’s Common Stock as of October 31, 2000 was 50,866,888.

---

Table of Contents

NATIONAL PROCESSING, INC.

INDEX

Part I.     Financial Information

				Page No.
Item 1.		Consolidated Financial Statements (unaudited)
		Consolidated Balance Sheets – September 30, 2000 and
		December 31, 1999			3
		Consolidated Statements of Operations –
		Three and Nine Months Ended September 30, 2000 and 1999			4
		Consolidated Statement of Changes in Shareholders’ Equity –
		Nine Months Ended September 30, 2000			5
		Consolidated Statements of Cash Flows –
		Nine Months Ended September 30, 2000 and 1999			6
		Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of
		Financial Condition and Results of Operations			10
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			16

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	17

Signatures					17

2

---

Table of Contents

National Processing, Inc.
Consolidated Balance Sheets
Unaudited

(Dollars in thousands)

			September 30				December 31
			2000				1999
Assets
Current assets:
	Cash and cash equivalents		$	67,696			$	32,042
	Securities available for sale			76,000				60,000
	Accounts receivable — trade			83,183				104,486
	Restricted deposits — customer funds			30,635				22,177
	Deferred tax assets			546				812
	Other current assets			11,244				11,743
Total current assets				269,304				231,260
Property and equipment:
	Furniture and equipment			79,502				81,439
	Building and leasehold improvements			19,324				21,006
	Software			22,993				18,027
	Property leased from affiliate			4,173				4,173
	Land and improvements			2,433				2,851
				128,425				127,496
Accumulated depreciation and amortization				68,814				62,408
				59,611				65,088
Other assets:
	Goodwill, net of accumulated amortization of $6,794 in   2000 and $5,040 in 1999			86,677				88,431
	Other intangible assets			30,900				34,628
	Deferred tax assets			2,906				3,698
	Other assets			6,130				6,109
Total other assets				126,613				132,866
Total assets			$	455,528			$	429,214
Liabilities and shareholders’ equity
Current liabilities:
	Restricted deposits — customer funds		$	30,635			$	22,177
	Accounts payable — trade			10,310				12,262
	Accrued bankcard assessments			19,286				20,122
	Income tax payable			5,281				16,318
	Other accrued liabilities			35,029				35,963
Total current liabilities				100,541				106,842
Obligation under property leased from affiliate				2,025				2,123
Other long-term liabilities				332				796
Deferred tax liabilities				2,621				3,047
Total liabilities				105,519				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; 50,849,987 and 50,785,652 shares issued and outstanding in 2000 and 1999, respectively			1				1
	Contributed capital			177,559				176,964
	Retained earnings			172,449				139,441
Total shareholders’ equity				350,009				316,406
Total liabilities and shareholders’ equity			$	455,528			$	429,214

See notes to consolidated financial statements

3

---

Table of Contents

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

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2000				1999				2000				1999
Revenue		$	108,632			$	94,909			$	311,012			$	329,185
Operating expenses			53,921				47,477				154,121				165,288
Wages and other personnel expenses			19,433				18,930				58,307				74,085
General and administrative expenses			10,973				12,625				33,094				42,104
Depreciation and amortization			5,377				5,249				16,075				17,081
Impairment, restructuring and related expenses			—				—				1,500				69,666
Operating profit (loss)			18,928				10,628				47,915				(39,039	)
Net interest income			2,231				2,042				5,924				2,626
Income (loss) before provision for income taxes			21,159				12,670				53,839				(36,413	)
Provision for income taxes			8,175				4,349				20,831				11,478
Net income (loss)		$	12,984			$	8,321			$	33,008			$	(47,891	)
Basic net income (loss) per common share		$	0.26			$	0.16			$	0.65			$	( 0.94	)
Diluted net income (loss) per common share		$	0.25			$	0.16			$	0.65			$	( 0.94	)

See notes to consolidated financial statements

4

---

Table of Contents

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

		Common				Contributed				Retained
		Stock				Capital				Earnings				Total
Balance at January 1, 2000		$	1			$	176,964			$	139,441			$	316,406
Net income			—				—				33,008				33,008
Stock options exercised			—				595				—				595
Balance at September 30, 2000		$	1			$	177,559			$	172,449			$	350,009

See notes to consolidated financial statements

5

---

Table of Contents

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

					Nine Months Ended
					September 30
					2000				1999
Operating Activities
	Net income (loss)				$	33,008			$	(47,891	)
	Items not requiring cash currently:
			Depreciation and amortization			16,075				17,081
			Impairment, restructuring and related expenses			1,431				58,214
			Deferred income taxes			632				(1,384	)
			Loss on disposition of fixed assets			591				585
	Change in current assets and liabilities:
			Accounts receivable – trade			21,303				26,581
			Accounts payable – trade			48				(12	)
			Accrued bankcard assessments			(836	)			(1,349	)
			Income taxes payable			(11,037	)			14,779
			Other current assets/liabilities			922				11,314
			Other, net			(485	)			1,088
	Net cash provided by operating activities					61,652				79,006
Investing Activities
	Capital expenditures					(8,804	)			(11,660	)
	Proceeds from sales of fixed assets					309				456
	Purchases of securities available for sale					(76,000	)			(60,000	)
	Proceeds from maturities of securities available for sale					60,000				—
	Proceeds from sale of business lines					—				62,554
	Other investing activities					(2,000	)			—
	Net cash used by investing activities					(26,495	)			(8,650	)
Financing Activities
	Principal payments under property leased from affiliate					(98	)			(109	)
	Exercise of stock options					595				1,019
	Net cash provided by financing activities					497				910
Net increase in cash and cash equivalents						35,654				71,266
Cash and cash equivalents, beginning of period						32,042				7,254
Cash and cash equivalents, end of period					$	67,696			$	78,520
Supplemental cash flow information:
		Taxes paid (refunded)			$	29,417			$	(7,028	)

See notes to consolidated financial statements

6

---

Table of Contents

NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

1.     BASIS OF PRESENTATION AND ACCOUNTING POLICIES

	The consolidated financial statements include the accounts of National Processing, Inc. (the Company) and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform with the current period presentation. The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. For the interim periods presented, management believes the unaudited consolidated financial statements reflect all adjustments of a normal recurring nature and disclosures which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
	Although the balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements at that date, the accompanying interim consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles. These interim financial statements should be read in conjunction with the Company’s 1999 Annual Report and Form 10-K.

2.     IMPAIRMENT, RESTRUCTURING AND RELATED EXPENSES

	In the second quarter of 2000, a pre-tax charge of $1.5 million was recorded for site consolidation initiatives. The charge totaled $1.0 million after-tax, or $0.02 per share, and related primarily to the write-off of leasehold improvements and the accrual of future contractual rent payments on abandoned facilities.
	During the quarter ended March 31, 1999, the Company recorded nonrecurring restructuring charges of $2.2 million, including $1.9 million for severance pay for approximately 540 employees and $0.3 million for other costs. These charges related to two of the Company’s facilities which have been closed and consolidated into the Company’s other operating facilities. These charges decreased net income and earnings per share by approximately $1.8 million and $.04, respectively. At September 30, 2000, the remaining liability was $0.2 million and related primarily to future severance payments for approximately 40 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,

7

---

Table of Contents

1999, the Company sold its Remittance and Check business lines for $44.3 million. As a result of the final dispositions of these business lines, the Company recorded a pre-tax credit of $6.5 million to the impairment loss in the second quarter of 1999. At September 30, 2000, the Company had $1.1 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 legal claims. For the nine months ended September 30, 1999, these divested business units had revenues of $57.3 million.

3.     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.

4.     NET INCOME PER COMMON SHARE

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

			Three Months Ended								Nine Months Ended
			September 30								September 30
			2000				1999				2000				1999
BASIC
	Net income (loss)		$	12,984			$	8,321			$	33,008			$	(47,891	)
	Average common shares outstanding			50,830				50,749				50,807				50,680
	Net income (loss) per common share — basic		$	0.26			$	0.16			$	0.65			$	(.94	)
DILUTED
	Net income (loss)		$	12,984			$	8,321			$	33,008			$	(47,891	)
	Average common shares outstanding			50,830				50,749				50,807				50,680
	Stock option adjustment			253				77				125				—
	Average common shares outstanding — diluted			51,083				50,826				50,932				50,680
	Net income (loss) per common share — diluted		$	0.25			$	0.16			$	0.65			$	(.94	)

5.     SEGMENT REPORTING

National Processing, Inc. operates two business segments – Merchant Services and Corporate Outsourcing Solutions. Merchant Services authorizes, processes and settles credit and debit card transactions for a variety of merchants. Corporate Outsourcing Solutions provides a variety of financial and administrative processing solutions to large corporate customers. These solutions include financial settlement, image scanning, data capture, storage and retrieval, and value-added customer reporting.

8

---

Table of Contents

	During the first half of 1999, the Company sold its Check business line (formerly part of the Merchant Services segment) and its Remittance, Payables and Freight business lines (all formerly part of the Corporate Outsourcing Solutions segment). The Company identifies business segments by the services they offer. The accounting policies of the reportable segments are the same as those of the Company. Prior period amounts were classified to conform to the current line of business reporting structure. The segment previously defined as Travel Services is now included in the Corporate Outsourcing Solutions segment.
	General and administrative expenses, other than direct Corporate expenses, are allocated to the segments based upon various methods determined by the nature of the expenses. There are no intersegment revenues. Impairment, restructuring and related expenses are reflected in the business segments to which they relate. Depreciation and amortization 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.

(Dollars in thousands)
		Merchant Services				Corporate Outsourcing Solutions				Corporate				Consolidated Total
For the quarter ended September 30, 2000
Revenue			$	79,687			$	28,945			$	—			$	108,632
Operating profit (loss)				15,315				5,831				(2,218	)			18,928
Depreciation and amortization				3,655				1,722				—				5,377
Net interest income				1,612				619				—				2,231
Net operating assets				132,940				62,717				154,352				350,009
For the quarter ended September 30, 1999
Revenue			$	66,119			$	28,790			$	—			$	94,909
Operating profit (loss)				9,195				4,545				(3,112	)			10,628
Depreciation and amortization				2,961				2,288				—				5,249
Net interest income				1,363				679				—				2,042
Net operating assets				108,018				42,648				155,121				305,787

(Dollars in thousands)
		Merchant Services				Corporate Outsourcing Solutions				Corporate				Consolidated Total
For the nine months ended September 30, 2000
Revenue		$	226,702			$	84,310			$	—			$	311,012
Impairment, restructuring loss and related expenses			—				1,500				—				1,500
Operating profit (loss)			40,974				13,013				(6,072	)			47,915
Depreciation and amortization			10,751				5,324				—				16,075
Net interest income			4,395				1,529				—				5,924
Net operating assets			132,940				62,717				154,352				350,009
For the nine months ended September 30, 1999
Revenue		$	213,931			$	115,254			$	—			$	329,185
Impairment, restructuring and related expenses			21,636				48,030				—				69,666
Operating profit (loss)			2,483				(35,144	)			(6,378	)			(39,039	)
Depreciation and amortization			9,187				7,894				—				17,081
Net interest income			1,750				876				—				2,626
Net operating assets			108,018				42,648				155,121				305,787

9

---

Table of Contents

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

Components of Revenue and Expenses

      Revenue. The Company’s Merchant Services revenue is primarily derived from fees paid by merchants for the authorization and settlement of credit and debit card transactions. Revenue is recorded net of interchange fees charged by the credit card associations. Corporate Outsourcing Solutions provides a variety of financial and administrative processing solutions to large corporate customers in three primary industries: Healthcare, Travel and Financial Services. These solutions include financial settlement, image scanning, data capture, storage and retrieval, and value-added customer reporting. A portion of Corporate Outsourcing Solutions revenue is 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 for both segments is derived from earnings on customer cash balances.

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

Results of Operations

      The Company divested certain business units during 1999 in order to focus on its core business lines. Accordingly, the segment results presented below for the comparison of 2000 to 1999 segregate the operating performance for the remaining core business lines versus those that were divested. The segment profits as presented herein differ from the operating profits presented in Note 5 in the accompanying consolidated financial statements due to the segregation of nonrecurring items and divested business lines.

10

---

Table of Contents

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

				2000								1999								Change
(Dollars in thousands)								% of								% of
				Amount				Revenues				Amount				Revenues				Amount				%
Revenue:
	Merchant Services			$	79,687				73	%		$	66,119				70	%		$	13,568				21	%
	Corporate Outsourcing Solutions				28,945				27				28,790				30				155				1
		Total Revenue			108,632				100				94,909				100				13,723				14
Operating Expenses:
	Merchant Services				64,372				81				56,924				86				7,448				13
	Corporate Outsourcing Solutions				23,114				80				24,245				84				(1,131	)			(5	)
		Total Operating Expenses			87,486				81				81,169				86				6,317				8
Segment Profit:
	Merchant Services				15,315				19				9,195				14				6,120				67
	Corporate Outsourcing Solutions				5,831				20				4,545				16				1,286				28
		Total Segment Profit			21,146				19				13,740				14				7,406				54
Other General and Administrative
	Expenses				2,218				2				3,112				3				(894	)			(29	)
Net Interest Income					2,231				2				2,042				2				189				9
Income Before Taxes					21,159				19				12,670				13				8,489				67
Provision for Income Taxes					8,175				8				4,349				5				3,826				88
Net Income				$	12,984				12			$	8,321				9			$	4,663				56

Merchant Services

     Revenue increased 21% to $79.7 million from $66.1 million. Transaction and dollar volume processed increased 24% and 21%, respectively, primarily due to new customer accounts, including the acquisition of a merchant processing portfolio on December 31, 1999, and increased volume from existing customers.

     Operating expenses increased 13% to $64.4 million from $57.0 million primarily due to increased volume. Operating margins as a percentage of revenue increased to 19% from 14%, primarily due to increased revenue from higher-margin regional merchants, economies of scale from increased volumes and improved pricing related to vendor negotiations. In addition, the 1999 period contained testing and remedition expenses for Year 2000 that did not re-occur in 2000. Due primarily to the factors outlined above, segment profit for the quarter ended September 30, 2000 increased 67% to $15.3 million in 2000 from $9.2 million in 1999.

11

---

Table of Contents

Corporate Outsourcing Solutions

     Revenue increased 1% to $28.9 million from $28.8 million. The Company experienced additional revenue from volume growth in the Healthcare business line and certain products within the Travel business line. However, these additional revenues were mostly offset by expected volume decreases in other product lines resulting from the continuing conversion from paper to electronic ticketing and reporting in the airline industry, which reduces the demand for the Company’s data capture services.

     Operating expenses decreased 5% to $23.1 million from $24.2 million due primarily to cost containment initiatives. As a result of the items discussed above, segment profit for the quarter ended September 30, 2000 increased 28% to $5.8 million from $4.5 million in 1999.

Other General and Administrative Expenses

     Other general and administrative expenses are comprised of corporate expenses that are not included in the determination of segment profit for the business segments. For the quarter ended September 30, 2000, these expenses decreased 29% to $2.2 million from $3.1 million in 1999, due primarily to legal expenses incurred in the 1999 quarter that did not recur in 2000.

Net Interest Income

     Net interest income for the third quarter increased to $2.2 million from $2.0 million for the same period of 1999 due to the increased level of cash and investments as well as rising interest rates. The increased levels of cash and investments were due primarily to cash flow from operations.

Provision for Income Taxes

     The effective tax rate was 38.6% for the third quarter of 2000 compared to 34.3% for the same period a year ago. This increase is due primarily to recording income tax on all foreign income at its U.S. statutory rate in 2000, as well as an increase in U.S. income versus offshore income, which is additionally subject to state and local taxation. The increase in the effective tax rate in the third quarter of 2000 was partially offset by $0.3 million due to a reduction in the valuation allowance for state net operating loss carryforwards.

12

---

Table of Contents

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999

						2000																1999									Change
														% of												% of
(Dollars in thousands)						Amount								Revenues								Amount				Revenues					Amount				%
Revenue:
	Merchant Services					$	226,702								73	%						$	189,638				58	%				$	37,064		20	%
	Corporate Outsourcing Solutions						84,310								27								82,212				25						2,098		3
			Total Core Revenue				311,012								100								271,850				83						39,162		14
	Divested Business Lines						—								—								57,335				17						(57,335	)	(100	)
			Total Revenue				311,012								100								329,185				100						(18,173	)	(6	)
Operating Expenses:
	Merchant Services						185,728								82								166,089				88						19,639		12
	Corporate Outsourcing Solutions						69,797								83								68,429				83						1,368		2
			Core Operating Expenses				255,525								82								234,518				86						21,007		9
	Divested Business Lines						—								—								57,662				101						(57,662	)	(100	)
			Total Operating Expenses				255,525								82								292,180				89						(36,655	)	(13	)
Segment Profit (Loss):
	Merchant Services						40,974								18								23,549	(1)			12						17,425		74
	Corporate Outsourcing Solutions						14,513	(4)							17								13,783	(2)			17						730		5
				Total Core Segment Profit			55,487								18								37,332				14						18,155		49
	Divested Business Lines						—								—								(327	)(3)			(1	)					327		(100	)
				Total Segment Profit			55,487								18								37,005				11						18,482		50
Other General and Administrative Expenses							6,072								2								6,378				2						(306	)	(5	)
Net Interest Income							5,924								2								2,626				1						3,298		126
Income Before Taxes and Nonrecurring Items							55,339								18								33,253				10						22,086		66
Nonrecurring Items:
		Impairment, Restructuring and Related Expenses					(1,500	)							—								(69,666	)			(21	)					68,166		NM
Income (Loss) Before Taxes							53,839								17								(36,413	)			(11	)					90,252		NM
Provision for Income Taxes							20,831								7								11,478				3						9,353		NM
Net Income (Loss)						$	33,008								11							$	(47,891	)			(15	)				$	80,899		NM

NM — Not meaningful

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

					2000									1999									Change
(Dollars in thousands,					Amount				%				Amount				%				Amount				%
except per share amounts)
Excluding Nonrecurring Items:
	Pre-Tax Income				$	55,339				100	%		$	33,253				100	%		$	22,086				66	%
	Taxes					21,356				39				11,006				33				10,350				94
		Net Income			$	33,983				61			$	22,247				67			$	11,736				53
		Per Share — Diluted			$	0.67							$	0.44							$	0.23				52
Nonrecurring Items:
	Pre-Tax Income (Loss)				$	(1,500	)			100			$	(69,666	)			100	%		$	68,166				NM
	Taxes					(525	)			35				472				(1	)			(997	)			NM
			Net Income (Loss)		$	(975	)			65			$	(70,138	)			101			$	69,163				NM
			Per Share — Diluted		$	(0.02	)						$	(1.38	)						$	1.36				NM
Total:
	Pre-Tax Income (Loss)				$	53,839				100	%		$	(36,413	)			100	%		$	90,252				NM
	Taxes					20,831				39				11,478				(32	)			9,353				NM
			Net Income (Loss)		$	33,008				61			$	(47,891	)			132			$	80,899				NM
			Per Share — Diluted		$	0.65							$	(.94	)						$	1.59				NM
NM — Not meaningful

13

---

Table of Contents

Nine months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999

Merchant Services

      Revenue for the core business line increased 20% to $226.7 million from $189.6 million. Transaction and dollar volume increased 26% and 21%, respectively, primarily due to new customer accounts, including the acquisition of a merchant processing portfolio on December 31, 1999, and increased volume from existing customers.

      Operating expenses for the core business line increased 12% to $185.7 million from $166.1 million primarily due to increased volume. Operating margins as a percentage of revenue increased to 18% from 12%, primarily due to increased revenue from higher-margin regional merchants, economies of scale from increased volumes and improved pricing related to vendor negotiations. In addition, the 1999 period contained testing and remedition expenses for Year 2000 that did not re-occur in 2000. Due primarily to the factors outlined above, segment profit for the nine months ended September 30, 2000, increased 74% to $41.0 million in 2000 from $23.5 million in 1999.

Corporate Outsourcing Solutions

      Revenue for the core business lines increased 3% to $84.3 million from $82.2 million. The Company experienced additional revenue from volume growth in the Healthcare business line and certain products within the Travel business line. However, these additional revenues were mostly offset by expected volume decreases in other product lines resulting from the continuing conversion from paper to electronic ticketing and reporting in the airline industry, which reduces the demand for the Company’s data capture services.

      Operating expenses for the core business lines increased 2% to $69.8 million from $68.4 million due primarily to increased volumes, as well as severance expense of $0.5 million recorded in the first quarter of 2000. As a result of the items discussed above, segment profit for the nine months ended September 30, 2000 increased 5% to $14.5 million in 2000 from $13.8 million in 1999.

Other General and Administrative Expenses

      Other general and administrative expenses are comprised of corporate expenses that are not included in the determination of segment profit for the business segments. For the nine months ended September 30, 2000, these expenses decreased 5% to $6.1 million in 2000 from $6.4 million in 1999, due primarily to legal expenses incurred in 1999 that did not recur in 2000.

Divested Business Lines

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

14

---

Table of Contents

Net Interest Income

      Net interest income for the nine months ended September 30, 2000 increased to $5.9 from $2.6 million for the same period in 1999 due to the increased level of cash and investments as well as rising interest rates. The increased levels of cash and investments were due to the receipt of sale proceeds from the business lines that were divested in the second quarter of 1999 and cash flow from operations.

Nonrecurring Items

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

      During the quarter ended March 31, 1999, the Company recorded nonrecurring restructuring charges of $2.2 million, including $1.9 million for severance pay for approximately 540 employees and $0.3 million for other costs. These charges related to two of the Company’s facilities which have been closed and consolidated into the Company’s other operating facilities. These charges decreased net income and earnings per share by approximately $1.8 million and $.04, respectively. At September 30, 2000, the remaining liability was $0.2 million and related primarily to future severance payments for approximately 40 employees.

      During the first half of 1999, the Company committed to a formal plan to dispose of its Freight, Payables, Remittance and Check Services business lines and recorded impairment losses and related expenses of $67.4 million related to the sale and wind-down of these business lines. The charges decreased net income and earnings per share for the nine months ended September 30, 1999 by $68.3 million and $1.35, respectively. Effective April 1, 1999, the Company sold its Freight and Payables business lines for $18.3 million. Effective June 1, 1999, the Company sold its Remittance and Check business lines for $44.3 million. At September 30, 2000, the Company had $1.1 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 legal claims. For the nine months ended September 30, 1999, these divested business units had revenues of $57.3 million.

Provision for Income Taxes

      Excluding the impact of nonrecurring items, the effective tax rate was 38.6% for the nine months ended September 30, 2000 compared to 33.1% for the same period a year ago. This increase is due primarily to recording income tax on all foreign income at its U.S. statutory tax rate in 2000, as well as an increase in U.S. income versus offshore income, which is additionally subject to state and local taxation. The increase in the effective tax rate in the first nine months of 2000 was partially offset by $0.9 million due to a reduction in the valuation allowance for state net operating loss carryforwards.

      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.

15

---

Table of Contents

Seasonality

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

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, and/or borrowed funds, and/or issuances of common stock.

      The Company’s capital expenditures include amounts for computer hardware and software, scanning and other document processing equipment as well as leasehold improvements to operating facilities. During the nine month period ended September 30, 2000, the Company’s capital expenditures totaled $8.8 million. Such expenditures were financed from operating cash flow, which totaled approximately $61.7 million for the nine month period. Operating cash flow during the nine month period ended September 30, 1999 totaled $79.0 million and capital expenditures were $11.7 million. Operating cash flow was less in the 2000 period compared to 1999 due to the timing of certain cash payments related to income taxes. It is anticipated that future capital expenditures will be funded with operating cash flow.

      As the Company does not carry significant amounts of inventory and historically has experienced short collection periods for its accounts receivable, it does not require substantial working capital to support its revenue growth. Working capital requirements will vary depending upon future acquisition activity. Increases in working capital needs are expected to be financed through operating cash flow and current cash balances.

      The Company maintains restricted cash balances held on behalf of clients pending distribution to vendors which are shown on the balance sheet as assets and equivalent offsetting liabilities. These cash balances totaled approximately $30.6 million and $22.2 million as of September 30, 2000 and December 31, 1999, respectively.

Forward Looking Statements

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

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

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

16

---

Table of Contents

Part II — Other Information

Item 1.   Legal Proceedings (None)

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

Item 3.   Defaults Upon Senior Securities (None)

Item 4.   Submission of Matters to a Vote of Security Holders (None)

Item 5.   Other Information (None)

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

a.          Exhibits

27.1      Financial Data Schedule

b.         Reports on Form 8-K

      July 18, 2000: On July 17, 2000, the Registrant issued a press release reporting earnings for the quarter and six months ended June 30, 2000.

SIGNATURES

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

										NATIONAL PROCESSING, INC.
Date:  November 13, 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)

17