SECURITIES AND EXCHANGE COMMISSION
	Washington, D.C. 20549
	FORM 10-K

For the transition period from                to                

NATIONAL PROCESSING, INC.

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, No Par Value

      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.  X   No     

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      

      The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 29, 2000 was $54,785,189. The market value calculation was determined using the closing sale price of the Registrant’s common stock on February 29, 2000, as reported on the New York Stock Exchange.

      The number of shares outstanding of the Registrant’s Common Stock as of February 29, 2000 was 50,786,986.

Documents Incorporated by Reference:

      Portions of the Registrant’s Proxy Statement (to be dated approximately March 28, 2000) are incorporated by reference into Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management; and Item 13, Certain Relationships and Related Transactions, of Part III.

Table of Contents

TABLE OF CONTENTS

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PART I

Item 1.  Business

      National Processing, Inc. (“NPI”, the “Company” or “Registrant”), through its wholly owned operating subsidiary National Processing Company (“NPC”), operates three business segments — Merchant Services, Corporate Services and Travel Services. Merchant Services provides retailers and other merchants with credit and debit card authorization, capture, settlement, exception processing and other related services. Merchant Services represented approximately 67% of the Company’s revenue in 1999 and provided services to over 470,000 merchant locations throughout the United States, Canada, Puerto Rico, Mexico and the Caribbean. Corporate Services revenue is derived from corporate outsourcing, transaction processing and settlement services, as well as other customized processing solutions. Corporate Services represented approximately 22% of the Company’s revenues in 1999. Travel Services principally settles airline ticket purchases made through travel agents on behalf of airlines and derives a substantial portion of its revenues from an exclusive contract with the Airlines Reporting Corporation (“ARC”). The Company is compensated on a “cost plus” basis under this contract. Travel Services represented approximately 11% of the Company’s revenue in 1999. During the second quarter of 1999, the Company sold its Check business line (formerly part of the Merchant Services segment) and also sold its Remittance, Payables and Freight business lines (all formerly part of the Corporate Services segment). The proceeds from the sales of these businesses totaled $62.6 million.

      The Company’s Corporate Services and Travel Services business segments have significant production operations in several international locations. The Company established its initial presence internationally with the opening of a processing facility in Juarez, Mexico in 1988. During 1997, the Company acquired Caribbean Data Services, Ltd., a data processing company with operating facilities in Barbados and the Dominican Republic, and MRS Jamaica, Inc., a healthcare form processing company with operating facilities in Jamaica. As of December 31, 1999, international operations employed approximately 76% of the Company’s employees.

      NPI is an Ohio corporation that was formerly a wholly owned subsidiary of National City Corporation, an Ohio-headquartered bank holding company (“National City” or “NCC”). On August 9, 1996, NPI sold 7,475,000 shares of its common stock in an initial public offering and retained the net proceeds from the transaction to fund internal business development. NCC currently owns 88% of NPI’s outstanding common stock. NPI maintains operations, employees and contracts substantially independent of NCC’s other operating subsidiaries. NPI and NCC are parties to agreements pursuant to which NCC and its subsidiaries provide NPI, and NPI provides NCC and its subsidiaries, certain administrative support, operations, and processing services. NPI is also a party to a tax sharing agreement and a registration rights agreement with NCC.

Industry Overview

      The transaction processing industry has experienced strong volume growth in recent years, as acceptance and use of credit and debit cards have grown, and corporations have increasingly outsourced non-core administrative and financial functions in order to reduce costs, capitalize upon advances in technology, and enhance the quality and availability of management information. This growth has created considerable competition in the marketplace, which has resulted in additional focus on economies of scale. In addition to competition, the cost of advancing technology and customer demand for a broad product line have caused consolidation among transaction processing providers.

  Merchant Services Segment

      The merchant card processing industry provides retailers and other merchants with credit card authorization, capture, settlement, exception processing and other related services. These same services are often provided to merchants for debit and other card related transactions. The industry has enjoyed significant growth over the years due to wider merchant acceptance of credit and debit cards and increased consumer usage of these cards.

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      NPC is the second largest provider of merchant card processing services in the United States. In 1999, NPC processed approximately 2.7 billion transactions (including approximately one out of every six Visa and MasterCard transactions in the U.S.) and settled approximately $116 billion in merchant card sales.

      The merchant card processing market is generally characterized by two segments of merchants consisting of large national merchants and small regional merchants. In 1997, the Company strategically expanded its card processing business through the acquisition of the common stock of FA Holdings, Inc., the sole owner of Financial Alliance Processing Services, Inc., an independent sales organization that specialized in selling credit and debit card processing services to regional merchants. In addition, on December 31, 1999, the Company further increased its market share of regional customers by acquiring a regional merchant processing portfolio from Heartland Payment Systems LLC. These acquisitions allowed NPC to diversify its customer base, enhance its risk management systems and, most importantly, significantly expand its distribution capabilities.

      Through approximately 250 direct sales representatives and 150 third party distribution relationships, the Company expanded its transaction volume and settlement volume by 29% and 21%, respectively, in 1999. The Company is well positioned to aggressively grow its national and regional customer portfolios through continued expansion of direct and third party distribution channels.

      Merchant Services’ current customer base consists of approximately 185,000 customers with over 470,000 locations, the vast majority of which are based in the United States with others located in Canada, Puerto Rico, Mexico and the Caribbean. In 1999, approximately 56% of merchant card processing revenues were contributed by regional merchants. In 1999, 1998 and 1997, merchant card processing represented approximately 92%, 78% and 71%, respectively, of total Merchant Services’ revenue.

      In the second quarter of 1999, the Company divested the Check business line so the Company could focus more closely on its core merchant card processing business. This business line comprised 8%, 22% and 29% of total Merchant Services revenue for 1999, 1998 and 1997, respectively.

      The Merchant Services’ market is extremely competitive, which results in pricing pressure and creates the need for continuous improvement in technology both to satisfy customer demands and to reduce operating costs. The costs to meet merchant requirements for improved service and satisfy the demand for additional technology-driven applications combined with the scale-driven nature of the industry have made it difficult for small scale transaction processors to remain competitive. As a result, the transaction processing industry will likely continue to undergo consolidation.

  Corporate Services Segment

      The business process outsourcing industry provides a variety of financial and administrative processing solutions to large corporate customers. These solutions often include financial settlement, image scanning, data capture, storage and retrieval, call center and valued added customer reporting. Growth in this industry has been driven by corporate America’s increased focus on core competencies, low unemployment rates in the United States and increased cost associated with U.S. based clerical positions.

      NPC’s Corporate Services segment currently focuses on three industries: Airlines, Financial Services and Healthcare Claim Processing Services. NPC provides image-scanning, data capture, and storage and retrieval services for major Airlines in the United States. NPC services the Financial Services industry by providing call center, application processing and other informational services for major credit card issuers and financial institutions. In addition, NPC provides various imaging and data capture services for other financial service companies, such as credit bureau agencies and brokerage firms. NPC also provides image scanning, data capture, and storage and retrieval for healthcare insurers as part of the Healthcare Claim Processing Services.

      In the second quarter of 1999, the Company divested the Remittance, Payables and Freight business lines so the Company could focus more closely on its core Outsourcing Services business lines. Collectively, the three business lines divested comprised 34%, 66% and 80% of total Corporate Services revenue for 1999, 1998 and 1997, respectively. Revenues from the retained business lines increased $12.5 million, or 25%, from 1998 to 1999.

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      In order to remain cost competitive, the Company and many of its competitors have moved to international locations to reduce operating expenses. The Company has four international locations in the Caribbean and Mexico that serve the Corporate Services segment.

  Travel Services Segment

      The Company’s Travel Services segment derives the majority of its revenue as the exclusive provider of transaction processing and settlement services for all airline tickets sold through travel agencies across the United States. Approximately 53%, 76% and 76% of its revenue in 1999, 1998 and 1997 was derived from an exclusive long-term contract with the Airlines Reporting Corporation (“ARC”). The Company is compensated on a “cost plus” basis under the current ARC contract which expires in December 2005. ARC revenue for 1999 is lower as a percentage of total Travel Services revenue due to the acquisition of JBH Travel Audit, Inc., which audits commissions payable to travel agencies, and increased volumes in other business lines. The Travel Services segment also derives revenue from the processing of airline lift tickets and from Commission Express, which consolidates and processes commission payments to travel agencies from airlines, car rental companies, cruise lines, tour operators and hotels.

Regulation

      As a result of National City’s ownership in NPI and as long as National City has a controlling interest, NPI is subject to banking laws, regulations and orders (collectively, the “Banking Laws”). For example, NPI is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (“FRB”), one of the principal regulatory bodies having jurisdiction over National City. The FRB reviews acquisitions and new businesses to be engaged in by NPI, and the FRB’s written approval is required in order for NPI to consummate an acquisition. Pursuant to the Bank Holding Act, NPI shall not engage in any activity, or own, control, or have the power to vote more than 5% of any class of voting security of any company engaged in any activity (i) for which the Bank Holding Act requires a bank holding company to receive prior approval from the FRB without such approval having been obtained, or (ii) that would cause NPI or any affiliate of NPI to violate any regulation, administrative order, or court order made pursuant to the Bank Holding Act. If at any time it is determined that any activity conducted by NPI or any subsidiary does not comply with the requirements of the Bank Holding Act, NPI is required to take all reasonable steps to cease such activity, or to divest any ownership or control position. If National City is unable to obtain the necessary consent or approval for any business activity substantially different from those business activities NPI currently conducts, then NPI may not engage in any of those new business activities or proceed with the contemplated acquisition of a business that would engage in such new activities. NPI does not believe, however, that either the Banking Laws or the Bank Holding Act will impede the manner in which NPI intends to conduct its business or its product and service offerings, although there can be no assurance that the Banking Laws or Bank Holding Act will not have such an effect.

      Prior to the divestiture of the Check business line, the Company engaged in check guarantee and collection services. As such, the Company was subject to certain consumer collection laws, orders and regulations (collectively, “Consumer Laws”) and the laws of the various states in which such activities were conducted, which among other things: (i) required the Company to obtain and maintain certain licenses and qualifications; (ii) limited the fees and other charges the Company was allowed to charge; and (iii) required specified disclosures.

      The Company is also subject to various other federal, state, local and foreign laws, orders and regulations applicable to the Company’s operations in the jurisdictions where it conducts business. Where applicable, regulators and other persons are authorized to seek remedies against entities such as the Company for violations of such laws, including the Consumer Laws.

      Through National City Bank of Kentucky, which serves as a member bank for the Company, the Company is registered with VISA® and MasterCard® as a certified processor and member service provider. As a result, the Company must adhere to the standards of the VISA® and MasterCard® credit card associations or else risk suspension or termination of its designation and/or status. There can be no assurance that

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Employees

      As of December 31, 1999, the Company and its subsidiaries had approximately 7,900 full-time and 200 part-time employees.

Seasonality

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

Financial Information About Segments and Geographic Areas

      This data is presented in Note N of the Consolidated Financial Statements.

Item 2.  Properties

      The Company leases its processing facility in Louisville, Kentucky, consisting of approximately 223,000 square feet, from National City Bank of Kentucky, a wholly owned subsidiary of National City. (See Transactions with Affiliates, Note F to Consolidated Financial Statements). The Company’s lease for the Louisville processing facility expires on February 28, 2019. The Company’s Juarez operation owns and uses four properties totaling 225,000 square feet. The Company’s other processing facilities have varying lease expiration terms and range in size from 3,900 square feet to 75,000 square feet and are located throughout the United States, Barbados, Dominican Republic, Jamaica, Mexico and Fiji. The Company’s 28 marketing and sales offices have varying lease expiration terms and range in size from 100 square feet to 4,400 square feet and are located throughout the United States. All properties leased and owned by the Company are in good repair and suitable condition for the purposes for which they are used. The Company periodically reviews its space requirements to consolidate and dispose of or sublet facilities which are no longer required in connection with its businesses and to acquire new space to meet the needs of its businesses.

Item 3.  Legal Proceedings

      Various legal actions arising in the ordinary course of business are pending against the Company. None of the litigation pending against the Company, individually or collectively, in the opinion of management, is expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Item 4.  Submission of Matters to a Vote of Security Holders

      None.

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PART II

Item 5.  Market for the Registrant’s Common Equity and Related Shareholder Matters

      The Company’s common stock is traded on the New York Stock Exchange under the symbol NAP. The common stock has been quoted on the New York Stock Exchange since August 9, 1996, the date of the initial public offering of the Company’s common stock. The quarterly high and low closing price and the final day’s closing price of the Company’s common stock for each of the quarterly periods in 1999 and 1998 were:

      The number of holders of record of the Company’s common stock as of February 29, 2000 was 81. The Company believes it has significantly more than 81 beneficial holders of its common stock.

      The Company has never declared or paid cash dividends on its common stock and has no plans to pay cash dividends in the foreseeable future. The declaration and payment of cash dividends on the Company’s common stock is at the discretion of the Company’s Board of Directors and any decision to declare a dividend will be based on a number of factors, including, but not limited to, earnings, financial condition, borrowing covenants and other factors deemed relevant.

      The name and address of the Company’s common stock transfer agent and registrar is National City Bank, Corporate Trust Operations, Department 5352, P.O. Box 92301, Cleveland, Ohio, 44193-0900 (1-800-622-6757).

      Investors or analysts requiring further information should contact either of the following:

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Item 6.  Selected Financial Data

      The following data should be read in conjunction with the Consolidated Financial Statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7.

(1)	This information includes the impact of the following acquisitions during the periods presented: in December 1995, the Company acquired the remittance processing business of First Data Resources, Inc.; on February 4, 1997, the Company acquired NTA, Inc. a freight payment processing company; on June 18, 1997, the Company acquired the operating assets and liabilities of InTraCon, Inc., a freight payment processing company; on June 20, 1997, the Company acquired the operating assets and liabilities of MRS Jamaica, Inc., a healthcare form processing company; on September 30, 1997, the Company acquired Caribbean Data Services, Ltd., a data processing company; on October 24, 1997, the Company acquired 79.6% of the outstanding shares of FA Holdings, Inc., a debit and credit card processor (the Company acquired the remaining outstanding shares of FA Holdings, Inc. on January 2, 1998); on January 15, 1998, the Company acquired JBH Travel Audit Inc., a company which audits commissions payable to travel agencies. On December 31, 1999, the Company acquired a regional merchant processing portfolio from Heartland Payment Systems LLC. These transactions were accounted for as purchases; accordingly, the results of operations are included in the consolidated statements of operations from the respective acquisition dates.
	Effective April 1, 1999, the Company sold its Freight and Payables business lines. Effective June 1, 1999, the Company sold its Check and Remittance business lines.
(2)	Included in net income are certain non-recurring items summarized as follows: for 1999, $71.7 million (also $71.7 million after-tax) of impairment, restructuring and related expenses; for 1998, $1.4 million ($0.8 million after-tax) of net gains related to contract terminations; for 1997, $13.3 million ($8.1 million after-tax) of impairment, restructuring and related expenses; for 1996, $3.9 million ($2.3 million after-tax) of gain related to a contract termination. There were no non-recurring items in 1995.
(3)	Net income per share for 1995 has been calculated based on 43.1 million shares outstanding which reflects the retroactive effect of the 57,465.67 to one stock split effective June 6, 1996.

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Item 7.  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 as such costs are not controlled by the Company. Corporate Services revenue is derived from corporate outsourcing, transaction processing and settlement services, as well as other customized processing solutions. Travel Services revenue is derived largely from an exclusive long-term contract with ARC under which the Company is compensated on a “cost plus” basis. Travel Services revenue is also derived from processing of airline lift tickets, consolidation and processing of commission payments, as well as from auditing commissions payable to travel agencies. 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’s operating results are presented below in the manner in which they are viewed by management. 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 1999 to 1998 segregate the operating performance for the remaining core business lines versus those that were divested. The results of operations information presented below for the comparison of 1998 to 1997 have not been restated to segregate the results of the divested business units as the presentation for these results is consistent with how management viewed the businesses at such time. The segment profits for 1999, 1998 and 1997 as shown below exclude certain non-recurring items.

      The segment profits as presented herein differ from the operating profits presented in note N in the Consolidated Financial Statements due to the segregation of non-recurring items and divested businesses.

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Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

NM — Not meaningful

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NM — Not meaningful

  Merchant Services

      Revenue for the core business lines increased 18% to $264.5 million from $225.0 million as a result of increased volumes, new customer accounts and improved pricing in the regional market. Operating expenses for the core business lines increased 12% to $226.4 million from $202.8 million primarily due to the customer base expansion and increased volumes. Operating margins as a percentage of revenue increased to 14% from 10% as a result of improved efficiencies and substantial operating leverage. Segment profits increased 71% to $38.1 million in 1999 from $22.3 million in 1998.

  Corporate Services

      Revenue for the core business lines increased 25% to $63.0 million from $50.5 million primarily as a result of new customer relationships and strong volume growth in the Healthcare Claim Processing Services business line. Operating expenses for the core business lines increased 22% to $55.3 million from $45.5 million due primarily to the increase in new customer relationships. Operating expenses as a percentage of revenue decreased to 88% from 90% as a result of improved productivity and other cost saving initiatives that were implemented in early 1999 combined with improved operating leverage in the Healthcare Claim Processing Services business line. As a result, segment profit increased 55% to $7.7 million in 1999 from $5.0 million in 1998.

  Travel Services

      Revenue decreased 6% to $46.1 million from $49.2 million as a result of decreased volumes related to the processing contract with ARC offset by increases in other business lines. The decline in revenue was caused by the continuing conversion from paper to electronic reporting which decreased the need for the Company’s data capture services. The Company is compensated by ARC on a cost-plus basis. Operating expenses for the overall segment decreased 9% to $35.9 million from $39.3 million. Segment profit increased 3% to $10.2 million in 1999 from $9.9 million in 1998 due to the change in business mix and strong growth in the Commission Express business line.

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  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 (loss) for the various business lines. These expenses increased $0.5 million, or 6%, to $8.2 million in 1999 from $7.7 in 1998 due principally to increases in information technology expenses as well as advisory and legal fees associated with the offer by NCC to purchase all outstanding shares of NPI not owned by NCC. This offer later expired and no shares were purchased. These increases were offset by reductions in other corporate expenses as a result of cost reduction efforts.

  Divested Business Lines

      Divested business lines are comprised of the Remittance, Payables, Freight (all formerly part of the Corporate Services segment) and Check (formerly part of the Merchant Services segment) business lines that were sold by the Company in the second quarter of 1999. Revenue and operating expenses for divested business lines decreased 64% and 65%, respectively. The decreases were due to the Company selling these business units during 1999. Thus the results for these business lines were only included for a portion of 1999 versus being included for the entire year of 1998. Segment loss for the divested business lines was $0.2 million in 1999 versus $6.6 million in 1998.

  Net Interest Income

      Net interest income increased to $4.5 million from $0.9 million due to the increased level of cash and investments during 1999 compared to 1998. 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, primarily generated from the Merchant Services segment.

  Non-Recurring Items

      During 1999, the Company recorded restructuring charges of $2.2 million, including $1.9 for severance expense 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. The charges decreased 1999 net income and earnings per share by $1.8 million and $0.04, respectively. At December 31, 1999, the remaining liability was $0.9 million and related primarily to future severance payments for approximately 200 remaining employees.

      During 1999, the Company committed to a formal plan to dispose of its Freight, Payables, Remittance and Check Services business lines and recorded pre-tax impairment losses and related expenses of $69.5 million related to the sale and wind-down of these business lines. The charges decreased 1999 net income and earnings per share by $69.9 million and $1.38, 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 December 31, 1999, the Company had $3.9 million remaining related to the final obligations of these dispositions recorded in other accrued liabilities. The remaining obligations are primarily for future severance payments, future rent subsidies and future processing subsidies. For 1999 and 1998, these divested business units had revenue of $57.3 million and $158.5 million, respectively. Segment profit (loss) for these business units were $(0.2) million and $(6.6) million in 1999 and 1998, respectively.

      The year ended December 31, 1998 includes a net gain from contract terminations in the amount of $1.4 million. This net gain is comprised of a $4.0 million one-time settlement fee related to the cancellation of a merchant card processing contract, partially offset by a $2.6 million loss recorded for the write-off of internally developed software and related costs following the cancellation of a third-party customer contract in the Freight business line. The net gain increased 1998 net income and earnings per share by $0.8 million and $0.02, respectively.

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  Provision for Income Taxes

      Excluding the impact of non-recurring items, the effective tax rate was 34% for 1999 compared to 39% for 1998. The decrease was due primarily to increases in foreign income in 1999, which was taxed at lower rates. The overall effective tax rate, inclusive of the restructuring charges and impairment loss, was higher in 1999 due to the write-off of $65.7 million of non-deductible goodwill related to the divested business lines.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

NM — Not meaningful

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NM — Not meaningful

  Merchant Services

      Revenue increased $53.8 million or 23%, to $287.4 million from $233.6 million. This increase was due to merchant card revenue increases of $37.7 million from the FA Holdings acquisition and additional increases in existing merchant card operations, partially offset by lower merchant check revenue from the termination and re-pricing of certain customer contracts. Operating expenses increased 26% to $262.0 million from $207.1 million due primarily to increased volumes and expanded sales distribution channels, information technology costs and customer service costs. Operating expenses as a percentage of revenue increased to 91% from 89%. As a result, segment profit decreased by 4% to $25.4 million from $26.4 million.

  Corporate Services

      Revenue increased by 16% to $146.6 million from $126.4 million due primarily to the acquisitions made by the Company in 1997 and 1998. Operating expenses increased 38% to $151.4 million from $109.8 million. Operating expenses as a percentage of revenue increased to 103% from 87%. The increases in operating expenses and operating expenses as a percentage of revenue were a result of increased volumes and increased operating expenses in the remittance operations due to a $5.2 million charge for research adjustments and $2.4 million in additional expenses due to delays in converting to new imaging technology. As a result, segment profit (loss) was ($4.8) million in 1998 versus $16.6 million in 1997.

  Travel Services

      Revenue increased 8% to $49.2 million from $45.7 million primarily due to the January 1998 acquisition of JBH Travel Audit, Inc. Operating expenses increased 7% to $39.4 million from $36.8 million as a result of this acquisition. Operating expenses as a percentage of revenue were 80% for both years. As a result, segment profit increased 10% to $9.9 million from $9.0 million.

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  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 various business lines. These expenses decreased $2.1 million in 1998, or 22%, to $7.7 million from $9.9 million in 1997. This decrease resulted principally from decreases in corporate overhead that were achieved as a result of the December 1997 corporate reorganization.

  Net Interest Income

      Net interest income decreased to $0.9 million from $4.0 million. This decrease resulted from reduced investment balances reflecting the cash used for the 1997 and 1998 acquisitions.

  Non-Recurring Items

      The year 1998 includes a net gain from contract terminations in the amount of $1.4 million. This net gain is comprised of a $4.0 million one-time settlement fee related to the cancellation of a merchant card processing contract, partially offset by a $2.6 million loss recorded for the write-off of internally developed software and related costs following the cancellation of a customer contract in the Freight business line. This net gain increased 1998 net income and earnings per share by $0.8 million and $0.02, respectively.

      In March 1997, the Company recorded expenses of $6.3 million, including $5.1 million for severance expense for approximately 79 employees, and $1.2 million for other costs related to organizational restructuring. In December 1997, the Company recorded expenses of $7.0 million following the acquisition of FA Holdings, Inc. The expenses resulted principally from the write-off of certain fixed assets (totaling $5.5 million) related to several of the Company’s facilities which were closed and consolidated into the Company’s other current facilities. The charges decreased 1997 net income and earnings per share by approximately $8.1 million and $0.16, respectively.

  Provision for Income Taxes

      The provision for income taxes for 1998 was $9.8 million compared to $11.7 million in 1997. The decrease resulted from the decrease in income before taxes of $7.7 million to $25.1 million. Additionally, the 1997 effective tax rate of 36% was lower than the 1998 rate of 39% due to a significant increase in non-tax deductible goodwill amortization in 1998 resulting from 1997 and 1998 business acquisitions and due to non-taxable interest income from investments in 1997.

Liquidity and Capital Resources

      The Company’s primary uses of capital resources 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 the Juarez, Mexico and Louisville, Kentucky operation facilities. During 1999, the Company’s capital expenditures totaled $16.9 million. Such expenditures were principally financed from operating cash flow, which for 1999 totaled $60.6 million. Capital expenditures for 1998 were $42.5 million. Operating cash flow for 1998 was $44.6 million. The Company expects capital expenditures for 2000 to be approximately $14.0 million principally to enhance merchant card processing capabilities.

      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 that are shown on the balance sheet as assets and equivalent offsetting liabilities. These cash balances totaled $22.2 million and $91.5 million as of December 31, 1999 and 1998, respectively. The decrease from 1998 to

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Year 2000

      During 1999, management completed the process of preparing for the Year 2000 date change. This process involved identifying and remediating date recognition problems in computer systems, software and other operating equipment, working with third parties to address their Year 2000 issues, and developing contingency plans to address potential risks in the event of Year 2000 failures. To date, the Company has successfully managed the transition.

      Although considered unlikely, unanticipated problems in the Company’s core business processes, including problems associated with non-compliant third parties and disruptions to the economy in general, could still occur. Management will continue to monitor all business processes, including interaction with the Company’s customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly.

      Through 1999, the cost of the Year 2000 project totaled approximately $9.0 million. Approximately 20% of these costs related to internal personnel working on the project and certain capitalizable costs related to replacing non-compliant hardware and software. During 1999 costs associated with the project totaled approximately $4.3 million. Final project costs of approximately $0.1 million are expected to be incurred in 2000 for ongoing monitoring and support activities.

Forward Looking Statements

      In Item 1, the sections entitled Industry Overview, Merchant Services Segment, Corporate Services Segment, Travel Services Segment and Regulation, Item 2 entitled Properties, Item 3 entitled Legal Proceedings, Item 5 entitled Market for the Registrant’s Common Equity and Related Shareholder Matters, Item 7, the sections entitled Liquidity and Capital Resources and Year 2000, and Item 7A entitled Quantitative and Qualitative Disclosure About Market Risk, contain certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements involve risks and uncertainties, including changes in general economic conditions, the Company’s ability to execute its business plans and the ability of third parties to effectively address their Year 2000 issues. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

  Derivative Instruments

      The Company does not use derivative instruments.

  Market Risk of Financial Instruments

      NPC’s primary market risk exposure with regard to financial instruments is to changes in interest rates, principally in the United States. At December 31, 1999, the Company had cash, short-term investments and restricted deposits on which interest income is earned. At December 31, 1999, the Company did not have any liabilities that were sensitive to interest rate changes. Future changes in interest rates would impact the Company’s earnings; however, management does not believe the changes would be significant.

Item 8.  Financial Statements and Supplementary Data

      See Index to Consolidated Financial Statements at Item 14.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

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Item 10.  Directors and Executive Officers of the Registrant

Executive Officers

      The Executive Officers of the Company as of February 29, 2000 were as follows:

      Executive officers will serve until his successor is chosen and qualified. There is no family relationship between any of the executive officers.

      Mr. Wimsett was appointed as President and Chief Executive Officer in September 1999. Prior to that time, he was an Executive Vice President of NPC’s Merchant Services Division from 1997 to 1999 and an Executive Vice President of NPC’s Check Services Division from 1995 to 1997.

      Mr. Pyke was appointed as Executive Vice President — Merchant Services in October 1999 and was a Senior Vice President of the Merchant Services Division since 1998. Mr. Pyke held a variety of management positions in NPC’s Merchant Services Division from 1996 to 1998. Prior to joining NPC, Mr. Pyke was Vice President of Risk Management with NaBanco, a merchant credit card processing subsidiary of First Data Corporation from 1995 to 1996.

      Mr. Pedersen was appointed Executive Vice President — Corporate Outsourcing in March 1999. Prior to that time, he was a Senior Vice President of the Imaging Services business since 1994.

      Mr. Martin joined the Company in January 2000 as Executive Vice President — Merchant Services Product Management. Mr. Martin previously served as President of Client Merchant Services for First Data Corporation from 1997 to 1998 and was an Executive Vice President for First Data Corporation from 1995 to 1997.

      Mr. Fountain was appointed as Chief Financial Officer in October 1999. Mr. Fountain previously served as Senior Vice President — Operations Accounting since 1998 prior to being named interim Chief Financial Officer in July 1999. Mr. Fountain held a variety of financial management positions with NPC from 1996 to 1998. Prior to joining NPC, Mr. Fountain worked as a consultant in 1995. From 1983 to 1995, Mr. Fountain held various financial management positions in the credit card industry.

      The other information required by Item 10 is incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2000.

Item 11.  Executive Compensation

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2000.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2000.

Item 13.  Certain Relationships and Related Transactions

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2000.

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Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) 1.  Financial Statements

2.  Financial Statement Schedules

      Omitted due to inapplicability or because the required information is immaterial to the Company’s consolidated financial statements.

3.  Exhibits

      The index of exhibits has been filed as separate pages of the 1999 Form 10-K and is available to shareholders on request from the Secretary of the Company at the principal executive offices. Copies of the exhibits may be obtained at a cost of 30 cents per page.

(b)  Reports on Form 8-K

      None.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 23, 2000.

	NATIONAL PROCESSING, INC.

	By:	/s/ DAVID E. FOUNTAIN

	Senior Vice President and Chief
	Financial Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.

*	The undersigned by signing his name hereto, does sign and execute the Annual Report on Form 10-K for fiscal year 1999 pursuant to the Power of Attorney executed by the above named Directors of the Company and which have been filed with the Securities Exchange Commission on behalf of such directors.

By:	/s/ CARLTON E. LANGER

Carlton E. Langer
As Attorney-in-Fact

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Shareholders

      We have audited the accompanying consolidated balance sheets of National Processing, Inc. and subsidiaries (a majority owned subsidiary of National City Corporation) as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Processing, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.

Cleveland, Ohio

F-1

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NATIONAL PROCESSING, INC.

Consolidated Balance Sheets

See notes to consolidated financial statements.

F-2

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NATIONAL PROCESSING, INC.

Consolidated Balance Sheets