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UNITED STATES

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:

National Processing, Inc. 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. Yes ü   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 January 31, 2002 was $221,416,453. The market value calculation was determined using the closing sale price of the Registrant’s common stock on January 31, 2002, as reported on the New York Stock Exchange.

      The number of shares outstanding of the Registrant’s Common Stock as of January 31, 2002 was 51,836,506.

Documents Incorporated by Reference:

      Portion’s of the Registrant’s Proxy Statement (to be dated approximately March 6, 2002) 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.

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TABLE OF CONTENTS

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PART I

Item 1.  Business

      National Processing, Inc. (the “Company” or “Registrant”), through its wholly-owned operating subsidiaries, which are collectively referred to as National Processing Company (“NPC”), operates two business segments, Merchant Card Services and Payment Services, which are focused on electronic payment settlement services. In 2001, the Company’s total dollar volume settled was over $230 billion.

      Merchant Card Services authorizes, processes, and performs financial settlement and reporting of card transactions, including credit, debit, stored value, and electronic benefits transfer (“EBT”). Merchant Card Services provides services to virtually every industry that accepts cards for payment settlement and currently provides services to over 600,000 merchant locations primarily in the United States. Merchant Card Services represented 85% of the Company’s revenue in 2001.

      Payment Services was formerly an operating unit within the Company’s Corporate Outsourcing Solutions segment. This segment was renamed Payment Services in 2001 after the sale of the Business Process Outsourcing (“BPO”) unit. Payment Services provides financial settlement and reporting solutions to large and mid-size corporate customers in the travel service and healthcare industries. Payment Services settles 100% of domestic airline tickets sold through travel agencies in the United States. Payment Services also settles commission payments for car rental companies, cruise line operators, and hotels. Payment Services represented 6% of the Company’s revenue in 2001.

      During 2001, the Company divested its BPO business and exited its Denver collections business, which collectively represented 9% of the Company’s revenue in 2001.

      The Company is an Ohio corporation that is 86% owned by National City Corporation, a financial holding company headquartered in Cleveland, Ohio (“National City”). The Company maintains operations, employees, and contracts substantially independent of National City’s other operating subsidiaries. The Company and National City are parties to agreements pursuant to which National City and its subsidiaries provide the Company, and the Company provides National City and its subsidiaries, certain administrative support, operations, and processing services. The Company is also a party to a tax-sharing agreement and a registration rights agreement with National City.

      See Segment Reporting, Note N to the Consolidated Financial Statements, for additional financial disclosures of the Company’s operating segments and foreign operations.

Industry Overview

  Merchant Card Services

      The merchant card processing industry provides retailers and other merchants with card-based payment authorization, capture, settlement and reporting, exception processing, and other related services. The industry has enjoyed significant growth over the last ten years due to wider merchant acceptance of card-based payment products and increased consumer usage of card-based payment services.

      NPC provides a diversified product mix to meet a wide range of customer needs, including:

	•	Processing of all credit card types
	•	Authorization and settlement accounting
	•	Merchant reporting
	•	Chargeback prevention and handling
	•	Point of Sale (POS) hardware and software
	•	On-line and off-line debit card acquiring
	•	Electronic Benefits Transfer (EBT)
	•	Customized reporting formats and data management

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	•	Call-center services
	•	E-commerce solutions

      NPC provides services to a wide array of customers in virtually every industry, including retailers, supermarkets, quick service and full service restaurants, petroleum and convenience stores, airlines, hospitality, and e-commerce. NPC is the second largest provider of merchant card processing services in the United States. In 2001, NPC processed 3.5 billion transactions, including approximately one out of every five Visa® and MasterCard ® transactions in the United States. NPC currently services over 600,000 merchant locations nationwide.

      The merchant card processing market can generally be divided into two markets: 1) national merchants and 2) regional merchants, including smaller “mom and pop” merchants. Since 1997, NPC has deployed a dual strategy focused on growing both markets. On December 31, 1999, the Company increased its market share of regional merchants by acquiring a merchant contract portfolio from Heartland Payment Systems LLC. The Company further expanded its market share of regional merchants by acquiring the merchant services business units from several National City banking subsidiaries on January 8, 2001 and a 70% ownership interest in ABN AMRO Merchant Services, LLC (“AAMS”) on June 28, 2001. In 2001, 56% of merchant card processing revenue was from regional merchants.

      Merchant Card Services revenue was $402.0 million, which represented 85% of the Company’s revenue in 2001. Total transaction volume increased by 24% to 3.5 billion in 2001. Total dollar settlement volume increased by 23% to $156 billion in 2001.

      Merchant Card Services uses various sales and marketing channels for both its national and regional customers. The Company employs approximately 300 commission only sales representatives who focus on direct marketing channels. In addition, the Company sells its services through approximately 650 third-party relationships such as independent sales offices and community banks who, in most cases, represent NPC exclusively.

      The merchant card processing 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 increased 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 and has led to consolidation in the industry. NPC competes in this industry by focusing on lowering the merchant’s “total cost of card acceptance”, which includes minimizing interchange and processing fees assessed by third parties.

      According to published industry sources, the six largest card processors handle over 70% of the transaction and dollar volume in the United States. The remaining market is highly fragmented among smaller merchant service providers. As a result, the transaction processing industry will likely continue to undergo consolidation.

  Payment Services

      Payment Services was formerly an operating unit within the Company’s Corporate Outsourcing Solutions segment. This segment was renamed Payment Services in 2001 after the sale of the BPO unit. Payment Services provides financial settlement and reporting solutions to large and mid-size corporate customers in the travel service and healthcare industries. Payment Services revenue was $30.1 million, which represented 6% of the Company’s revenue in 2001. Payment Services settled $75 billion of payments in 2001.

      In the travel service industry, Payment Services provides financial settlement and reporting to airlines, hotels, travel agents, cruise lines, and car rental companies. Through an exclusive long-term “cost-plus” contract with the Airlines Reporting Corporation (“ARC”), Payment Services provides payment settlement services for all airline tickets sold by travel agents in the United States. In addition, NPC provides an industry-wide global payment system for consolidating and processing business-to-business commission payments for

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      In the healthcare industry, Payment Services uses AcceleratedPay^SM, a healthcare settlement solution, to provide financial settlement and reporting to healthcare organizations such as insurance companies, managed care organizations, and self-insured organizations. These services are performed in the Company’s United States locations.

      Competition for the Payment Services segment varies based on the individual product lines. The Company currently has an exclusive long-term contract with ARC to provide payment settlement for all airline tickets sold by travel agents in the United States. The other Payment Services product lines experience competition in the marketplace. NPC competes in this industry by focusing on price, quality, and customer service.

  Divested Business Units and Related Charges

      In 2001, the Company divested its BPO business and exited its Denver collections business which were components of the former Corporate Outsourcing Solutions segment. Revenue from these divested businesses was $41.2 million, which represented 9% of the Company’s revenue in 2001. The sale of the BPO business unit to Affiliated Computer Services (“ACS”) was completed on August 29, 2001, for $43.0 million in cash ($41.3 million after transaction related expenses). The Company recorded charges of $3.9 million ($4.6 million after-tax, or $0.09 per diluted share) related to the BPO divestiture. These charges consisted of a loss of $3.3 million ($4.2 million after-tax, or $0.08 per diluted share) on the sale of the business and a $0.6 million charge ($0.4 million after-tax, or $0.01 per diluted share) for severance costs related to fourth quarter organizational restructuring actions taken to reduce support costs associated with the BPO unit.

      In 2000, the Company recorded charges of $8.6 million ($5.6 million after-tax, or $0.11 per diluted share) related to these business units. These charges consisted of $7.1 million ($4.6 million after-tax, or $0.09 per diluted share) to write-off goodwill and fixed assets for the Denver collections business and $1.5 million ($1.0 million after-tax, or $0.02 per diluted share) for site consolidation initiatives in the BPO unit.

      In 1999, the Company recorded charges of $71.7 million ($71.7 million after-tax, or $1.42 per diluted share) related to divested business units. These charges consisted of $69.5 million ($69.9 million after-tax, or $1.38 per diluted share) for impairment and associated expenses related to the sale of the Freight, Payables, Remittance, and Check Acceptance business lines and a $2.2 million ($1.8 million after-tax, or $0.04 per diluted share) restructuring charge related to the closure of a BPO facility. The Freight, Payables, Remittance, and Check Acceptance business lines were sold in the first half of 1999 for $62.6 million in cash.

Regulation

      As a result of National City’s ownership in the Company and as long as National City has a controlling interest, the Company is subject to banking laws, regulations, and orders (collectively, the “Banking Laws”). For example, the Company is subject to the supervision and examination by 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 the Company, and the FRB’s written approval is required for the Company to consummate an acquisition. Pursuant to the Bank Holding Company Act, the Company 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 Company Act requires a bank holding company to receive prior approval from the FRB without such approval having been obtained, or (ii) that would cause the Company or any affiliate of the Company to violate any regulation, administrative order, or court order made pursuant to the Bank Holding Company Act. If at any time it is determined that any activity conducted by the Company or any subsidiary does not comply with the requirements of the Bank Holding Company Act, the Company 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

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      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.

      Through National City Bank of Kentucky, (“NCBK”), 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 risk suspension or termination of its designation and/or status. There can be no assurance that (i) VISA® and MasterCard ® will maintain the Company’s registrations; (ii) the current VISA® and MasterCard ® rules allowing the Company and other non-bank transaction processors to market and provide transaction processing services will remain in effect; or (iii) VISA® and MasterCard ® will continue to interpret their rules as they have done in the past, which may have an impact on the Company’s business operations. NCBK is a wholly-owned subsidiary of National City.

Sponsorship Agreement

      The Company and NCBK are parties to a sponsorship agreement (the “Sponsorship Agreement”) whereby the Company acts as NCBK’s sole agent for the purposes of providing electronic data authorization and capture, reporting, settlement, and clearing services for merchants who participate in Visa® and MasterCard ® programs. The Company, along with other nonbank processors, must be sponsored by a financial institution that is a member of the Visa® and MasterCard ® associations. NCBK, being a member of such associations, acts as the Company’s sole sponsor under the terms of the Sponsorship agreement.

      The Company retains full responsibility for performance of Merchant Card Services, except for certain obligations or responsibilities of NCBK pursuant to the Sponsorship Agreement. The Sponsorship Agreement provides that the Company will comply with (1) all Visa® and MasterCard ® bylaws, manuals and operating regulations and other written materials as they from time to time are amended which bind or apply to NCBK as a member of Visa® and MasterCard ® with respect to Merchant Card Services or to the Company as a third party processor, (2) all agreements between merchants and NCBK with respect to Merchant Card Services, and (3) all applicable federal or state laws and regulations. Under the Sponsorship Agreement, the Company will receive all fees, discounts and other amounts payable by merchants for Merchant Card Services and will bear the expenses of maintaining facilities necessary to provide such services. Certain indemnification provisions are also contained in the Sponsorship Agreement, under which the Company will indemnify NCBK against losses, claims or other amounts arising out of the Company’s failure to perform in accordance with the terms of the Sponsorship Agreement due to negligence of the Company.

      The Company mitigates its contingent liability risk by instructing NCBK to withhold certain settlement funds due to merchants based on contractual terms. As of December 31, 2001, NCBK had $64.7 million of customer deposits and withheld settlement funds.

Employees

      As of December 31, 2001, the Company and its subsidiaries had approximately 2,000 full-time and part-time employees.

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Seasonality

      The Company experiences seasonality in certain businesses and typically realizes higher revenue in the third and fourth calendar quarters and lower revenue in the first calendar quarter, reflecting increased transaction volume in the summer and holiday months. Accounts receivable is generally highest in the fourth quarter as December is typically the highest volume month due to holiday sales. As a result, cash balances are typically lower in the fourth quarter.

Item 2.  Properties

      The Company leases its main processing facility in Louisville, Kentucky, consisting of approximately 224,000 square feet, from National City Bank of Kentucky. (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 other U.S. facilities have varying lease expiration terms and range in size from 2,000 square feet to 16,000 square feet. The Company also has 32 marketing and sales offices, which have varying lease expiration terms and range in size from 200 square feet to 2,600 square feet and are located throughout the United States. The Company owns one processing facility in Juarez, Mexico, consisting of 50,000 square feet. 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 overall facility needs in order to add or delete capacity.

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 quarterly high and low trade price and the final day’s closing price of the Company’s common stock for each of the quarterly periods in 2001 and 2000 were as follows:

      The number of holders of record of the Company’s common stock as of January 31, 2002 was 118. The Company believes it has significantly more than 118 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, P.O. Box 92301, Locator 5352, Cleveland, Ohio, 44139-0900, (800.622.6757).

      Investors or analysts requiring further information should contact:

	David E. Fountain
	Chief Financial Officer
	1231 Durrett Lane
	Louisville, KY 40213-2008
	(502.315.3311)

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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.

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Components of Revenue and Expenses

      Revenue. The Company’s Merchant Card Services revenue is primarily derived from fees paid by merchants for the authorization, processing, and settlement of credit and debit card transactions. Fees are generated either on a per transaction basis or on a “discount” basis, which is a percent of dollar volume processed. Revenue is recorded net of interchange fees charged by the credit card associations as such costs are not controlled by the Company. Revenue is also derived from the sale of equipment used to process card transactions.

      Payment Services revenue is generated from a variety of electronic payment settlement and reporting products. The majority of Payment Services revenue is earned from an exclusive long-term contract with the Airlines Reporting Corporation under which the Company is compensated on a “cost-plus” basis.

      A portion of total revenue is derived from earnings on customer cash balances, which are maintained by NCBK pursuant to contract terms. For the years ended December 31, 2001, 2000, and 1999, this represented less than 2% of consolidated revenue.

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

Results of Operations

      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 2001 and 2000 in order to focus on its core competency of electronic payment settlement. Accordingly, the segment results presented below segregate the operating performance for the core business lines from those that were divested. Certain prior year amounts have been reclassified to conform with the 2001 presentation.

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Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

NM — Not Meaningful

  Merchant Card Services

      Revenue for 2001 increased 26% to $402.0 million from $317.9 million in 2000. The Company acquired National City’s merchant business units on January 8, 2001 and a 70% interest in ABN AMRO Merchant Services, LLC on June 28, 2001, which contributed $15.5 million and $17.7 million, respectively, of incremental revenue in 2001. Organic revenue growth, which excludes the impact of current year acquisitions, was 16% in 2001.

      Transaction volume processed increased by 24% to 3.5 billion in 2001 from 2.8 billion in 2000. Dollar volume processed increased 23% to $156 billion in 2001 from $127 billion in 2000. Organic transaction and dollar volume growth increased 23% and 20%, respectively, in 2001. Organic transaction and dollar volume increased primarily due to the addition of new national customers, strong execution in regional sales channels and continued expansion in new vertical markets.

      Expenses increased 23% to $325.0 million in 2001 from $263.5 million in 2000 primarily due to increased processing volumes. Operating margins as a percentage of revenue increased to 19% in 2001 from 17% in 2000, primarily due to economies of scale from increased volume and the National City and AAMS acquisitions. Due primarily to the factors listed above, operating profits increased 41% to $76.9 million in 2001 from $54.4 million in 2000.

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  Payment Services

      Payment Services was formerly an operating unit within the Company’s Corporate Outsourcing Solutions segment. This segment was renamed Payment Services in 2001 after the sale of the BPO unit.

      Revenue for 2001 decreased 18% to $30.1 million in 2001 from $36.5 million in 2000. Revenue decreased primarily due to decreased volume from the Company’s Airlines Reporting Corporation contract, which is the result of continuing conversion from paper to electronic reporting in the airline industry.

      Expenses were $24.4 million in 2001, down 12% from $27.7 million in 2000 due primarily to decreased volume and staff reductions. Operating margins as a percentage of revenue decreased to 19% in 2001 from 24% in 2000. Operating profits decreased 35% to $5.8 million in 2001 from $8.8 million in 2000.

  Divested Business Lines and Related Charges

      In 2001, the Company divested its BPO business and exited its Denver collections business which were components of the former Corporate Outsourcing Solutions segment. Revenue from these divested businesses was $41.2 million, which represented 9% of the Company’s revenue in 2001. The sale of the BPO business unit to Affiliated Computer Services was completed on August 29, 2001, for $43.0 million in cash ($41.3 million after transaction related expenses). The Company recorded charges of $3.9 million ($4.6 million after-tax, or $0.09 per diluted share) related to the BPO divestiture. These charges consisted of a loss of $3.3 million ($4.2 million after-tax, or $0.08 per diluted share) on the sale of the business and a $0.6 million charge ($0.4 million after-tax, or $0.01 per diluted share) for severance costs related to fourth quarter organizational restructuring actions taken to reduce support costs associated with the BPO unit.

      In 2000, the Company recorded charges of $8.6 million ($5.6 million after-tax, or $0.11 per diluted share) related to these business units. These charges consisted of $7.1 million ($4.6 million after-tax, or $0.09 per diluted share) to write-off goodwill and fixed assets for the Denver collections business and $1.5 million ($1.0 million after-tax, or $0.02 per diluted share) for site consolidation initiatives in the BPO unit.

  Net Interest Income

      Net interest income decreased 17% to $6.9 million in 2001 from $8.3 million in 2000 due primarily to lower average interest rates in 2001.

  Provision for Income Taxes

      The overall effective tax rate was 40.1% in 2001 compared to 38.4% in 2000. The increase in the effective tax rate was due to additional provisions related to the sale of the BPO unit due to repatriation of previously untaxed earnings for U.S. tax purposes. The increase in the effective tax rate was partially offset by differences in state income tax rates between legal entities within the Company due to recent acquisition and divestiture activity and a $0.3 million reduction in the valuation allowance for state net operating loss carry forwards.

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Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

NM — Not Meaningful

  Merchant Card Services

      Revenue for 2000 increased 20% to $317.9 million from $264.5 million in 1999. The Company acquired Heartland Payment Systems LLC on December 31, 1999, which contributed $15.1 million of incremental revenue in 2000. Organic revenue growth, which excludes the impact of current year acquisitions, was 14% in 2000.

      Transaction volume processed increased by 26% to 2.8 billion in 2000 from 2.2 billion in 1999. Dollar volume processed increased 22% to $127 billion in 2000 from $104 billion in 1999. Organic transaction and dollar volume growth increased 24% and 20%, respectively, in 2000. The addition of new national customers, strong execution in regional sales channels, and continued expansion in new vertical markets led to the increase in organic transaction and dollar volume.

      Expenses increased 13% to $263.5 million in 2000 from $232.2 million in 1999 primarily due to the customer base expansion and increased volumes. Operating margins as a percentage of revenue increased to 17% in 2000 from 12% in 1999, primarily due to increased revenue from higher margin regional merchants, economies of scale from increased volumes and cost savings initiatives. Operating expenses for 1999 also included $0.5 million ($0.3 million after-tax, or $0.01 per diluted share) for severance and other costs related to the closure of a processing facility. Operating profit increased 68% to $54.4 million in 2000 from $32.3 million in 1999.

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  Payment Services

      Payment Services was formerly an operating unit within the Company’s Corporate Outsourcing Solutions segment. This segment was renamed Payment Services in 2001 after the sale of the BPO unit.

      Revenue for 2000 of $36.5 million was down slightly from $36.8 million in 1999. Revenue declined primarily due to decreased volume from the Company’s Airlines Reporting Corporation contract, which was the result of the continuing conversion from paper to electronic reporting in the airline industry.

      Expenses were $27.7 million, down 7% from $29.8 million due to cost savings initiatives and decreased volume. Operating margins as a percentage of revenue increased to 24% from 19% as a result of improved productivity and other cost saving initiatives. As a result, operating profit increased 27% to $8.8 million in 2000 from $7.0 million in 1999.

  Divested Business Lines and Related Charges

      Divested business lines are comprised of the Remittance, Payables, Freight, and Check Acceptance business lines that were sold by the Company in the first half of 1999, the Denver collections operation discontinued in March 2001, and the Business Process Outsourcing business unit sold in August 2001.

      In 2000, the Company recorded charges of $8.6 million ($5.6 million after-tax, or $0.11 per diluted share) related to these business units. These charges consisted of $7.1 million ($4.6 million after-tax, or $0.09 per diluted share) to write-off goodwill and fixed assets for the Denver collections business and $1.5 million ($1.0 million after-tax, or $0.02 per diluted share) for site consolidation initiatives in the BPO unit.

      In 1999, the Company recorded charges of $71.7 million ($71.7 million after-tax, or $1.42 per diluted share) related to these business units. These charges consisted of $69.5 million ($69.9 million after-tax, or $1.38 per diluted share) for impairment and associated expenses related to the sale of the Freight, Payables, Remittance, and Check Acceptance business lines and a $2.2 million ($1.8 million after-tax, or $0.04 per diluted share) restructuring charge related to the closure of a BPO facility. The Freight, Payables, Remittance, and Check Acceptance business lines were sold in the first half of 1999 for $62.6 million in cash.

  Net Interest Income

      Net interest income increased to $8.3 million in 2000 from $4.5 million in 1999 due to higher interest rates in 2000 compared to 1999 and increased levels of cash and investments due to the receipt of sale proceeds from the business lines that were divested in the first half of 1999, as well as cash flow from operations.

  Provision for Income Taxes

      The overall effective tax rate was 38.4% in 2000. The 2000 provision for income taxes was lowered by $1.1 million due to a reduction in the valuation allowance for state net operating loss carry forwards. The 1999 provision for income taxes included the effect of the write-off of $65.7 million of nondeductible goodwill related to the divested business lines.

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 computers, external and internally developed software, as well as improvements to operating facilities. During 2001, the Company’s capital expenditures totaled $20.1 million. Such expenditures were financed from operating cash flow, which for 2001 totaled $49.9 million. Capital expenditures and operating cash flow for 2000 were $14.4 million and $45.1 million, respectively. Operating cash flow increased 11% in 2001 compared to 2000 due to improved profits and the timing of tax payments between the Company and National City, offset by higher accounts receivable

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

      On June 28, 2001, the Company acquired a 70% ownership interest in AAMS for $48.5 million in cash.

      On August 29, 2001, the Company completed the sale of the BPO unit to Affiliated Computer Services, Inc. for $43.0 million cash ($41.3 million after transaction related expenses).

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

Effects of September 11 Terrorist Attacks

      The terrorist attacks in New York and Washington on September 11, 2001, led to reduced levels of air travel. The Company currently processes credit card transactions for six of the top ten United States airlines, and the majority of its Payment Services business is also tied to the travel industry. Travel-related customers, principally airlines, represented approximately 13% of revenue from continuing businesses for the year ended December 31, 2001, 6% from Merchant Card Services and 7% from Payment Services. To the extent future air travel continues at levels below historical trends, that portion of Merchant Card Services and Payment Services revenue will be impacted. There is less revenue exposure in the Payment Services business due to the cost-plus contract with the Airlines Reporting Corporation and contractual minimums with other travel-related customers.

      The unprecedented slowdown in air travel, combined with the costs of additional security measures, has raised questions about the ongoing financial viability of the airline industry. In the event of bankruptcy liquidation of one or more of the Company’s airline customers, the Company could become financially responsible for refunding tickets purchased through VISA® or MasterCard ® under the chargeback rules of those associations. See Commitments and Contingencies, Note L to Consolidated Financial Statements.

      In the near term, management believes that airline bankruptcy liquidations are highly unlikely given the recent Federal financial support for the airline industry. In November 2001, Congress passed the Aviation and Transportation Security Act which requires airlines to honor tickets for other airlines that may suspend, interrupt or discontinue service due to insolvency or bankruptcy. Considering the foregoing and in light of other actions taken to mitigate the situation, management believes the likelihood of any material loss under the chargeback rules is remote.

Recent Accounting Pronouncements

  Goodwill and Other Intangible Assets

      In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. Under the provisions of SFAS 142, goodwill and certain other intangible assets, which do not possess finite useful lives, will no longer be amortized over the estimated life but rather will be tested at least annually for impairment based on specific guidance provided in the new standard. Intangible assets determined to have finite lives will continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing.

      The provisions of SFAS 142 were adopted by the Company as required effective January 1, 2002. Application of the nonamortization provisions of the statement is expected to reduce amortization expense by approximately $3.2 million pre-tax, resulting in an increase in net income of approximately $2.6 million, or

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      In general, application of the new provisions may result in more income statement volatility due to the potential periodic recognition of impairment losses, which are likely to vary in amount and regularity, for goodwill and other indefinite-lived intangible assets, versus reducing those assets through the recognition of recurring, consistent amortization amounts.

  Accounting for Long-Lived Assets

      SFAS 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, was issued in October 2001 and addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution to owners. The new provisions supersede SFAS 121, which addressed asset impairment, and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. Under SFAS 144, more dispositions may qualify for discontinued operations treatment in the income statement. The provisions of SFAS 144 became effective for the Company January 1, 2002 and are not expected to have a material impact on the Company’s results of operations, financial position, or liquidity.

Forward Looking Statements and Risk Factors

      Item 1 (the sections entitled Industry Overview, Merchant Card Services, Payment Services, 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 (entitled Liquidity and Capital Resources, Effect of September 11 Terrorist Attacks, and Recent Accounting Pronouncements), 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). Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Risks and uncertainties that could cause actual results to differ materially include, but are not limited to the following: the Company’s ability to execute its business plans; changes in general economic conditions in the United States and other relevant economies; changes in consumer spending habits; changes in the growth rate of the card processing industry from recent years; ability to execute the Company’s acquisition strategy; successful integration of acquisitions; consolidation in the banking, card processing or electronic payment settlement industries; consolidation of major customers or industries serviced; significant industry competition; renewal of major customer relationships; changes in interest rates; governmental and economic stability in foreign countries in which the Company operates; unanticipated litigation or material changes in existing litigation, chargebacks, customer bankruptcy, claims and assessments; organizational changes or loss of key management members; reliance on third party processing relationships; changes in banking regulations; changes in credit card association rules, regulations or operations; changes in other laws or regulations that impact the Company’s business; changes in accounting policies and procedures as may be required due to new accounting pronouncements of the Financial Accounting Standards Board or other regulatory agencies; technological changes; timely and successful implementation of future processing systems projects; financial or other business impacts due to systems infiltrations; and successful business continuity plans.

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Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

  Derivative Instruments

      The Company does not use derivative instruments.

  Market Risk of Financial Instruments

      The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. As of December 31, 2001, the Company had $101 million in unrestricted cash and cash equivalents. For the year ended December 31, 2001, NCBK also held an average of approximately $150 million of customer funds, on which the Company earns interest.

      Because of the short-term nature of these instruments, a sudden change in market interest rates would not impact the fair value of these instruments. The Company’s earnings, however, are impacted by changes in interest rates, affecting both interest earnings on the Company’s cash equivalents and interest earnings on customer funds maintained by NCBK. At December 31, 2001, a hypothetical 100 basis point increase in short-term interest rates would result in an increase of approximately $3 million in annual pre-tax earnings. A hypothetical 100 basis point decrease in short-term interest rates would result in a decrease of approximately $3 million in annual pre-tax earnings.

Item 8.  Financial Statements and Supplementary Data

      See Index to Consolidated Financial Statements at Item 14.

      None.

PART III

Item 10. Directors and Executive Officers of the Registrant

      The Executive Officers of the Company as of January 31, 2002 were as follows:

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

      Mr. Wimsett was appointed President and Chief Executive Officer in September 1999. Mr. Wimsett previously served as Executive Vice President of NPC’s Merchant Card Services Division from 1997 to 1999 and as President of NPC Check Services from 1995 to 1997. Mr. Wimsett has held various management positions at NPC from 1983 to 1995.

      Mr. Pyke was appointed Chief Operating Officer in October 2001. Mr. Pyke previously served as Executive Vice President — Merchant Card Services from October 1999 to October 2001 and was a Senior Vice President of the Merchant Card Services Division from 1998 to 1999. Mr. Pyke held a variety of management positions in NPC’s Merchant Card Services Division from 1996 to 1998. Prior to joining NPC,

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      Mr. Martin was appointed as Executive Vice President — Merchant Card Services Product Management in January 2000. 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. Before working with First Data Corporation, Mr. Martin served in various positions at NPC for over 25 years.

      Mr. Robins was appointed Executive Vice President — Business Development in November 2000. Mr. Robins was employed by Visa U.S.A. from 1989 to 2000 and served as Executive Vice President of Market Development and Acceptance from 1996 to 2000.

      Mr. Fountain was appointed Chief Financial Officer in October 1999. Mr. Fountain was appointed interim Chief Financial Officer in July 1999 and served as Senior Vice President — Chief Accounting Officer from 1998 to 1999. Mr. Fountain held a variety of financial management positions with NPC from 1996 to 1998. Before working with NPC, from 1983 to 1995, Mr. Fountain held various financial management positions in the credit card industry with Total System Services, Inc., MBNA Corporation and Associates First Capital.

      Mr. Lanham was appointed Chief Accounting Officer in May 2000. Mr. Lanham joined NPC in November 1999 as Vice President — Corporate Controller. From 1991 to 1999, Mr. Lanham was employed by Arthur Andersen, serving as a manager in the firm’s Audit and Business Advisory division from 1996 to 1999.

      The other information required by Item 10 is incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 6, 2002.

Item 11.  Executive Compensation

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 6, 2002.

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 6, 2002.

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 6, 2002.

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PART IV

(a) 1.  Financial Statements

2.  Financial Statement Schedules

      Omitted due to inapplicability or because required information is shown in the Company’s consolidated financial statements or notes thereto.

3.  Exhibits

      The index of exhibits has been filed as separate pages of the 2001 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

      October 17, 2001: The Registrant issued a news release reporting earnings for the quarter and nine months ended September 30, 2001.

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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 February 20, 2002.

	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 2001 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

Shareholders and Board of Directors

      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, 2001 and 2000, 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, 2001. These financial statements are the responsibility of National Processing, Inc.’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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

	/s/ Ernst & Young LLP

Cleveland, Ohio

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NATIONAL PROCESSING, INC.