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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.     

      Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes ü   No     .

      The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 28, 2002 was $227,737,709. The market value calculation was determined using the closing sale price of the Registrant’s common stock on June 28, 2002, as reported on the New York Stock Exchange.

      The number of shares outstanding of the Registrant’s Common Stock as of January 31, 2003 was 52,152,277.

Documents Incorporated by Reference:

      Portions of the Registrant’s Proxy Statement (to be dated approximately March 28, 2003) 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

  Organization

      National Processing, Inc. and its subsidiaries (the “Company”) are providers of electronic payment processing. The Company, headquartered in Louisville, Kentucky, is an Ohio corporation that is 85% owned by National City Corporation (“National City”), a financial holding company headquartered in Cleveland, Ohio. The Company maintains operations, employees, and contracts that are 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.

  Business

      The Company currently operates two business segments, Merchant Card Services and Payment Services. Merchant Card Services authorizes, processes, and performs financial settlement and reporting of card transactions, including credit and debit card transactions. Merchant Card Services provides services to merchant locations primarily in the United States and represented 96% of the Company’s revenue in 2002.

      Payment Services was formerly a component of 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, which was also formerly a component of the Company’s Corporate Outsourcing Solutions segment. Payment Services provides financial settlement and reporting solutions to large and mid-size corporate customers in the travel and healthcare industries. Payment Services settles 100% of domestic airline tickets issued by travel agencies and settled through the Airlines Reporting Corporation. Payment Services also settles commission payments for car rental companies, cruise line operators, and hotels. Payment Services represented 4% of the Company’s revenue in 2002.

      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.

      See Segment Reporting, Note 15 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, hospitality, and e-commerce. NPC is the second largest provider of merchant card processing services in the United States. In 2002, NPC processed 3.9 billion transactions, including approximately one out of every five Visa® and MasterCard ® transactions in the United States.

      The merchant card processing market can generally be divided into two markets: 1) national merchants and 2) regional merchants, including small single-location 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 31, 2001 and a 70% ownership interest in ABN AMRO Merchant Services, LLC (“AAMS”) on June 28, 2001. In 2002, approximately 60% of merchant card processing revenue was from regional merchants.

      Merchant Card Services revenue was $434.9 million, which represented 96% of the Company’s revenue in 2002. Total transaction volume increased by 11% to 3.9 billion in 2002. Total dollar settlement volume increased by 9% to $169 billion in 2002.

      Merchant Card Services uses various sales and marketing channels for both its national and regional customers. The Company employs approximately 250 commission only sales representatives who focus on direct marketing channels. In addition, the Company sells its services through approximately 700 third-party relationships such as independent sales offices and community banks who, in most cases, represent National Processing 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 ten largest card processors handle approximately 90% 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 and healthcare industries. Payment Services revenue was $20.4 million, which represented 4% of the Company’s revenue in 2002. Payment Services settled $67 billion of payments in 2002.

      In the travel 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 settles 100% of domestic airline tickets issued by travel agencies and settled through the Airlines Reporting Corporation. In addition, NPC provides an industry-wide global payment system for consolidating and processing business-to-business commission payments for virtually all United States based car rental companies as well as for the hotel and cruise line industries. During 2001, these services were performed in both the Company’s Mexican and United States locations. In 2002, these services were performed in the Company’s United States locations.

      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

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      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 and Discontinued Business Units

      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 divested and discontinued 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.

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 necessary consent or approval for any business activity substantially different from those business activities the Company currently conducts, then the Company 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. The Company does not believe, however, that either the Banking Laws or the Bank Holding Company Act will impede the manner in which the Company conducts its business or its product and service offerings, although there can be no assurance that the Banking Laws or Bank Holding Company Act will not have such an effect.

      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

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      On July 30, 2002, the Senate and the House of Representatives of the United States (Congress) enacted the Sarbanes-Oxley Act of 2002, a statute that addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The New York Stock Exchange has also proposed corporate governance rules that were presented to the Securities and Exchange Commission for review and approval. The proposed changes are intended to allow shareholders to more easily and efficiently monitor the performance of companies and directors.

      Effective August 29, 2002, as directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s chief executive officer and chief financial officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal controls; they have made certain disclosures to the Company’s auditors and the audit committee of the board of directors about the Company’s internal controls; and they have included information in the Company’s quarterly and annual reports about their evaluation and whether there have been significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

      On November 14, 2002, the Board of Directors of National Processing approved a series of actions to strengthen and improve its already strong corporate governance practices. Included in those actions was the adoption of a new Code of Ethics, a Code of Ethics for Senior Financial Officers, Corporate Governance Guidelines and new charters for the Audit and Compensation Committees. More information on National Processing’s Corporate Governance is available on the National Processing web site at: www.npc.net.

      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.

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 is a member of such associations and acts as the Company’s primary sponsor.

      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 in accordance with the terms of the Sponsorship Agreement. See Note 13 to the Consolidated Financial Statements.

Visa® Guarantee

      On August 6, 2002, the Company provided a financial guarantee relating to NCBK’s membership obligations with Visa®. The agreement guarantees the payment of NCBK’s membership obligations pursuant to the Visa® Certificate of Incorporation and Amendments, Bylaws, rules, policies and operating rules should NCBK default or fail to meet its obligations of membership including NCBK’s obligations to pay any Visa®

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Employees

      As of December 31, 2002, the Company had approximately 1,800 full-time and part-time employees.

Seasonality

      The Company experiences seasonality in certain businesses and typically realizes higher revenue in the third and fourth quarters and lower revenue in the first 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.

Web Site Access to United States Securities and Exchange Commission Filings

      All reports filed electronically by National Processing, Inc. with the United States Securities and Exchange Commission (SEC), including the annual report on Form 10-K, quarterly reports on Form 10-Q and current event reports on Form 8-K, as well as any amendments to those reports, are accessible at no cost on the Company’s web site at www.npc.net. These filings are also available on the SEC’s web site at www.sec.gov.

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 7 to the 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 5,000 square feet to 16,000 square feet. The Company also has 29 marketing and sales offices, which have varying lease expiration terms and range in size from 100 square feet to 2,300 square feet and are located throughout the United States. The Company owns one idle processing facility in Juarez, Mexico, consisting of 50,000 square feet, which is currently held for sale. 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

      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 2002 and 2001 were as follows:

      The number of holders of record of the Company’s common stock as of January 31, 2003 was 97. The Company believes it has significantly more than 97 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, 44193-0900, (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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      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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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

      The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have greater reliance on the use of estimates, assumptions, and judgments and as such have greater possibility of producing results that could be materially different than originally reported.

      The Company is included in the consolidated federal income tax return of National City. National City allocates income taxes to the Company as if it were a stand-alone tax paying entity. Deferred tax assets and liabilities are recognized as certain items are required to be treated differently for financial statement purposes versus how they are treated for tax purposes.

      Management judgments and estimates are required in determining the income tax provision as well as the balances of deferred tax assets and liabilities. As of December 31, 2002, the Company had net deferred tax assets of $14.3 million. The Company records a valuation allowance to reduce deferred tax assets when it is more likely than not that certain amounts will not be realized. The Company considers projected future taxable income and tax planning strategies in assessing the need for a valuation allowance. Should the Company determine in the future that all or part of its net deferred tax asset is unrealizable, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Management provides reserves when it is likely that a taxing authority may take a sustainable position on a matter contrary to the Company’s position.

      Long-lived assets, consisting primarily of property and equipment, goodwill and other intangible assets, comprise a significant portion of the Company’s total assets.

      Property and equipment, net of accumulated depreciation, totaled $53.7 million as of December 31, 2002, which represented 10% of total assets. Useful lives of property and equipment (which includes internal use software) are estimated in order to determine the amount of depreciation expense to be recorded during each reporting period. The useful lives are estimated at the time the assets are acquired based on historical experience with similar assets and current business plans. Based on future events and changes in business plans, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. These changes could also result in the recognition of an immediate impairment charge to reflect the write-down in value of the assets. See Note 3 to the Consolidated Financial Statements. Alternatively, assets may ultimately be used by the Company for longer than their assigned depreciable lives.

      Internal-use software is a component of property and equipment. The Company capitalizes certain costs incurred to develop or obtain internal-use software in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company capitalizes costs once the preliminary project stage has been completed, management has approved funding for the project, and it is probable that the project will be completed and that the software will be used for its intended use. Capitalized software development and purchased software are recorded at cost. Commencing the month following project completion, these costs are amortized on a straight-line basis over the estimated useful life of the software, ranging from three to ten years. Software development costs may become impaired due to technological obsolescence of the project or where development efforts are abandoned due to changes in business plans. For purposes of depreciation and impairment, capitalized costs are treated in the same manner as other property and equipment.

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      Goodwill and other intangible assets, net of accumulated amortization, totaled $133.2 million as of December 31, 2002, which represented 24% of total assets. The Company analyzes goodwill and other intangible assets for impairment issues on an annual basis or more frequently if events or circumstances warrant. In assessing the recoverability of goodwill and intangible assets, the Company must make estimates regarding future cash flows and assumptions about other factors to determine the fair value. Changes in estimates or the related assumptions may cause the Company to record impairment charges for the related assets. See Note 3 to the Consolidated Financial Statements.

      The Company records reserves for chargebacks and other contingent liabilities when such amounts are deemed to be probable and estimable in accordance with SFAS 5, Accounting for Contingencies. The required reserves may change in the future due to new developments including but not limited to changes in litigation or increased chargeback exposure as the result of merchant insolvency, liquidation, or other reasons. The required reserves are reviewed periodically to determine if adjustments are required. See Note 13 to the Consolidated Financial Statements.

Components of Revenue and Expenses

      Approximately 95% of Merchant Card Services revenue is derived from processing contracts with merchants for authorization, processing, and settlement of credit and debit card transactions. Processing fee revenue is earned either on a “per transaction” basis or “discount” basis, which is a percent of dollar volume processed. Merchant contracts generally have terms ranging from three to five years. Processing fee revenue is recorded in the period that the related transaction is processed and is recorded net of interchange fees charged by the credit card associations and fees charged by debit networks. For the years ended December 31, 2002, 2001 and 2000, interchange and debit network fees were $2.4 billion, $2.2 billion, and $1.8 billion, respectively. The increase in interchange and debit network fees is attributed to increased processing volumes. The remainder of Merchant Card Services revenue is derived from sources other than processing fees, including equipment and supply sales, equipment repair fees, application and installation fees, and third-party commissions.

      Approximately 50% 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. The remainder of Payment Services revenue is derived from other non-card based electronic settlement products. Revenue is recorded in the period services are provided.

      A portion of total consolidated revenue is derived from earnings on customer cash balances, which are maintained by NCBK pursuant to contractual terms. For the years ended December 31, 2002, 2001 and 2000, earnings on customer balances were $4.3 million, $8.3 million and $8.4 million, respectively.

      Bankcard assessments are liabilities to Visa® and MasterCard ® that originate from the Company’s agreements with these agencies. The Company recovers these assessment charges through various contractual arrangements with its customers. Bankcard assessment expense is the largest component of operating expense and, for the years ended December 31, 2002, 2001 and 2000, was $134.9 million, $126.1 million and $103.2 million, respectively. The increase in assessment expense is attributed to increased processing volumes. Operating expense also includes costs of providing services to customers including wages and personnel costs, authorization fees, commissions paid to independent sales organizations, and data processing costs.

      General and administrative expense includes corporate management and administrative expense as well as fees for certain administrative services, such as internal audit and legal services from National City and its affiliates.

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

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Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

NM — Not Meaningful

      Revenue for 2002 increased 8% to $434.9 million from $402.0 million in 2001. The acquisition of ABN AMRO Merchant Services, LLC (AAMS) on June 28, 2001 contributed $18.9 million of incremental revenue for the six months ended June 30, 2002. Organic revenue growth, which excludes the impact of acquisitions, was 2% in 2002.

      Transaction volume processed increased by 11% to 3.9 billion in 2002 from 3.5 billion in 2001. Dollar volume processed increased 9% to $169 billion in 2002 from $156 billion in 2001. Organic transaction and dollar volume processed, which excludes the impact of acquisitions, increased by 10% and 6%, respectively, in

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      Operating expenses for the year ended December 31, 2002 increased 9% to $320.7 million from $293.7 million in 2001 due to increased processing volume, offset partially by expense reductions achieved in third-party processing contracts.

      General and administrative expenses increased 17% to $18.3 million for the year ended December 31, 2002 from $15.6 million in 2001 due primarily to changes in estimates for certain non-income related taxes.

      Depreciation and amortization increased 6% to $16.7 million for the year ended December 31, 2002 from $15.8 million in 2001 due to additional depreciation from the capitalization of a new web-based accounting reporting system and the addition of a new data center in Lansing, Michigan. This increase was partially offset by the non-amortization of goodwill. The year ended December 31, 2001 included $2.7 million of goodwill amortization expense that did not recur in 2002 due to the adoption of the new accounting standard. See Recent Accounting Pronouncements.

      In May 2002, the Company announced its plans to close its remaining operations in Juarez, Mexico by the end of 2002. The work performed in Mexico has been relocated to existing facilities in the United States. The Company recorded a pre-tax restructuring charge of $1.7 million ($2.4 million after-tax, or $0.04 per diluted share) in the second quarter of 2002 related to severance costs for approximately 120 employees, building and equipment write-downs, and related items. The after-tax charge exceeds the pre-tax amount due to additional provisions required for nondeductible losses and dividends from foreign subsidiaries. As of December 31, 2002, the Company had $0.5 million remaining in accrued liabilities for future obligations related to the closure.

      Operating margins as a percentage of revenue decreased to 18% in 2002 from 19% in 2001 due to the above items.

      On June 28, 2001, the Company acquired a 70% interest in AAMS. For the year ended December 31, 2002, minority interest was $2.5 million compared to $0.8 million for 2001.

     Payment Services

      Revenue for 2002 decreased 32% to $20.4 million from $30.1 million in 2001. Revenue decreased primarily due to decreased paper-based transactions from the Company’s Airlines Reporting Corporation contract and lower earnings on customer balances due to lower average interest rates in 2002. The revenue decrease was partially offset by increased pricing in the Company’s commission settlement product.

      Operating expenses for the year ended December 31, 2002 decreased 51% to $9.8 million from $19.8 million in 2001 due primarily to decreased paper-based transactions and related staff reductions.

      General and administrative expenses decreased 25% to $1.7 million for 2002 from $2.3 million in 2001 due to the decline in paper-based transactions and related staff reductions.

      Depreciation and amortization decreased 20% to $1.8 million for 2002 from $2.2 million in 2001 due to the consolidation of the Airlines Reporting Corporation contract into a single operating facility. The work previously performed in Juarez, Mexico was relocated to Louisville in the fourth quarter of 2001.

      Operating margins as a percentage of revenue increased to 35% in 2002 from 19% in 2001 due to the above items.

     Divested and Discontinued Business Units

      In 2001, the Company divested its Business Process Outsourcing (“BPO”) business and discontinued its Denver collections business, which were components of the former Corporate Outsourcing Solutions segment. The Denver collections business was discontinued on March 30, 2001. The sale of the BPO 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). For the year ended December 31, 2001, these business units had revenue of $41.2 million. Operating profit (loss) for the divested and discontinued business units, which includes a $3.9 million loss on the sale of the BPO unit in 2001, was $(0.3) million for the year ended December 31, 2001.

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      During 2001, the Company recorded a net pre-tax charge of $3.9 million ($4.6 million after-tax, or $0.09 per diluted share) related to the BPO divestiture. The after-tax charge exceeds the pre-tax amount due to additional provisions required for nondeductible losses, repatriation of previously untaxed earnings in foreign countries, and dividends from foreign subsidiaries. As of December 31, 2002, the Company had $0.8 million remaining in accrued liabilities related to final obligations associated with the BPO divestiture.

     Unallocated Corporate Items

      In 2002, the Company recorded $3.2 million ($1.9 million after-tax, or $0.04 per diluted share) of net expenses related to a separation agreement with the former CEO.

     Net Interest Income

      Net interest income earned on the Company’s cash and cash equivalents for 2002 was $4.4 million, down 36% from $6.9 million in 2001 due to lower average interest rates in 2002.

      The overall effective tax rate was 37.7% in 2002 compared to 40.1% in 2001. The decrease in the effective tax rate was due to a $1.0 million foreign tax credit recorded in 2002, which had not previously been recognized due to uncertainty. The 2001 period also included the additional tax provisions related to the BPO divestiture discussed above.

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

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NM — Not Meaningful

      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 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 processed, which excludes the impact of acquisitions, increased by 23% and 20%, respectively, in 2001. The addition of new national customers, strong execution in regional sales channels, and continued expansion in new markets led to the increase in organic transaction and dollar volume.

      Operating expenses increased 25% to $293.7 million in 2001 from $235.5 million in 2000 primarily due to increased transaction volumes.

      General and administrative expenses increased 9% to $15.6 million in 2001 from $14.3 million in 2000 due to increased transaction volume in 2001.

      Depreciation and amortization expense increased 15% to $15.8 million in 2001 from $13.7 million in 2002 due to the additional amortization related to the acquisition of a 70% interest in AAMS on June 28, 2001.

      Operating margins as a percentage of revenue increased to 19% in 2001 from 17% in 2000 due to the above items.

     Payment Services

      Revenue for 2001 decreased 18% to $30.1 million from $36.5 million in 2000. Revenue declined primarily due to decreased paper-based transactions from the Company’s Airlines Reporting Corporation contract.

      Operating expenses decreased 8% to $19.8 million in 2001 from $21.7 million in 2000 primarily due to decreased paper-based transactions and related staff reductions.

      General and administrative expenses decreased 34% to $2.3 million in 2001 from $3.5 million in 2000 due to decreased paper-based transactions and related staff reductions.

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      Depreciation and amortization decreased 13% to $2.2 million in 2001 from $2.6 million in 2000 due to site consolidation initiatives.

      Operating margins as a percentage of revenue decreased to 19% in 2001 from 24% in 2000 due to the above items.

     Divested and Discontinued Business Units

      In 2001, the Company divested its Business Process Outsourcing (“BPO”) business and discontinued its Denver collections business, which were components of the former Corporate Outsourcing Solutions segment. The Denver collections business was discontinued on March 30, 2001. The sale of the BPO 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). For the year ended December 31, 2001, these business units had revenue of $41.2 million. Operating profit (loss) for the divested and discontinued business units, which includes a $3.9 million loss on the sale of the BPO unit in 2001, was $(0.3) million for the year ended December 31, 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.

     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 with the Company due to acquisition and divestiture activity and a $0.3 million reduction in the valuation allowance for state net operating loss carry forwards.

Forward-Looking Results of Operations

      The Company currently processes card transactions for several of the largest airlines in the United States. Airline customers represented approximately 8% of the Company’s consolidated revenue (5% from Merchant Card Services and 3% from Payment Services) for the year ended December 31, 2002. In the event of 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 Note 13 to the Consolidated Financial Statements. At December 31, 2002, the dollar value of tickets purchased, but as yet unflown, was approximately $1.0 billion. Based upon available information, this is management’s best estimate of maximum potential chargebacks related to its airline customers. As of December 31, 2002, NCBK held $139.5 million in merchant deposits and withheld settlement funds for certain airline merchants. The merchant deposits collateralize only individual airline merchants and some airline merchants have no deposits. Of the total merchant deposits, $125.0 million was related to a single airline merchant. In the near term, management believes liquidations are unlikely for any of the Company’s airline customers.

      US Airways Group, Inc. and United Air Lines, Inc., both of which are merchant processing customers of the Company, have filed for bankruptcy court protection under Chapter 11. Based upon information currently available to the Company and actions management has taken to mitigate risks, management currently believes a material loss under the chargeback rules is unlikely.

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      In May 2002, the Company announced its decision to discontinue processing debit and credit card transactions for the airline industry. The Company will honor its existing contractual obligations to the airlines it currently serves but does not intend to renew such contracts when their current terms expire. The contracts currently in effect have various expiration dates extending through November 2005.

      The Company’s revenues are directly affected by overall consumer spending trends. The Company is also currently experiencing increased pricing pressure in competing for new national merchants as well as in the renewal of existing national merchant contracts. These factors may affect the Company’s future operating profits and margins.

Recent Accounting Pronouncements

      In June 2001, the Financial Accounting Standards Board issued 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. As part of adopting the provisions of SFAS 142, a transitional impairment test was applied to all goodwill during the quarter ended March 31, 2002. No impairment was required to be recorded as a result of this test. The Company currently does not have any other indefinite-lived intangible assets on its balance sheet. There have not been any material categorical reclassifications or adjustments to the useful lives of finite-lived intangible assets as a result of adopting the new standard.

      If the non-amortization provisions of SFAS 142 had been adopted effective January 1, 2000, goodwill amortization expense, which is primarily nondeductible for income tax purposes, would have been reduced by $2.7 million and $2.3 million for years ended December 31, 2001 and 2000, respectively. For the year ended December 31, 2001, proforma net income would have been $55.0 million, or $1.06 per diluted share, versus reported net income of $52.7 million, or $1.01 per diluted share. For the year ended December 31, 2000, proforma net income would have been $45.5 million or $0.89 per diluted share, versus reported net income of $43.4 million, or $0.85 per diluted share.

      The Company’s amortizable intangible assets as of December 31, 2002 related almost exclusively to acquired merchant portfolios. These costs are amortized on a straight-line basis over periods ranging from 7 to 10 years. Amortization expense for years ended December 31, 2002, 2001 and 2000 were $6.9 million, $5.6 million and $7.3 million, respectively. The estimated annual amortization expense for existing intangible assets for each of the next five years is as follows: 2003 — $7.1 million; 2004 — $6.7 million; 2005, 2006 and 2007 — $4.8 million.

      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.

      SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, 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

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      SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in September 2002 and addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost is recognized at the date of the entity’s commitment to an exit plan. The provisions of SFAS 146 become effective for the Company on January 1, 2003 and are not anticipated to have a material impact on the Company’s results of operations, financial position, or liquidity.

      In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure, which provides guidance on how to transition from the intrinsic value method of accounting for stock-based employee compensation under APB 25 to SFAS 123’s fair value method of accounting, if a company so selects.

      Effective January 1, 2003, the Company plans to adopt the fair value method of recording stock options under SFAS 123. In accordance with the transitional guidance of SFAS 148, the fair value method of accounting for stock options will be applied prospectively to awards granted subsequent to December 31, 2002. As permitted, options granted prior to January 1, 2003, will continue to be accounted for under APB Opinion 25, and the proforma impact of accounting for these options at fair value will continue to be disclosed in the consolidated financial statements until the last of those options vest in 2005.

      As the cost of anticipated future option awards is phased in over a four-year period, the annual impact will rise assuming options are granted in future years at a similar level and under similar market conditions to 2002. The actual impact per diluted share may vary in the event the fair value or the number of options granted increases or decreases from the current estimate, or if the current accounting guidance changes. The Company uses the Black-Scholes model to estimate option values. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options, which have different characteristics from the Company’s employee stock options. The model is also sensitive to changes in subjective assumptions, which can materially affect the fair value estimate.

      In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 expands the disclosures made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability (with a corresponding reduction in revenue) for the fair value of the obligation assumed under certain guarantees.

      The Company’s contingent obligation to honor chargebacks (see Note 13 to the Consolidated Financial Statements) under merchant contracts is considered a performance guarantee under FIN 45. Performance guarantees are contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure to perform under an obligating agreement. Performance guarantees are subject to both the recognition and disclosure requirements of FIN 45.

      The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002. The required disclosures are included in Note 13 to the Consolidated Financial Statements.

      The recognition requirements of FIN 45 will require the Company to establish a liability at the inception of a guarantee based on an estimate of the guarantee’s fair value. The recognition requirements are to be applied prospectively to new guarantees issued or modified after December 31, 2002. The Company has not yet finalized the impact of adopting the recognition requirements of FIN 45, however the Company does not

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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 hardware, external and internally developed software, and improvements to operating facilities. During 2002, the Company’s capital expenditures totaled $16.3 million. Such expenditures were financed from operating cash flow, which for 2002 totaled $101.6 million. Capital expenditures and operating cash flow for 2001 were $20.1 million and $49.9 million, respectively. Operating cash flow increased in 2002 due to lower year end accounts receivable balances and the timing of tax payments. Operating cash flow for 2001 was negatively impacted by higher year end accounts receivable balances. The Company expects capital expenditures for 2003 to be comparable to 2002, which will be principally used to enhance merchant card processing capabilities.

      On January 8, 2001, the Company acquired the merchant services business units from several National City banking subsidiaries for $44.0 million in cash. See Note 4 to the Consolidated Financial Statements.

      On June 28, 2001, the Company acquired a 70% ownership interest in AAMS for $48.5 million in cash. See Note 4 to the Consolidated Financial Statements.

      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). See Note 5 to the Consolidated Financial Statements.

      On July 3, 2002, the Company acquired processing contracts from a key strategic partner for $2.7 million cash. The terms of the agreement also include future payments to the seller for a portion of the revenue derived from these contracts for a specified period plus an additional one-time payment of up to $1.0 million. See Note 4 to the Consolidated Financial Statements.

      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.

Forward-Looking Statements and Risk Factors

      Item 1 (the sections entitled Industry Overview, Merchant Card Services, Payment Services, Regulation, and Visa® Guarantee), 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 Critical Accounting Policies, Liquidity and Capital Resources, Forward-Looking Results of Operations, 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

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Item 7A.     Quantitative and Qualitative Disclosure About Market Risk

      The Company does not use derivative instruments.

      The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. As of December 31, 2002, the Company had $186 million in cash and cash equivalents. For the year ended December 31, 2002, NCBK also held an average of approximately $244 million of customer cash balances. The Company retains incremental interest earned on certain of these funds above what is contractually due to the customers. Interest earned on customer cash balances is included as a component of revenue.

      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 affected by changes in interest rates, with respect to interest on the Company’s cash and cash equivalents as well as on customer funds maintained by NCBK. At December 31, 2002, a hypothetical 100 basis point increase in short-term interest rates would result in an increase of approximately $3 million in annual pre-tax income. A hypothetical 100 basis point decrease in short-term interest rates would result in a decrease of approximately $3 million in annual pre-tax income.

Item 8.     Financial Statements and Supplementary Data

      See Index to Consolidated Financial Statements at Item 15.

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

      None.

PART III

      The Executive Officers of the Company as of January 31, 2003 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. Gorney was appointed Chairman and Chief Executive Officer in September 2002. Mr. Gorney has served as an Executive Vice President of National City Corporation from 1998 to the present, with responsibility for National City’s overall technology and operations functions.

      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.

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      Mr. Martin was appointed as Executive Vice President — Merchant Card Services in January 2000. Mr. Martin previously served as President of Client Merchant Services for First Data Corporation in 1998.

      Mr. Robins was appointed Executive Vice President — Business Development in November 2000. Mr. Robins was employed by Visa U.S.A. from 1998 to 2000 serving as Executive Vice President of Market Development and Acceptance.

      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. Lanham was appointed Chief Accounting Officer in May 2000. Mr. Lanham joined the Company in November 1999 as Vice President — Corporate Controller. From 1998 to 1999, Mr. Lanham was employed by Arthur Andersen, serving as a manager in the firm’s Audit and Business Advisory division.

      The other information required by Item 10 is incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2003.

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2003.

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2003.

      Incorporated by reference from the Company’s Definitive Proxy Statement to be dated approximately March 28, 2003.

      The management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. Within 90 days of this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman and Chief Executive Officer (CEO), and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the evaluation date for ensuring that information required to be disclosed in this annual report on Form 10-K was recorded, processed, summarized, and reported within the time period required by the United States Securities and Exchange Commission’s rules and forms. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation date.

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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 exhibits filed as part of the 2002 Form 10-K are accessible at no cost on the Company’s web site at www.npc.net or through the United States Securities and Exchange Commission’s web site at www.sec.gov. Copies of the exhibits may be requested at a cost of $.30 per page from National Processing’s investor relations department.

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