##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2002

or

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

For the transition period from________________to___________

Commission File Number: 1-11905

National Processing, Inc.

(Exact name of Registrant as specified in its charter)


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

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

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

The number of shares outstanding of the Registrants Common Stock as of October
31, 2002 was 52,083,479.





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TABLE OF CONTENTS



|                                           |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                           | Consolidated Balance Sheets                                                                  
|                                           | Consolidated Statements of Income                                                            
|                                           | Consolidated Statement of Changes in Shareholders Equity                                    
|                                           | Consolidated Statements of Cash Flows                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 3. Quantitative and Qualitative Disclosure of Market Risk                               
|                                           | Item 4. Controls and Procedures                                                              
|Part II  Other Information               
|                                           | Item 1. Legal Proceedings (None)                                                             
|                                           | Item 2. Changes in Securities and Use of Proceeds (None)                                     
|                                           | Item 3. Defaults Upon Senior Securities (None)                                               
|                                           | Item 4. Submission of Matters to a Vote of Security Holders (None)                           
|                                           | Item 5. Other Information (None)                                                             
|                                           | Item 6. Exhibits and Reports on Form 8-K:                                                    
|a. Exhibits                               
|SIGNATURES                                
|PART II ITEM 6: EXHIBIT INDEX             
|Exhibit 10.21                             
|Exhibit 10.22                             
|Exhibit 10.23                             
|Exhibit 10.37                             
|Exhibit 10.38                             
|Exhibit 10.39                             



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##### Table of Contents



NATIONAL PROCESSING, INC.

INDEX

|               |         |                       |                                                                                                  |    |          | 
|-------------- | ------- | --------------------- | ------------------------------------------------------------------------------------------------ | -- | -------- | 
|               |         |                       |                                                                                                  |    | Page No.
|               |         |                       |                                                                                                  |    |         
|Part I         |         | Financial Information |                                                                                                  |   
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 1. |                       | Consolidated Financial Statements (unaudited)                                                    |    |         
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               |         |                       | Consolidated Balance Sheets  September 30, 2002,
December 31, 2001 and September 30, 2001       |    | 3       
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               |         |                       | Consolidated Statements of Income  Three and Nine
Months Ended September 30, 2002 and 2001      |    | 4       
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               |         |                       | Consolidated Statement of Changes in Shareholders
Equity  Nine Months Ended September 30, 2002 |    | 5       
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               |         |                       | Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001            |    | 6       
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               |         |                       | Notes to Consolidated Financial Statements                                                       |    | 7       
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 2. |                       | Managements Discussion and Analysis of
Financial Condition and Results of Operations            |    | 16      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 3. |                       | Quantitative and Qualitative Disclosure of
Market Risk                                           |    | 28      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 4. |                       | Controls and Procedures                                                                          |    | 28      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|Part II        |         | Other Information     |                                                                                                  |   
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 1. |                       | Legal Proceedings (None)                                                                         |    | 29      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 2. |                       | Changes in Securities and Use of Proceeds (None)                                                 |    | 29      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 3. |                       | Defaults Upon Senior Securities (None)                                                           |    | 29      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 4. |                       | Submission of Matters to a Vote of Security Holders (None)                                       |    | 29      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 5. |                       | Other Information (None)                                                                         |    | 29      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|               | Item 6. |                       | Exhibits and Reports on Form 8-K                                                                 |    | 29      
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|Signatures     |         |                       |                                                                                                  | 30
|              
|              
|              
|              
|               |         |                       |                                                                                                  |    |         
|              
|              
|              
|              
|Certifications |         |                       |                                                                                                  | 31

2



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##### Table of Contents






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

|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |         |         | 
|----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------- | ------------ | ------- | ----------- | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                |                                                                                                                                                                                                            |                                     |         | September 30 |         | December 31 |         | September 30
|                                                |                                                                                                                                                                                                            |                                     |         | 2002         |         | 2001        |         | 2001        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |             
|Assets                                          |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Cash and cash equivalents           |         | $            | 209,548 |             |         | $            | 101,257 |   |         | $       | 145,844 | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Accounts receivable  trade         |         |              | 96,661  |             |         |              | 163,644 |   |         |         | 88,986  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Deferred tax assets                 |         |              | 2,672   |             |         |              | 3,299   |   |         |         | 2,348   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Other current assets                |         |              | 5,960   |             |         |              | 7,138   |   |         |         | 7,687   | 
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Total current assets                            |                                                                                                                                                                                                            |                                     | 314,841 |              |         |             | 275,338 |              |         |   | 244,865 |        
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                         |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Furniture and equipment             |         |              | 54,361  |             |         |              | 54,178  |   |         |         | 53,017  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Building and leasehold improvements |         |              | 11,815  |             |         |              | 10,770  |   |         |         | 11,204  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Software                            |         |              | 38,042  |             |         |              | 30,453  |   |         |         | 27,193  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Property leased from affiliate      |         |              | 4,173   |             |         |              | 4,173   |   |         |         | 4,173   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Land and improvements               |         |              | 442     |             |         |              | 442     |   |         |         | 442     | 
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                                |                                                                                                                                                                                                            |                                     | 108,833 |              |         |             | 100,016 |              |         |   | 96,029  |        
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated depreciation and amortization |                                                                                                                                                                                                            |                                     | 54,533  |              |         |             | 50,244  |              |         |   | 48,514  |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Property and equipment, net                     |                                                                                                                                                                                                            |                                     | 54,300  |              |         |             | 49,772  |              |         |   | 47,515  |        
|                                               
|                                               
|                                               
|                                               
|Other assets:                                   |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill, net of accumulated amortization of
$8,283 at September 30, 2002 and December
31, 2001, and $7,490 at September 30, 2001                                                                          |                                     |         | 91,227       |         |             |         | 91,227       |         |   |         | 92,021  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets, net of accumulated
amortization of $19,699, $14,610 and $13,020
at September 30, 2002, December 31, 2001 and
September 30, 2001, respectively                                     |                                     |         | 43,261       |         |             |         | 44,950       |         |   |         | 44,040  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                                                                        |                                     |         | 11,588       |         |             |         | 13,310       |         |   |         | 19,007  |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                                                                               |                                     |         | 4,190        |         |             |         | 3,741        |         |   |         | 6,553   |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Total other assets                              |                                                                                                                                                                                                            |                                     | 150,266 |              |         |             | 153,228 |              |         |   | 161,621 |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Total assets                                    |                                                                                                                                                                                                            | $                                   | 519,407 |              |         | $           | 478,338 |              |         | $ | 454,001 |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Liabilities and shareholders equity            |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Accounts payable  trade            |         | $            | 21,087  |             |         | $            | 19,080  |   |         | $       | 16,941  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Accrued bankcard assessments        |         |              | 24,726  |             |         |              | 28,113  |   |         |         | 22,527  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Accrued compensation and benefits   |         |              | 3,300   |             |         |              | 6,465   |   |         |         | 5,606   | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Income tax payable                  |         |              | 8,647   |             |         |              | 8,089   |   |         |         | 12,890  | 
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                                                                                            | Other accrued liabilities           |         |              | 14,886  |             |         |              | 13,906  |   |         |         | 16,676  | 
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Total current liabilities                       |                                                                                                                                                                                                            |                                     | 72,646  |              |         |             | 75,653  |              |         |   | 74,640  |        
|                                               
|                                               
|                                               
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                                                                            |                                     | 1,764   |              |         |             | 1,862   |              |         |   | 1,895   |        
|                                               
|                                               
|                                               
|                                               
|Minority interest                               |                                                                                                                                                                                                            |                                     | 2,720   |              |         |             | 827     |              |         |   | 519     |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Total liabilities                               |                                                                                                                                                                                                            |                                     | 77,130  |              |         |             | 78,342  |              |         |   | 77,054  |        
|                                               
|                                               
|                                               
|                                               
|Shareholders equity:                           |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, without par value;
5,000,000 shares authorized; no shares
issued or outstanding                                                                                                           |                                     |         |             |         |             |         |             |         |   |         |        |        
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, without par value; 95,000,000
shares authorized; 52,081,146, 51,818,508,
and 51,538,112 issued and outstanding at
September 30, 2002, December 31, 2001
and September 30, 2001, respectively |                                     |         | 1            |         |             |         | 1            |         |   |         | 1       |        
|                                               
|                                               
|                                               
|                                               
|                                                | Contributed capital                                                                                                                                                                                        |                                     |         | 198,821      |         |             |         | 193,584      |         |   |         | 188,757 |        
|                                               
|                                               
|                                               
|                                               
|                                                | Unearned compensation                                                                                                                                                                                      |                                     |         | (366         | )       |             |         | (477         | )       |   |         | (530    | )      
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                                                                                                                                                                                          |                                     |         | 243,821      |         |             |         | 206,888      |         |   |         | 188,719 |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Total shareholders equity                      |                                                                                                                                                                                                            |                                     | 442,277 |              |         |             | 399,996 |              |         |   | 376,947 |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        
|Total liabilities and shareholders equity      |                                                                                                                                                                                                            | $                                   | 519,407 |              |         | $           | 478,338 |              |         | $ | 454,001 |        
|                                                |                                                                                                                                                                                                            |                                     |         |              |         |             |         |              |         |   |         |        

See notes to consolidated financial statements

3



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##### Table of Contents






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

|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|-------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                               |  | Three Months Ended |         | Nine Months Ended
|                                                               |  | September 30       |         | September 30     
|                                                               |  |                    |         |                  
|                                                               |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                                                               |  |                    |         |                   |  |      |         |     
|Revenue                                                        |  | $                  | 114,486 |                   |  | $    | 122,376 |      |  | $ | 337,095 |  |  | $ | 349,297 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Operating expense                                              |  |                    | 81,498  |                   |  |      | 88,374  |      |  |   | 244,661 |  |  |   | 254,838 | 
|                                                              
|                                                              
|                                                              
|                                                              
|General and administrative expense                             |  |                    | 9,851   |                   |  |      | 5,457   |      |  |   | 18,535  |  |  |   | 18,115  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Depreciation and amortization                                  |  |                    | 5,012   |                   |  |      | 5,124   |      |  |   | 13,491  |  |  |   | 15,488  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Impairment, restructuring, and related expense                 |  |                    |        |                   |  |      |        |      |  |   | 1,650   |  |  |   | 6,250   | 
|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Operating profit                                               |  |                    | 18,125  |                   |  |      | 23,421  |      |  |   | 58,758  |  |  |   | 54,606  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Net interest income                                            |  |                    | 1,190   |                   |  |      | 1,477   |      |  |   | 3,294   |  |  |   | 5,590   | 
|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Income before provision for income taxes
and minority interest |  |                    | 19,315  |                   |  |      | 24,898  |      |  |   | 62,052  |  |  |   | 60,196  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Provision for income taxes                                     |  |                    | 5,949   |                   |  |      | 9,345   |      |  |   | 23,226  |  |  |   | 25,186  | 
|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Income before minority interest                                |  |                    | 13,366  |                   |  |      | 15,553  |      |  |   | 38,826  |  |  |   | 35,010  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Minority interest                                              |  |                    | 680     |                   |  |      | 519     |      |  |   | 1,893   |  |  |   | 519     | 
|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Net income                                                     |  | $                  | 12,686  |                   |  | $    | 15,034  |      |  | $ | 36,933  |  |  | $ | 34,491  | 
|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Basic income per common share                                  |  | $                  | 0.24    |                   |  | $    | 0.29    |      |  | $ | 0.71    |  |  | $ | 0.67    | 
|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Diluted income per common share                                |  | $                  | 0.24    |                   |  | $    | 0.29    |      |  | $ | 0.70    |  |  | $ | 0.66    | 
|                                                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

4



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##### Table of Contents






National Processing, Inc.
Consolidated Statement of Changes in Shareholders Equity
Unaudited
(In thousands, except share amounts)

|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------ | ---------- | ------ |  | ----------- | - | ------------ |  | -------- | ------- | ----- |  | - | ---- | - |  | - | ------- |  |  | - | ------- | 
|                                                                                              |  | Common |            | Common |  | Contributed |   | Unearned     |  | Retained |         |       |  |  
|                                                                                              |  | Shares |            | Stock  |  | Capital     |   | Compensation |  | Earnings |         | Total
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |      
|Balance at January 1, 2002                                                                    |  |        | 51,818,508 |        |  | $           | 1 |              |  | $        | 193,584 |       |  | $ | (477 | ) |  | $ | 206,888 |  |  | $ | 399,996 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net income                                                                                    |  |        |           |        |  |             |  |              |  |          |        |       |  |   |     |   |  |   | 36,933  |  |  |   | 36,933  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Issuance of common shares under stock-based
compensation plans, including related
tax effects |  |        | 262,638    |        |  |             |  |              |  |          | 5,237   |       |  |   | 111  |   |  |   |        |  |  |   | 5,348   | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 
|Balance at September 30, 2002                                                                 |  |        | 52,081,146 |        |  | $           | 1 |              |  | $        | 198,821 |       |  | $ | (366 | ) |  | $ | 243,821 |  |  | $ | 442,277 | 
|                                                                                              |  |        |            |        |  |             |   |              |  |          |         |       |  |   |      |   |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

5



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##### Table of Contents






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

|                                               |                                                               |                                                    |         |                   |        |      |         |         |        |  
|---------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------------- | ------- | ----------------- | ------ | ---- | ------- | ------- | ------ | -
|                                               |                                                               |                                                    |         | Nine Months Ended
|                                               |                                                               |                                                    |         | September 30     
|                                               |                                                               |                                                    |         |                  
|                                               |                                                               |                                                    |         | 2002              |        | 2001
|                                               |                                                               |                                                    |         |                   |        |     
|Operating Activities                           |                                                               |                                                    |         |                   |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Net income                                                    |                                                    | $       | 36,933            |        |      | $       | 34,491  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Items not requiring cash currently:                           |                                                    |         |                   |        |      |         |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Depreciation and amortization                      |         |                   | 13,491 |      |         |         | 15,488 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Restructuring, divestiture, and impairment charges |         |                   | 1,650  |      |         |         | 6,250  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Deferred income taxes                              |         |                   | 2,349  |      |         |         | (704   | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Loss on disposition of fixed assets                |         |                   | 309    |      |         |         | 34     |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Minority interest                                  |         |                   | 1,893  |      |         |         | 519    |  
|                                              
|                                              
|                                              
|                                              
|                                               | Change in current assets and liabilities:                     |                                                    |         |                   |        |      |         |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Accounts receivable  trade                        |         |                   | 66,983 |      |         |         | 30,145 |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Accounts payable  trade                           |         |                   | 2,007  |      |         |         | 2,460  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Accrued bankcard assessments                       |         |                   | (3,387 | )    |         |         | (1,931 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Income taxes payable                               |         |                   | 1,954  |      |         |         | 7,814  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Other current assets/liabilities                   |         |                   | (2,836 | )    |         |         | (4,086 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                               | Other, net                                         |         |                   | 306    |      |         |         | 31     |  
|                                               |                                                               |                                                    |         |                   |        |      |         |        
|                                               | Net cash provided by operating activities                     |                                                    |         | 121,652           |        |      |         | 90,511  |       
|                                              
|                                              
|                                              
|                                              
|Investing Activities                           |                                                               |                                                    |         |                   |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Capital expenditures                                          |                                                    |         | (13,582           | )      |      |         | (14,813 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Acquisitions, net of cash received                            |                                                    |         | (2,700            | )      |      |         | (48,500 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sale of fixed assets                            |                                                    |         |                  |        |      |         | 34      |       
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from maturities of Eurodollar deposits               |                                                    |         |                  |        |      |         | 56,000  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Common control business unit purchase                         |                                                    |         |                  |        |      |         | (44,000 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Net proceeds from sale of business lines                      |                                                    |         |                  |        |      |         | 43,000  |       
|                                               |                                                               |                                                    |         |                   |        |      |         |        
|                                               | Net cash used in investing activities                         |                                                    |         | (16,282           | )      |      |         | (8,279  | )     
|                                              
|                                              
|                                              
|                                              
|Financing Activities                           |                                                               |                                                    |         |                   |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments under property leased from affiliate       |                                                    |         | (98               | )      |      |         | (98     | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Issuance of common stock under stock-based compensation plans |                                                    |         | 3,019             |        |      |         | 5,603   |       
|                                               |                                                               |                                                    |         |                   |        |      |         |        
|                                               | Net cash provided by financing activities                     |                                                    |         | 2,921             |        |      |         | 5,505   |       
|                                               |                                                               |                                                    |         |                   |        |      |         |        
|Net increase in cash and cash equivalents      |                                                               |                                                    | 108,291 |                   |        |      | 87,737  |        
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                               |                                                    | 101,257 |                   |        |      | 58,107  |        
|                                               |                                                               |                                                    |         |                   |        |      |         |        
|Cash and cash equivalents, end of period       |                                                               | $                                                  | 209,548 |                   |        | $    | 145,844 |        
|                                               |                                                               |                                                    |         |                   |        |      |         |        
|Supplemental cash flow information:            |                                                               |                                                    |         |                   |        |      |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Taxes paid                                                    |                                                    | $       | 19,144            |        |      | $       | 17,718  |       

See notes to consolidated financial statements

6



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##### Table of Contents






NATIONAL PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited



|1. |  | ORGANIZATION AND BUSINESS
|-- |  | -------------------------
|  
|   |  | Organization             



| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | National Processing, Inc. and its subsidiaries (the Company) are
providers of electronic payment processing headquartered in Louisville,
Kentucky. The Company is 85% owned by National City Corporation
(National City), a financial holding company headquartered in Cleveland,
Ohio.



| |  | 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. Merchant Card Services represents approximately 95% of the
Companys revenue.                                                                                                                                                                                                                                                                                                                                                                   
|
| | 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)
business, 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 represents approximately 5% of
the Companys revenue.



| |  | Sponsorship Agreement
| |  | ---------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company and National City subsidiary banks are parties to a
sponsorship agreement (the Sponsorship Agreement) whereby the Company
acts as National City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. National City Bank of Kentucky (NCBK), a
wholly owned subsidiary of National City, is a member of such associations
and acts as the Companys primary sponsor.



| |  | Visa Guarantee
| |  | --------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has 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® member attendant to NCBKs
membership in Visa®, and
Visas expenses incurred in payment of such obligations on NCBKs
behalf or otherwise because of NCBKs failure to meet such obligations.
The Company does not believe it is practical to estimate the fair value of
the guarantee.

7



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##### Table of Contents





|   |  | The amount guaranteed exceeds the amount of the Companys
equity, however, the Company believes its exposure to loss under the
guarantee is unlikely. National Processing processes all transactions
received from Visa® by NCBK under the exclusive terms of the Sponsorship
Agreement.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                              



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the accounts of
National Processing, Inc. and its subsidiaries. On June 28, 2001, the
Company acquired a 70% ownership interest in ABN AMRO Merchant Services,
LLC (AAMS) from ABN AMRO North America, Inc. and its subsidiaries
(AANA) (see Note 4). Since the date of its acquisition, the results of
operations of AAMS have been included in the consolidated financial
statements and AANAs 30% ownership interest has been accounted for as a
minority interest. All significant intercompany transactions and balances
have been eliminated. The accounting and reporting policies of the
Company conform with accounting principles generally accepted in the
United States.
|
| | Financial statements prepared in accordance with accounting
principles generally accepted in the United States require the use of
estimates and assumptions by management that affect the reported amounts
of revenue and expenses, assets and liabilities, and the disclosure
requirements for contingent assets and liabilities during and at the date
of the financial statements. Consequently, actual results could differ
from those estimates.                                                                                                                                                                                                                                                                                  
|
| | For the interim periods presented, management believes the unaudited
consolidated financial statements reflect all adjustments of a normal
recurring nature and disclosures which are necessary for a fair
presentation of the results for the interim periods presented. The
results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year or any
other interim period.                                                                                                                                                                                                                                                                                          
|
| | The Company experiences seasonality in its 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.                                                                                                                                                                                                                                                                                                                                                  
|
| | Although the consolidated balance sheet at December 31, 2001 has been
derived from the audited consolidated financial statements at that date,
the accompanying interim consolidated financial statements do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States. These interim financial
statements should be read in conjunction with the Companys 2001 Annual
Report on Form 10-K.                                                                                                                                                                                                                                                                          
|
| | The Company recognizes revenue as services are performed, recording
revenue net of certain costs not controlled by the Company, primarily
interchange and debit network fees. Interchange and debit network fees
for the three months ended September 30, 2002 and 2001 were $608.8 million
and $573.9 million, respectively. For the nine months ended September 30,
2002 and 2001, interchange and debit network fees were $1.8 billion and
$1.6 billion, respectively.                                                                                                                                                                                                                                                              
|
| | The Company records assessments charged by credit card associations
as expense as the Company is the primary obligor of these costs.
Assessment expense for the three months ended
September 30, 2002 and 2001 was $33.7 million and $31.9 million,
respectively. For the nine months ended September 30, 2002 and 2001,
assessment expense was $99.1 million and $89.8 million, respectively.                                                                                                                                                                                                                                                                                                                                         

8



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##### Table of Contents





| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Certain 2001 amounts have been reclassified to conform with the 2002
presentation.



|3. |  | RECENT ACCOUNTING PRONOUNCEMENTS    
|-- |  | ------------------------------------
|  
|   |  | Goodwill and Other Intangible Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In September 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,
are no longer amortized into net income over an estimated life but rather
are tested at least annually for impairment based on specific guidance
provided in the new standard. Intangible assets determined to have finite
lives 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 loss 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 SFAS 142 had been adopted effective January 1, 2001, goodwill
amortization expense, which is primarily nondeductible for income tax
purposes, would have been reduced by $0.8 million and $1.9 million for the
three and nine months ended September 30, 2001, respectively. For the
three months ended September 30, 2001, proforma net income would have been
$15.7 million, or $0.30 per diluted share, versus reported net income of
$15.0 million, or $0.29 per diluted share. For the nine months ended
September 30, 2001, proforma net income would have been $36.2 million,
$0.70 per diluted share, versus reported net income of $34.5 million, or
$0.66 per diluted share.                                                                                                                                                               
|
| | The Companys amortizable intangible assets as of September 30, 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 the quarter and nine months ended
September 30, 2002 was $1.8 million and $5.1 million, respectively.
The estimated annual amortization expense for existing intangible assets
for 2002 and each of the next five years is as follows: 2002  $6.8
million; 2003  $7.0 million; 2004  $6.6 million; 2005, 2006 and 2007 -
$4.7 million.                                                                                                                                                                                                                                                         
|
| | In general, application of the new provisions may result in more
income statement volatility due to potential periodic recognition of
impairment losses, which are likely to vary in amount and frequency, 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

9



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##### Table of Contents





| |  | 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 require 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 have not had a material impact on the
Companys results of operations, financial position, or liquidity.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Accounting for Exit or Disposal Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in June 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 a 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 January 1, 2003 and are not anticipated to have
a material impact on the Companys results of operations, financial
position, or liquidity.



|4. |  | ACQUISITIONS
|-- |  | ------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 3, 2002, the Company acquired processing contracts from a key
strategic partner for $2.7 million in cash and was recorded as an
intangible asset. 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. Under the terms of the agreement, the Company will provide
front-end authorization services for approximately 50,000 merchant
locations. Prior to the acquisition, the Company was already
providing settlement services for these merchants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | On June 28, 2001, the Company acquired a 70% ownership interest in
AAMS from AANA for $48.5 million in cash. Under the terms of the
agreement, the Company provides AAMS with all merchant-processing services
including both authorization and settlement of all card-based
transactions. The acquisition, accounted for as a purchase, increased the
Companys goodwill by approximately $27.0 million. The remainder of the
purchase price was allocated to other identifiable intangibles, primarily
acquired merchant contracts, which are being amortized on a straight-line
basis over 10 years. Since the date of its acquisition, the results of
operations of AAMS have been included in the consolidated financial
statements and AANAs 30% ownership interest has been accounted for as a
minority interest. Incremental revenue and operating profit as a result
of this acquisition were $18.9 million and $3.0 million, respectively, for
the six months ended June 30, 2002. Revenue and operating profit
as a result of this acquisition were $27.7 million and $4.8 million, respectively, for the nine months ended September 30, 2002.
|
| | On January 8, 2001, the Company purchased the merchant services
business units from several of
National Citys banking subsidiaries for $44.0 million in cash. This
acquisition included merchant contracts and additional sales personnel.
The Company also assumed responsibility for all merchant processing sales
efforts throughout National Citys subsidiary banks 1,200 branch network
via an                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

10



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | exclusive multi-year marketing agreement. The Company had
previously provided the authorization and settlement processing for these
merchants via a third party processing contract with National Citys
subsidiary banks. The acquisition was accounted for as a transaction
among entities under common control and was recorded at National Citys
historical cost bases. The excess of the cash paid over the historical
cost bases was recorded as a reduction in shareholders equity, net of
income taxes of $15.4 million. The results of operations of the National
City merchant services business units have been included in the
consolidated financial statements since the date of acquisition.



|5. |  | 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 three and nine months ended
September 30, 2001, the divested and discontinued business units had
revenue of $9.8 million and $41.2 million, respectively. Operating profit
(loss) for the divested and discontinued business units, which includes a
$6.3 million impairment charge taken in the second quarter of 2001, was
$1.2 million and $(2.7) million, respectively, for the quarter and nine
months ended September 30, 2001.



|6. |  | IMPAIRMENT, RESTRUCTURING AND UNUSUAL ITEMS
|-- |  | -------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2002, the Company announced 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 tax provisions required for
nondeductible losses and dividends from foreign subsidiaries. As of
September 30, 2002, the Company had $0.4 million remaining in accrued
liabilities for future obligations related to this closure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 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. This net charge consisted of a second quarter
pre-tax charge of $6.3 million ($6.2 million after-tax, or $0.12 per
share), which was partially offset by net positive pre-tax adjustment of
$2.4 million ($1.5 million after-tax, or $0.03 per diluted share) in the
fourth quarter. The second quarter charge was for the estimated loss for
the sale of the BPO business. The net fourth quarter gain represented a
$3.0 million pre-tax ($1.9 million after-tax, or $0.04 per diluted share)
adjustment to the second quarter charge due to changes in estimates for
legal and other post-closing matters, partially offset by a $0.6 million
pre-tax ($0.4 million after-tax, or $0.01 per diluted share) severance
charge related to organizational restructuring actions taken to reduce
support costs associated with the BPO unit. As of September 30, 2002, the
Company had $0.8 million remaining in accrued liabilities related to the
final obligations associated with the BPO divestiture.
|
| | In September 2002, the Company recorded a $3.4 million ($2.0 million
after-tax, or $0.04 per diluted share) charge related to a separation
agreement with the former CEO. This amount was                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

11



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|   |  | included in general and
administrative expense in the accompanying financial statements.
|-- |  | ----------------------------------------------------------------------------------------
|  
|7. |  | COMMITMENTS AND CONTINGENCIES                                                           
|  
|   |  | Chargebacks                                                                             



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the rules of Visa® and MasterCard®, when a merchant processor
acquires card transactions, it has certain contingent liabilities for the
transactions processed. This contingent liability arises in the event of
a billing dispute between the merchant and a cardholder that is not
ultimately resolved in the merchants favor. In such a case, the
transaction is charged back to the merchant and the disputed amount is
credited or otherwise refunded to the cardholder. If the Company is
unable to collect this amount from the merchants account, and if the
merchant refuses or is unable to reimburse the Company for the chargeback
due to liquidation or other reasons, the Company will bear the loss for
the amount of the refund paid to the cardholder. In most cases, this
contingent liability situation is unlikely to arise because most products
or services are delivered when purchased, and credits are issued on
returned items. However, where the product or service is not provided
until some later time following the purchase, the contingent liability
could be more likely.
|
| | The Company currently processes card transactions for several of the
largest airlines in the United States. Airline customers represented
approximately 9% of the Companys consolidated revenue (6% from Merchant
Card Services and 3% from Payment Services) for the nine months ended
September 30, 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. In the near term,
management believes liquidations are unlikely for any of the Companys
airline customers given the 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
eighteen months (through May 2003) for other airlines that may suspend,
interrupt or discontinue services due to insolvency or liquidation.                                                                                                         
|
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | One of the Companys airline customers is US Airways Group, Inc. US
Airways Group, Inc. has filed for bankruptcy court protection under
Chapter 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Based upon information currently available to the Company and actions
management has taken to mitigate these risks, management currently
believes a material loss under the chargeback rules is unlikely.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



| |  | Litigation
| |  | ----------



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

12



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|8. |  | NET INCOME PER COMMON SHARE
|-- |  | ---------------------------



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

|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |        | 
|------- | ------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|        |                                             |  | Three Months Ended September 30 |        | Nine Months Ended September 30
|        |                                             |  |                                 |        |                               
|        |                                             |  | 2002                            |        | 2001                           |  | 2002 |        | 2001
|        |                                             |  |                                 |        |                                |  |      |        |     
|BASIC   |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|       
|       
|       
|       
|        | Net income                                  |  | $                               | 12,686 |                                |  | $    | 15,034 |      |  | $ | 36,933 |  |  | $ | 34,491 | 
|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|        | Average common shares outstanding           |  |                                 | 52,073 |                                |  |      | 51,419 |      |  |   | 51,982 |  |  |   | 51,233 | 
|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|        | Net income per common share  basic         |  | $                               | 0.24   |                                |  | $    | 0.29   |      |  | $ | 0.71   |  |  | $ | 0.67   | 
|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|DILUTED |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|       
|       
|       
|       
|        | Net income                                  |  | $                               | 12,686 |                                |  | $    | 15,034 |      |  | $ | 36,933 |  |  | $ | 34,491 | 
|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|        | Average common shares outstanding           |  |                                 | 52,073 |                                |  |      | 51,419 |      |  |   | 51,982 |  |  |   | 51,233 | 
|       
|       
|       
|       
|        | Dilutive effect of stock options            |  |                                 | 430    |                                |  |      | 985    |      |  |   | 544    |  |  |   | 706    | 
|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|        | Average common shares outstanding 
diluted |  |                                 | 52,503 |                                |  |      | 52,404 |      |  |   | 52,526 |  |  |   | 51,939 | 
|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       
|        | Net income per common share  diluted       |  | $                               | 0.24   |                                |  | $    | 0.29   |      |  | $ | 0.70   |  |  | $ | 0.66   | 
|        |                                             |  |                                 |        |                                |  |      |        |      |  |   |        |  |  |   |       



|9. |  | TRANSACTIONS WITH AFFILIATES
|-- |  | ----------------------------



| |                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company leases certain facilities from NCBK, a wholly owned
subsidiary of National City, under long-term agreements classified as
Property Leased from Affiliate in the accompanying consolidated balance
sheets. The Company has paid $0.1 million, including interest, under this
lease for the nine months ended September 30, 2002.



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Substantially all of the Companys cash and cash equivalents are held
at NCBK and other National City subsidiaries. The majority of the
interest income and earnings on customer balances included in the
consolidated statements of income are derived from accounts held at NCBK
and other National City subsidiaries.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company receives certain administrative services, such as
internal audit and legal services, from National City and its affiliates.
The Company also utilizes NCBK and other National City subsidiaries for
the majority of its banking services. Charges for these services are
included in general and administrative expenses and totaled $0.5 million
and $1.5 million for the quarter and nine months ended September 30, 2002.
For the quarter and nine months ended September 30, 2001, charges for
these services totaled $0.4 million and $1.2 million, respectively. As of
September 30, 2002, December 31, 2001 and September 30, 2001, no amounts
were due to or from National City.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 8, 2001, the Company acquired the merchant services
business units from several National City banking subsidiaries for $44.0
million, which was paid in cash at closing (see Note 4).



|10. |  | SEGMENT REPORTING
|--- |  | -----------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Payment Services provides financial settlement and
reporting solutions to large and mid-size corporate customers in the
travel and healthcare industries.

13



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reportable segments are identified by the services they offer.
General and administrative expenses are generally allocated to the
segments based upon various methods determined by the nature of the
expenses. There is no intersegment revenue. Depreciation expense for
corporate fixed assets is allocated to the reportable segments. Corporate
assets are comprised primarily of cash and cash equivalents, income tax
balances, and fixed assets used by these segments or by support service
areas. The accounting policies of the reportable segments are the same as
those of the Company. Prior period amounts have been classified to
conform to the current line of business reporting structure.

14



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##### Table of Contents



|                                               |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|---------------------------------------------- |  | ------------- | ------- | ----------- |  | ------------- | ------ | ----- |  | ------------ | ------- | - |  | - | ------- | 
|                                               |  | Merchant      |         | Payment     |  |               |        |       |  | Consolidated
|                                               |  | Card Services |         | Services(1) |  | Corporate (2) |        | Total
|                                               |  |               |         |             |  |               |        |      
|For the three months ended September 30, 2002  |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 109,738 |             |  | $             | 4,748  |       |  | $            |        |   |  | $ | 114,486 | 
|                                              
|                                              
|                                              
|                                              
|Operating profit                               |  |               | 20,165  |             |  |               | 1,349  |       |  |              | (3,389  | ) |  |   | 18,125  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 4,549   |             |  |               | 463    |       |  |              |        |   |  |   | 5,012   | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 1,105   |             |  |               | 85     |       |  |              |        |   |  |   | 1,190   | 
|                                              
|                                              
|                                              
|                                              
|For the three months ended September 30, 2001  |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 105,551 |             |  | $             | 16,825 |       |  | $            |        |   |  | $ | 122,376 | 
|                                              
|                                              
|                                              
|                                              
|Operating profit                               |  |               | 20,964  |             |  |               | 2,457  |       |  |              |        |   |  |   | 23,421  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 4,405   |             |  |               | 719    |       |  |              |        |   |  |   | 5,124   | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 1,324   |             |  |               | 153    |       |  |              |        |   |  |   | 1,477   | 
|                                              
|                                              
|                                              
|                                              
|For the nine months ended September 30, 2002   |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 321,973 |             |  | $             | 15,122 |       |  | $            |        |   |  | $ | 337,095 | 
|                                              
|                                              
|                                              
|                                              
|Impairment, restructuring, and related expense |  |               | 1,650   |             |  |               |       |       |  |              |        |   |  |   | 1,650   | 
|                                              
|                                              
|                                              
|                                              
|Operating profit                               |  |               | 56,761  |             |  |               | 5,386  |       |  |              | (3,389  | ) |  |   | 58,758  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 12,146  |             |  |               | 1,345  |       |  |              |        |   |  |   | 13,491  | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 2,989   |             |  |               | 305    |       |  |              |        |   |  |   | 3,294   | 
|                                              
|                                              
|                                              
|                                              
|For the nine months ended September 30, 2001   |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Revenue                                        |  | $             | 286,255 |             |  | $             | 63,042 |       |  | $            |        |   |  | $ | 349,297 | 
|                                              
|                                              
|                                              
|                                              
|Impairment, restructuring and related expense  |  |               |        |             |  |               | 6,250  |       |  |              |        |   |  |   | 6,250   | 
|                                              
|                                              
|                                              
|                                              
|Operating profit                               |  |               | 53,213  |             |  |               | 1,393  |       |  |              |        |   |  |   | 54,606  | 
|                                              
|                                              
|                                              
|                                              
|Depreciation and amortization                  |  |               | 11,424  |             |  |               | 4,064  |       |  |              |        |   |  |   | 15,488  | 
|                                              
|                                              
|                                              
|                                              
|Net interest income                            |  |               | 4,805   |             |  |               | 785    |       |  |              |        |   |  |   | 5,590   | 
|                                              
|                                              
|                                              
|                                              
|As of September 30, 2002                       |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Goodwill                                       |  | $             | 91,227  |             |  | $             |       |       |  | $            |        |   |  | $ | 91,227  | 
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |               | 251,265 |             |  |               | 4,063  |       |  |              | 264,079 |   |  |   | 519,407 | 
|                                              
|                                              
|                                              
|                                              
|As of December 31, 2001                        |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Goodwill                                       |  | $             | 91,227  |             |  | $             |       |       |  | $            |        |   |  | $ | 91,227  | 
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |               | 326,409 |             |  |               | 6,383  |       |  |              | 145,546 |   |  |   | 478,338 | 
|                                              
|                                              
|                                              
|                                              
|As of September 30, 2001                       |  |               |         |             |  |               |        |       |  |              |         |   |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Goodwill                                       |  | $             | 92,021  |             |  | $             |       |       |  | $            |        |   |  | $ | 92,021  | 
|                                              
|                                              
|                                              
|                                              
|Total assets                                   |  |               | 253,354 |             |  |               | 6,133  |       |  |              | 194,514 |   |  |   | 454,001 | 



---

|(1) |  | Payment Services was formerly a component of the Companys
Corporate Outsourcing Solutions segment. This segment was renamed
Payment Services after the sale of the BPO business unit in August
2001. The Payment Services segment disclosures for 2001 include the
results of divested and discontinued business units formerly
classified as part of the Corporate Outsourcing Solutions segment.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The quarter and nine months ended September 30, 2002 include a
$3,389 charge related to a separation agreement with the former CEO.
This expense was not allocated to the business segments.                                                                                                                                                                                                       

15



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##### Table of Contents






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

The following should be read in conjunction with the Companys 2001 Annual
Report on Form 10-K, 2002 Quarterly Reports on Form 10-Q and other 2002 filings
with the Securities and Exchange Commission.

Critical Accounting Policies

General

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 of the use of estimates, assumptions, and
judgments and as such have greater possibility of producing results that could
be materially different than originally reported.

Income Taxes

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 September 30, 2002, the Company has 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

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 $54.3
million as of September 30, 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.
Alternatively, assets may

16



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##### Table of Contents



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 it is probable 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.

Goodwill and other intangible assets, net of accumulated amortization,
totaled $134.5 million as of September 30, 2002, which represented 26% 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 makes 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.

Contingencies

The Company records reserves for 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 7 to the Consolidated Financial
Statements.)

17



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##### Table of Contents



Components of Revenue and Expense

Revenue

Approximately 95% of Merchant Card Services revenue is derived from
processing contracts with merchants for the 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. Interchange and debit network fees for the three months ended
September 30, 2002 and 2001 were $608.8 million and $573.9 million,
respectively. For the nine months ended September 30, 2002 and 2001,
interchange and debit network fees were $1.8 billion and $1.6 billion,
respectively. The increase in interchange and debit network fees for the three
and nine months ended September 30, 2002 over comparable 2001 periods 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 small portion of total consolidated revenue is derived from earnings on
customer cash balances, which are maintained by National City pursuant to
contractual terms. For the three months ended September 30, 2002 and 2001,
earnings on customer balances were $1.0 million and $2.1 million, respectively.
For the nine months ended September 30, 2002 and 2001, earnings on customer
balances were $3.0 million and $6.5 million, respectively.

Expense

Assessment expense is the largest component of operating expense. For the
three months ended September 30, 2002 and 2001, assessment expense was $33.7
million and $31.9 million, respectively. Assessment expense for the nine
months ended September 30, 2002 and 2001 was $99.1 million and $89.8 million,
respectively. The increase in assessment expense for the three and nine months
ended September 30, 2002 over comparable 2001 periods 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 exited certain business units
during 2001 in order to focus on its core business of electronic payment
settlement. Accordingly, the segment results presented below segregate the
operating

18



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##### Table of Contents



performance for the remaining core business lines from those that were exited.
Certain prior year amounts have been reclassified to conform with the 2002
presentation.

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

|                                          |  |          |         |            |  |          |     |            |  |              |       |              |  |             |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|----------------------------------------- |  | -------- | ------- | ---------- |  | -------- | --- | ---------- |  | ------------ | ----- | ------------ |  | ----------- | --- | - |  | - | - |  |  | - | ------ | - |  | - | ------- | 
|(Dollars in thousands)                    |  |          |         |            |  | %        |     |            |  |              |       | %            |  |             |     |   |  |   |   |  |  |   |        |  
|                                          |  | Merchant |         | Change     |  |          |     |            |  | Change       |       | Divested and |  | Unallocated |     |   |  |  
|                                          |  | Card     |         | Over       |  | Payment  |     | Over       |  | Discontinued |       | Corporate    |  |             |     |  
|2002                                      |  | Services |         | Prior Year |  | Services |     | Prior Year |  | Businesses   |       | Items        |  | Total      
|                                          |  |          |         |            |  |          |     |            |  |              |       |              |  |            
|Revenue                                   |  | $        | 109,738 |            |  |          | 4   |            |  | $            | 4,748 |              |  |             | (33 | ) |  | $ |  |  |  | $ |       |   |  | $ | 114,486 | 
|                                         
|                                         
|                                         
|                                         
|Operating expense                         |  |          | 79,203  |            |  |          | 3   |            |  |              | 2,295 |              |  |             | (52 | ) |  |   |  |  |  |   |       |   |  |   | 81,498  | 
|                                         
|                                         
|                                         
|                                         
|General and administrative expense        |  |          | 5,821   |            |  |          | 59  |            |  |              | 641   |              |  |             | 37  |   |  |   |  |  |  |   | 3,389  |   |  |   | 9,851   | 
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 4,549   |            |  |          | 3   |            |  |              | 463   |              |  |             | (17 | ) |  |   |  |  |  |   |       |   |  |   | 5,012   | 
|                                          |  |          |         |            |  |          |     |            |  |              |       |              |  |             |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Operating profit                          |  |          | 20,165  |            |  |          | (4  | )          |  |              | 1,349 |              |  |             | 6   |   |  |   |  |  |  |   | (3,389 | ) |  |   | 18,125  | 
|                                         
|                                         
|                                         
|                                         
|Net interest income                       |  |          | 1,105   |            |  |          | (17 | )          |  |              | 85    |              |  |             | (3  | ) |  |   |  |  |  |   |       |   |  |   | 1,190   | 
|                                          |  |          |         |            |  |          |     |            |  |              |       |              |  |             |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Income before taxes and minority interest |  |          | 21,270  |            |  |          | (5  | )          |  |              | 1,434 |              |  |             | 5   |   |  |   |  |  |  |   | (3,389 | ) |  |   | 19,315  | 
|                                         
|                                         
|                                         
|                                         
|Provision for income taxes                |  |          | 6,967   |            |  |          | (17 | )          |  |              | 338   |              |  |             | (14 | ) |  |   |  |  |  |   | (1,356 | ) |  |   | 5,949   | 
|                                          |  |          |         |            |  |          |     |            |  |              |       |              |  |             |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Income before minority interest           |  |          | 14,303  |            |  |          | 3   |            |  |              | 1,096 |              |  |             | 13  |   |  |   |  |  |  |   | (2,033 | ) |  |   | 13,366  | 
|                                         
|                                         
|                                         
|                                         
|Minority interest                         |  |          | 680     |            |  |          | 31  |            |  |              |      |              |  |             |     |   |  |   |  |  |  |   |       |   |  |   | 680     | 
|                                          |  |          |         |            |  |          |     |            |  |              |       |              |  |             |     |   |  |   |   |  |  |   |        |   |  |   |         | 
|Net income                                |  | $        | 13,623  |            |  |          | 2   |            |  | $            | 1,096 |              |  |             | 13  |   |  | $ |  |  |  | $ | (2,033 | ) |  | $ | 12,686  | 
|                                          |  |          |         |            |  |          |     |            |  |              |       |              |  |             |     |   |  |   |   |  |  |   |        |   |  |   |         | 

|                                          |  |          |         |  |  |  |  |          |       |   |       |  |  |              |       |              |  |             |       |  |  |   |         |  |  |   |        | 
|----------------------------------------- |  | -------- | ------- |  |  |  |  | -------- | ----- | - | ----- |  |  | ------------ | ----- | ------------ |  | ----------- | ----- |  |  | - | ------- |  |  | - | ------ | 
|                                          |  | Merchant |         |  |  |  |  |          |       |   |       |  |  |              |       | Divested and |  | Unallocated |       |  |  |  
|                                          |  | Card     |         |  |  |  |  | Payment  |       |   |       |  |  | Discontinued |       | Corporate    |  |             |       | 
|2001                                      |  | Services |         |  |  |  |  | Services |       |   |       |  |  | Businesses   |       | Items        |  | Total      
|                                          |  |          |         |  |  |  |  |          |       |   |       |  |  |              |       |              |  |            
|Revenue                                   |  | $        | 105,551 |  |  |  |  | $        | 7,068 |   |       |  |  | $            | 9,757 |              |  | $           |      |  |  | $ | 122,376 | 
|                                         
|                                         
|                                         
|                                         
|Operating expense                         |  |          | 76,526  |  |  |  |  |          |       |   | 4,762 |  |  |              |       |              |  |             | 7,086 |  |  |   |        |  |  |   | 88,374 | 
|                                         
|                                         
|                                         
|                                         
|General and administrative expense        |  |          | 3,656   |  |  |  |  |          |       |   | 468   |  |  |              |       |              |  |             | 1,333 |  |  |   |        |  |  |   | 5,457  | 
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |          | 4,405   |  |  |  |  |          |       |   | 560   |  |  |              |       |              |  |             | 159   |  |  |   |        |  |  |   | 5,124  | 
|                                          |  |          |         |  |  |  |  |          |       |   |       |  |  |              |       |              |  |             |       |  |  |   |         |  |  |   |        | 
|Operating profit                          |  |          | 20,964  |  |  |  |  |          |       |   | 1,278 |  |  |              |       |              |  |             | 1,179 |  |  |   |        |  |  |   | 23,421 | 
|                                         
|                                         
|                                         
|                                         
|Net interest income                       |  |          | 1,324   |  |  |  |  |          |       |   | 88    |  |  |              |       |              |  |             | 65    |  |  |   |        |  |  |   | 1,477  | 
|                                          |  |          |         |  |  |  |  |          |       |   |       |  |  |              |       |              |  |             |       |  |  |   |         |  |  |   |        | 
|Income before taxes and minority interest |  |          | 22,288  |  |  |  |  |          |       |   | 1,366 |  |  |              |       |              |  |             | 1,244 |  |  |   |        |  |  |   | 24,898 | 
|                                         
|                                         
|                                         
|                                         
|Provision for income taxes                |  |          | 8,407   |  |  |  |  |          |       |   | 393   |  |  |              |       |              |  |             | 545   |  |  |   |        |  |  |   | 9,345  | 
|                                          |  |          |         |  |  |  |  |          |       |   |       |  |  |              |       |              |  |             |       |  |  |   |         |  |  |   |        | 
|Income before minority interest           |  |          | 13,881  |  |  |  |  |          |       |   | 973   |  |  |              |       |              |  |             | 699   |  |  |   |        |  |  |   | 15,553 | 
|                                         
|                                         
|                                         
|                                         
|Minority interest                         |  |          | 519     |  |  |  |  |          |       |   |      |  |  |              |       |              |  |             |      |  |  |   |        |  |  |   | 519    | 
|                                          |  |          |         |  |  |  |  |          |       |   |       |  |  |              |       |              |  |             |       |  |  |   |         |  |  |   |        | 
|Net income                                |  | $        | 13,362  |  |  |  |  |          |       | $ | 973   |  |  |              |       |              |  | $           | 699   |  |  | $ |        |  |  | $ | 15,034 | 
|                                          |  |          |         |  |  |  |  |          |       |   |       |  |  |              |       |              |  |             |       |  |  |   |         |  |  |   |        | 

Merchant Card Services

Revenue for the three months ended September 30, 2002 increased 4% to
$109.7 million from $105.6 million in 2001. Organic revenue growth, which
excludes the impact of acquisitions, was 2% for the three months ended
September 30, 2002.

Transaction volume processed for the three months ended September 30, 2002
increased 9% to 974 million from 897 million in 2001. Dollar volume processed
for the three months ended September 30, 2002 increased 6% to $41.9 billion
from $39.6 billion in 2001. Organic transaction and dollar volume, which
excludes the impact of acquisitions, also increased 9% and 6%, respectively,
for the 2002 third quarter. The volume increases were primarily due to growth
in existing national customers, addition of new regional merchants and
continued expansion in new markets.

Operating expense for the three months ended September 30, 2002 increased
3% to $79.2 million from $76.5 million in 2001 due to increased processing
volume, offset partially by expense reductions achieved in third-party
processing contracts.

General and administrative expense increased 59% to $5.8 million for the
three months ended September 30, 2002 from $3.7 million in 2001 primarily due
to changes in estimates for certain non-income
related taxes.

19



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##### Table of Contents



Depreciation and amortization increased 3% to $4.5 million for the three
months ended
September 30, 2002 from $4.4 million in 2001 due to additional
depreciation from the capitalization of a new web-based merchant accounting and
reporting system and the addition of a new data center in Lansing, Michigan.
These increases were partially offset by the non-amoritization of goodwill.
The three months ended September 30, 2001 included $0.8 million of goodwill
amortization expense that did not recur in 2002 due to the adoption of a new
accounting standard (see Recent Accounting Pronouncements).

On June 28, 2001, the Company acquired 70% interest in AAMS. For the
three months ended September 30, 2002, minority interest increased 31% to $0.7
million from $0.5 million in the third quarter of 2001 due to higher AAMS
profits.

Payment Services

Revenue for the three months ended September 30, 2002 decreased 33% to
$4.7 million from $7.1 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 expense for the three months ended September 30, 2002 decreased
52% to $2.3 million from $4.8 million in 2001 due primarily to decreased
paper-based transactions and related staff reductions.

General and administrative expense for the three months ended September
30, 2002 was relatively flat increasing slightly to $0.6 million from $0.5
million in 2001.

Depreciation and amortization decreased 17% to $0.5 million from $0.6
million due to consolidation of the Airlines Reporting Corporation contract
into a single operating facility. The work previously performed in Juarez,
Mexico was relocated to Louisville, Kentucky in the fourth quarter of 2001.

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 three months ended September 30, 2001, these business units had revenue
of $9.8 million. Operating profit for the divested and discontinued business
units was $1.2 million for the quarter ended September 30, 2001.

Unallocated Corporate Items

In September 2002, the Company recorded a $3.4 million ($2.0 million
after-tax, or $0.04 per diluted share) charge related to a separation agreement
with the former CEO.

20



---



##### Table of Contents



Net Interest Income

Net interest income earned on the Companys cash and cash equivalents for
the three months ended September 30, 2002, was $1.2 million, down 19% from $1.5
million in the 2001 third quarter due to lower average interest rates in 2002.

Provision for Income Taxes

The overall effective tax rate for the third quarter of 2002 was 30.8%
compared to 37.5% for the same quarter a year ago. The decrease in the
effective tax rate was principally due to the realization of $1.0 million of
foreign tax credits in 2002, which had not previously been recognized due to
uncertainty.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

|                                              |  |          |         |             |  |          |     |             |   |              |        |              |  |             |     |   |   |   |   |  |   |   |        |   |       |   |         | 
|--------------------------------------------- |  | -------- | ------- | ----------- |  | -------- | --- | ----------- | - | ------------ | ------ | ------------ |  | ----------- | --- | - | - | - | - |  | - | - | ------ | - | ----- | - | ------- | 
|(Dollars in thousands)                        |  |          |         |             |  |          |     |             |   |              |        |              |  |             |     |   |   |   |   |  |   |   |        |   |       |   |         | 
|                                              |  | Merchant |         | %           |  |          |     |             |   | %            |        | Divested and |  | Unallocated |     |   |   |  
|                                              |  | Card     |         | Change Over |  | Payment  |     | Change Over |   | Discontinued |        | Corporate    |  |             |     |  
|2002                                          |  | Services |         | Prior Year  |  | Services |     | Prior Year  |   | Businesses   |        | Items        |  | Total      
|                                              |  |          |         |             |  |          |     |             |   |              |        |              |  |            
|Revenue                                       |  | $        | 321,973 |             |  |          | 12  |             |   | $            | 15,122 |              |  |             | (31 | ) |   | $ |  |  |   | $ |       |   |       | $ | 337,095 | 
|                                             
|                                             
|                                             
|                                             
|Operating expense                             |  |          | 237,651 |             |  |          | 13  |             |   |              | 7,010  |              |  |             | (51 | ) |   |   |  |  |   |   |       |   |       |   | 244,661 | 
|                                             
|                                             
|                                             
|                                             
|General and administrative expense            |  |          | 13,765  |             |  |          | 21  |             |   |              | 1,381  |              |  |             | (18 | ) |   |   |  |  |   |   | 3,389  |   |       |   | 18,535  | 
|                                             
|                                             
|                                             
|                                             
|Depreciation and amortization                 |  |          | 12,146  |             |  |          | 6   |             |   |              | 1,345  |              |  |             | (22 | ) |   |   |  |  |   |   |       |   |       |   | 13,491  | 
|                                             
|                                             
|                                             
|                                             
|Impairment, restructuring and related
expense |  |          | 1,650   |             |  | NM       |     |             |  |              |        |              |  |             |     |   |  |   |   |  |  |   |        |   | 1,650 |  
|                                              |  |          |         |             |  |          |     |             |   |              |        |              |  |             |     |   |   |   |   |  |   |   |        |   |       |   |         | 
|Operating profit                              |  |          | 56,761  |             |  |          | 7   |             |   |              | 5,386  |              |  |             | 33  |   |   |   |  |  |   |   | (3,389 | ) |       |   | 58,758  | 
|                                             
|                                             
|                                             
|                                             
|Net interest income                           |  |          | 2,989   |             |  |          | (38 | )           |   |              | 305    |              |  |             | (25 | ) |   |   |  |  |   |   |       |   |       |   | 3,294   | 
|                                              |  |          |         |             |  |          |     |             |   |              |        |              |  |             |     |   |   |   |   |  |   |   |        |   |       |   |         | 
|Income before taxes and minority
interest     |  |          | 59,750  |             |  |          | 3   |             |   |              | 5,691  |              |  |             | 27  |   |   |   |  |  |   |   | (3,389 | ) |       |   | 62,052  | 
|                                             
|                                             
|                                             
|                                             
|Provision for income taxes                    |  |          | 22,625  |             |  |          | 2   |             |   |              | 1,957  |              |  |             | 40  |   |   |   |  |  |   |   | (1,356 | ) |       |   | 23,226  | 
|                                              |  |          |         |             |  |          |     |             |   |              |        |              |  |             |     |   |   |   |   |  |   |   |        |   |       |   |         | 
|Income before minority interest               |  |          | 37,125  |             |  |          | 4   |             |   |              | 3,734  |              |  |             | 21  |   |   |   |  |  |   |   | (2,033 | ) |       |   | 38,826  | 
|                                             
|                                             
|                                             
|                                             
|Minority interest                             |  |          | 1,893   |             |  |          | 265 |             |   |              |       |              |  |             |     |   |   |   |  |  |   |   |       |   |       |   | 1,893   | 
|                                              |  |          |         |             |  |          |     |             |   |              |        |              |  |             |     |   |   |   |   |  |   |   |        |   |       |   |         | 
|Net income                                    |  | $        | 35,232  |             |  |          |    |             |   | $            | 3,734  |              |  |             | 21  |   |   | $ |  |  |   | $ | (2,033 | ) |       | $ | 36,933  | 
|                                              |  |          |         |             |  |          |     |             |   |              |        |              |  |             |     |   |   |   |   |  |   |   |        |   |       |   |         | 

|                                              |  |          |         |  |  |  |  |          |  |   |        |  |  |              |  |              |  |             |        |   |  |   |   |  |  |   |         | 
|--------------------------------------------- |  | -------- | ------- |  |  |  |  | -------- |  | - | ------ |  |  | ------------ |  | ------------ |  | ----------- | ------ | - |  | - | - |  |  | - | ------- | 
|                                              |  | Merchant |         |  |  |  |  |          |  |   |        |  |  |              |  | Divested and |  | Unallocated |        |   |  |  
|                                              |  | Card     |         |  |  |  |  | Payment  |  |   |        |  |  | Discontinued |  | Corporate    |  |             |        |  
|2001                                          |  | Services |         |  |  |  |  | Services |  |   |        |  |  | Businesses   |  | Items        |  | Total      
|                                              |  |          |         |  |  |  |  |          |  |   |        |  |  |              |  |              |  |            
|Revenue                                       |  | $        | 286,255 |  |  |  |  |          |  | $ | 21,877 |  |  |              |  |              |  | $           | 41,165 |   |  | $ |  |  |  | $ | 349,297 | 
|                                             
|                                             
|                                             
|                                             
|Operating expense                             |  |          | 210,195 |  |  |  |  |          |  |   | 14,399 |  |  |              |  |              |  |             | 30,244 |   |  |   |  |  |  |   | 254,838 | 
|                                             
|                                             
|                                             
|                                             
|General and administrative expense            |  |          | 11,423  |  |  |  |  |          |  |   | 1,691  |  |  |              |  |              |  |             | 5,001  |   |  |   |  |  |  |   | 18,115  | 
|                                             
|                                             
|                                             
|                                             
|Depreciation and amortization                 |  |          | 11,424  |  |  |  |  |          |  |   | 1,727  |  |  |              |  |              |  |             | 2,337  |   |  |   |  |  |  |   | 15,488  | 
|                                             
|                                             
|                                             
|                                             
|Impairment, restructuring and related
expense |  |          |        |  |  |  |  |          |  |   |       |  |  |              |  |              |  |             | 6,250  |   |  |   |  |  |  |   | 6,250   | 
|                                              |  |          |         |  |  |  |  |          |  |   |        |  |  |              |  |              |  |             |        |   |  |   |   |  |  |   |         | 
|Operating profit                              |  |          | 53,213  |  |  |  |  |          |  |   | 4,060  |  |  |              |  |              |  |             | (2,667 | ) |  |   |  |  |  |   | 54,606  | 
|                                             
|                                             
|                                             
|                                             
|Net interest income                           |  |          | 4,805   |  |  |  |  |          |  |   | 408    |  |  |              |  |              |  |             | 377    |   |  |   |  |  |  |   | 5,590   | 
|                                              |  |          |         |  |  |  |  |          |  |   |        |  |  |              |  |              |  |             |        |   |  |   |   |  |  |   |         | 
|Income before taxes and minority
interest     |  |          | 58,018  |  |  |  |  |          |  |   | 4,468  |  |  |              |  |              |  |             | (2,290 | ) |  |   |  |  |  |   | 60,196  | 
|                                             
|                                             
|                                             
|                                             
|Provision for income taxes                    |  |          | 22,227  |  |  |  |  |          |  |   | 1,394  |  |  |              |  |              |  |             | 1,565  |   |  |   |  |  |  |   | 25,186  | 
|                                              |  |          |         |  |  |  |  |          |  |   |        |  |  |              |  |              |  |             |        |   |  |   |   |  |  |   |         | 
|Income before minority interest               |  |          | 35,791  |  |  |  |  |          |  |   | 3,074  |  |  |              |  |              |  |             | (3,855 | ) |  |   |  |  |  |   | 35,010  | 
|                                             
|                                             
|                                             
|                                             
|Minority interest                             |  |          | 519     |  |  |  |  |          |  |   |       |  |  |              |  |              |  |             |       |   |  |   |  |  |  |   | 519     | 
|                                              |  |          |         |  |  |  |  |          |  |   |        |  |  |              |  |              |  |             |        |   |  |   |   |  |  |   |         | 
|Net income                                    |  | $        | 35,272  |  |  |  |  |          |  | $ | 3,074  |  |  |              |  |              |  | $           | (3,855 | ) |  | $ |  |  |  | $ | 34,491  | 
|                                              |  |          |         |  |  |  |  |          |  |   |        |  |  |              |  |              |  |             |        |   |  |   |   |  |  |   |         | 



|NM  Not Meaningful |  | 
|------------------- |  | 

Merchant Card Services

Revenue for the nine months ended September 30, 2002 increased 12% to
$322.0 million from $286.3 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 5% for the nine months ended
September 30, 2002.

21



---



##### Table of Contents



Transaction volume processed for the nine months ended September 30, 2002
increased 14% to 2.8 billion from 2.5 billion in 2001. Dollar volume processed
for the nine months ended September 30, 2002 increased 12% to $123.9 billion
from $110.6 billion in 2001. Organic transaction and dollar volume, which
excludes the impact of acquisitions, also increased 12% and 9%, respectively,
for the nine months ended September 30, 2002. The volume increases were
primarily due to growth in existing national customers, addition of new
regional merchants, and continued expansion in new markets.

Operating expense for the nine months ended September 30, 2002 increased
13% to $237.7 million from $210.2 million in 2001 due to increased processing
volume, offset partially by expense reductions achieved in third-party
processing contracts.

General and administrative expense increased 21% to $13.8 million for the
nine months ended September 30, 2002 from $11.4 million in 2001 due primarily
to changes in estimates for certain non-income related taxes.

Depreciation and amortization increased 6% to $12.1 million for the nine
months ended September 30, 2002 from $11.4 million in 2001 due to additional depreciation
from the capitalization of a new web-based accounting and 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 nine months ended
September 30, 2001 included $1.7 million of goodwill amortization expense that
did not recur in 2002 due to the adoption of a new accounting standard (see
Recent Accounting Pronouncements).

On June 28, 2001, the Company acquired 70% interest in AAMS. For the nine
months ended September 30, 2002, minority interest was $1.9 million compared to
$0.5 million for the nine months ended September 30, 2001.

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 September 30, 2002, the Company had
$0.4 million remaining in accrued liabilities for future obligations related to
the closure.

Payment Services

Revenue for the nine months ended September 30, 2002 decreased 31% to
$15.1 million from $21.9 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 expense for the nine months ended September 30, 2002 decreased
51% to $7.0 million from $14.4 million in 2001 due primarily to decreased
paper-based transactions and related staff reductions.

General and administrative expense decreased 18% to $1.4 million for the
nine months ended September 30, 2002 from $1.7 million in 2001 due to the decline in
paper-based transactions and related

22



---



##### Table of Contents



staff reductions.

Depreciation and amortization decreased 22% to $1.3 million for the nine
months ended September 30, 2002 from $1.7 million in 2001 due to consolidation
of the Airlines Reporting Corporation contract into a single operating
facility. The work previously performed in Juarez, Mexico was relocated to
Louisville, Kentucky in the fourth quarter of 2001.

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 nine months ended September 30, 2001, these business units had revenue
of $41.2 million. Operating profit (loss) for the divested and discontinued
business units was $(2.7) million for the nine months ended September 30, 2001
and includes a $6.3 million impairment charge taken in the second quarter of
2001.

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.
This net charge consisted of a second quarter pre-tax charge of $6.3 million
($6.2 million after-tax, or $0.12 per share), which was partially offset by net
positive pre-tax adjustment of $2.4 million ($1.5 million after-tax, or $0.03
per diluted share) in the fourth quarter. The second quarter charge was for
the estimated loss for the sale of the BPO business. The net fourth quarter
gain represented a $3.0 million pre-tax ($1.9 million after-tax, or $0.04 per
diluted share) adjustment to the second quarter charge due to changes in
estimates for legal and other post-closing matters, partially offset by a $0.6
million pre-tax ($0.4 million after-tax, or $0.01 per diluted share) severance
charge related to organizational restructuring actions taken to reduce support
costs associated with the BPO unit. As of September 30, 2002, the Company had
$0.8 million remaining in accrued liabilities related to the final obligations
associated with the BPO divestiture.

Unallocated Corporate Items

In September 2002, the Company recorded a $3.4 million ($2.0 million
after-tax, or $0.04 per diluted share) charge 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
the nine months ended September 30, 2002, was $3.3 million, down 41% from $5.6
million for the nine months ended September 30, 2001 due to lower average
interest rates in 2002.

Provision For Income Taxes

The overall effective tax rate for the nine months ended September 30,
2002 was 37.4% compared to 41.8% for the same period a year ago. 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.

23



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##### Table of Contents



Forward-Looking Results of Operations

Airlines

The Company currently processes card transactions for several of the
largest airlines in the United States. Airline customers represented
approximately 9% of the Companys consolidated revenue (6% from Merchant Card
Services and 3% from Payment Services) for the nine months ended September 30,
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 7 to Consolidated Financial Statements). In the
near term, management believes liquidations are unlikely for any of the
Companys airline customers given the 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 eighteen months
(through May 2003) for other airlines that may suspend, interrupt or
discontinue services due to insolvency or liquidation.

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.

One of the Companys airline customers is US Airways Group, Inc. US
Airways Group, Inc. has filed for bankruptcy court protection under Chapter 11.

Based upon information currently available to the Company and actions
management has taken to mitigate these risks, management currently believes a
material loss under the chargeback rules is unlikely.

Additional Factors Impacting Forward-Looking Results of Operations

The Company is currently experiencing increased pricing pressure in
competing for new national merchants as well in retaining the existing base of
national merchants. This may impact the Companys future operating profits and
margins.

The Company is dependent on overall consumer spending trends. The Company
is currently receiving weakening economic forecasts including projections for
weak retail sales during the fourth quarter holiday season. Based on the weak
economic forecast and the unanticipated loss of two major national merchants in
the third quarter 2002, the Company believes that fourth quarter 2002
revenue and net income will be less than previously anticipated.

24



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##### Table of Contents



Recent Accounting Pronouncements

Goodwill and Other Intangible Assets

In September 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, are no longer amortized into net income over an estimated
life but rather are tested at least annually for impairment based on specific
guidance provided in the new standard. Intangible assets determined to have
finite lives 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 of the provisions of SFAS 142,
a transitional impairment test was applied to all goodwill during the quarter
ended March 31, 2002. No impairment loss 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 SFAS 142 had been adopted effective January 1, 2001, goodwill
amortization expense, which is primarily nondeductible for income tax purposes,
would have been reduced by $0.8 million and $1.9 million for the three and nine
months ended September 30, 2001, respectively. For the three months ended
September 30, 2001, proforma net income would have been $15.7 million, or $0.30
per diluted share, versus reported net income of $15.0 million, or $0.29 per
diluted share. For the nine months ended September 30, 2001, proforma net
income would have been $36.2 million, $0.70 per diluted share, versus reported
net income of $34.5 million, or $0.66 per diluted share.

The Companys amortizable intangible assets as of September 30, 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 the quarter and nine months ended September 30, 2002
was $1.8 million and $5.1 million, respectively. The estimated annual
amortization expense for existing intangible assets for 2002 and each of the
next five years is as follows: 2002  $6.8 million; 2003  $7.0 million; 2004 -
$6.6 million; 2005, 2006 and 2007  $4.7 million.

In general, application of the new provisions may result in more income
statement volatility due to potential periodic recognition of impairment
losses, which are likely to vary in amount and frequency, 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 require expected future operating
losses from discontinued operations to

25



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##### Table of Contents



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 have not had a material impact on the Companys results of
operations, financial position, or liquidity.

Accounting for Exit or Disposal Activities

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 a 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 January 1, 2003
and are not anticipated to have a material impact on the Companys results of
operations, financial position, or liquidity.

Seasonality

The Company experiences seasonality in its businesses and typically
realizes higher revenue in the third and fourth calendar 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.

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 the nine months ended September 30, 2002, the Companys
capital expenditures totaled $13.6 million. Such expenditures were financed
from operating cash flow, which totaled $121.7 million for the nine months
ended September 30, 2002. Operating cash flow and capital expenditures during
the nine months ended September 30, 2001 totaled $90.5 million and $14.8
million, respectively.

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 Acquisitions, Note 4 to Consolidated Financial Statements).

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

On August 29, 2001, the Company completed the sale of the Business Process
Outsourcing unit to Affiliated Computer Services, Inc. for $43.0 million cash
($41.3 million after transaction-related expenses). (See Divested and
Discontinued Business Units, Note 5 to Consolidated Financial Statements).

26



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##### Table of Contents



On July 3, 2002, the Company acquired processing contracts from a key
strategic partner for $2.7 million in 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.

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 and future capital
expenditures are expected to be financed through operating cash flow and
current cash balances.

Forward-Looking Statements and Risk Factors

The section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations contains 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. Refer to the Companys Annual Report on Form 10-K for the year
ended December 31, 2001 and subsequent filings with the Securities and Exchange
Commission for risks and uncertainties that could cause actual results to
differ materially.

27



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##### Table of Contents






Item 3. Quantitative and Qualitative Disclosure of 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 September 30, 2002, the
Company had $210 million in cash and cash equivalents. For the third quarter
of 2002, National City also held an average of approximately $235 million of
customer cash balances. The Company retains the 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 impacted by changes in interest rates,
which affects both interest earnings on the Companys cash and cash equivalents
and interest earnings on customer funds maintained by National City. At
September 30, 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 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 4. Controls and Procedures

Within 90 days of this report, an evaluation was performed under the
supervision and with the participation of the Corporation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.
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.

28



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##### Table of Contents






Part II  Other Information




Item 1. Legal Proceedings (None)




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




Item 3. Defaults Upon Senior Securities (None)




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




Item 5. Other Information (None)




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






|a. |  | Exhibits
|-- |  | --------

|      |  |                                                                                                                                                                    
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21 |  | Employment Agreement and Undertaking of Confidentiality
between National Processing Company and Thomas A. Wimsett dated
December 12, 1997 (filed as Exhibit 10.21).
|     
|     
|     
|     
|      |  |                                                                                                                                                                    
|     
|     
|     
|     
|10.22 |  | Separation Agreement, Release and Waiver between National
Processing, Inc. and Thomas A. Wimsett dated September 29, 2002
(filed as Exhibit 10.22).                
|     
|     
|     
|     
|      |  |                                                                                                                                                                    
|     
|     
|     
|     
|10.23 |  | Visa® U.S.A. Inc. Guaranty between National Processing, Inc.
and Visa® U.S.A. Inc. dated August 6, 2002 (filed as
Exhibit 10.23).                                  
|     
|     
|     
|     
|10.37 |  | Form of severance agreement between the Registrant and certain Senior
Vice Presidents (filed as  Exhibit 10.37).                                                   
|     
|     
|     
|     
|10.38 |  | Form of severance agreement between the Registrant and certain
Executive Vice Presidents (filed as Exhibit 10.38).                                                 
|     
|     
|     
|     
|10.39 |  | Employment Agreement and Undertaking of Confidentiality between the
Registrant and David Fountain dated October 27, 1998 (filed as
Exhibit 10.39).                 

The index of exhibits has been filed as separate pages of the Form 10-Q
for the quarterly period ended September 30, 2002 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
|-- |  | -------------------

July 17, 2002: On July 17, 2002, the Registrant issued a press release
reporting earnings for the quarter and six months ended June 30, 2002.

August 14, 2002: On August 14, 2002, the Registrant filed a Form 8-K
containing the signed certifications with respect to National Processing Inc.s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on
August 14, 2002.

October 1, 2002: On September 30, 2002, the Registrant issued a press
release announcing that Thomas A. Wimsett, formerly a director, the Chief
Executive Officer and President, had resigned from the Company. The Registrant
announced that Jon L. Gorney succeeded Paul G. Clark as Chairman of National
Processing, Inc. Clark will remain a member of the Registrants Board of
Directors. Jon L. Gorney also assumed the Chief Executive Officer position
previously held by Thomas A. Wimsett.

29



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##### Table of Contents






SIGNATURES

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

|      |  |                   |  |                                                                                                  
|----- |  | ----------------- |  | -------------------------------------------------------------------------------------------------
|      |  |                   |  | NATIONAL PROCESSING, INC.                                                                        
|     
|     
|     
|     
|      |  |                   |  |                                                                                                  
|     
|     
|     
|     
|Date: |  | November 12, 2002 |  | By: /s/ Jon L. Gorney                                                                            
|      |  |                   |  |                                                                                                  
|      |  |                   |  | Jon L. Gorney
Chairman and Chief Executive Officer
(Duly Authorized Signer)                      
|     
|     
|     
|     
|      |  |                   |  |                                                                                                  
|     
|     
|     
|     
|      |  |                   |  | By: /s/ David E. Fountain                                                                        
|      |  |                   |  |                                                                                                  
|      |  |                   |  | David E. Fountain
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

30



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##### Table of Contents



CERTIFICATIONS

I, Jon L. Gorney, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of National
Processing, Inc.;                                                                                                                                                                                                                                              
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about he effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                         



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weakness in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                      



| | 6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation
including any corrective actions with regard to significant deficiencies
and material weakness.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                   |  |                                                   
|----- |  | ----------------- |  | --------------------------------------------------
|Date: |  | November 12, 2002 |  | /s/ Jon L. Gorney                                 
|      |  |                   |  |                                                   
|      |  |                   |  | Jon L. Gorney
Chairman and Chief Executive Officer

31



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##### Table of Contents



CERTIFICATIONS

I, David E. Fountain, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of National
Processing, Inc.;                                                                                                                                                                                                                                              
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about he effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                         



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weakness in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                      



| | 6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation
including any corrective actions with regard to significant deficiencies
and material weakness.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                   |  |                                                                    
|----- |  | ----------------- |  | -------------------------------------------------------------------
|Date: |  | November 12, 2002 |  | /s/ David E. Fountain                                              
|      |  |                   |  |                                                                    
|      |  |                   |  | David E. Fountain
Senior Vice President and Chief Financial Officer

32



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##### Table of Contents



NATIONAL PROCESSING, INC.




PART II ITEM 6: EXHIBIT INDEX

|               |  |                                                                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION                                                                                                                                                                       
|               |  |                                                                                                                                                                                   
|3.1 (i)        |  | Amended Articles of Incorporation of the Registrant. (A)                                                                                                                          
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|3.1 (ii)       |  | Code of Regulations of the Registrant. (A)                                                                                                                                        
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|4.1            |  | Specimen Certificate for the Common Stock, without par value, of the Registrant. (B)                                                                                              
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|4.2            |  | Registration Rights Agreement between the Registrant and National City
Corporation, dated July 16, 1996. (B)                                                                      
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.1           |  | Absolute Net Ground Lease by and between Preston Manor, Inc. and Allied
Stores Corporation, dated January 16, 1969. (A)                                                           
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.2           |  | Second Amendment to Lease by and between William G. Earley, Plaza
Centers, Inc. and First National Bank of Louisville, dated April 15, 1986.
(A)                                  
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.3           |  | (Intentionally Omitted)                                                                                                                                                           
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.4           |  | Sponsorship Agreement between NPC and National City Bank of Kentucky,
dated June 30, 1996. (B)                                                                                    
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.5           |  | Administrative Services Agreement between NPC and National City
Corporation, dated July 15, 1996. (B)                                                                             
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.6           |  | (Intentionally Omitted)                                                                                                                                                           
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.7           |  | (Intentionally Omitted)                                                                                                                                                           
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.8           |  | Form of Card Services Agreement by and among NPC and its affiliated
corporations and certain bank subsidiaries of National City Corporation.
(B)                                  
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.9           |  | Tax Sharing Agreement between the Company and National City Corporation,
dated July 17, 1996. (B)                                                                                 
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.10          |  | The Agreement between Airlines Reporting Corporation and First National
Bank of Louisville and NPC for Area Settlement Plan Processing Services,
dated October 16, 1986. (B)      
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.11          |  | First Amendment to Agreements between Airlines Reporting Corporation and
First National Bank of Louisville and NPC, dated December 12, 1991. (A)                                  
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.12          |  | 1994 Amendment to Agreements between Airlines Reporting Corporation and
NPC, dated December 31, 1994. (A)                                                                         
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.13          |  | Supplemental Agreement by and between NPC and Airlines Reporting
Corporation, dated February 24, 1995. (A)                                                                        
|              
|              
|              
|              
|               |  |                                                                                                                                                                                   
|              
|              
|              
|              
|10.14          |  | Amendment to Agreement between Airlines Reporting Corporation and
National City Bank of Kentucky and NPC, for Area Settlement Plan
Processing Services, dated August 19, 1995. (A)

1



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##### Table of Contents



|               |  |                                                                                                                                                                                                                                                                                
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION                                                                                                                                                                                                                                                                    
|               |  |                                                                                                                                                                                                                                                                                
|              
|              
|              
|              
|10.15          |  | December 1, 1998 Amendment to the ARC and NPC Processing Agreement.
(Incorporated herein by reference to Exhibit 10.15 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 1999)                                                                    
|              
|              
|              
|              
|               |  |                                                                                                                                                                                                                                                                                
|              
|              
|              
|              
|10.16          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
|              
|              
|              
|              
|               |  |                                                                                                                                                                                                                                                                                
|              
|              
|              
|              
|10.17          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
|              
|              
|              
|              
|               |  |                                                                                                                                                                                                                                                                                
|              
|              
|              
|              
|10.18          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
|              
|              
|              
|              
|               |  |                                                                                                                                                                                                                                                                                
|              
|              
|              
|              
|10.19          |  | Employment Agreement and Undertaking of Confidentiality between the Registrant and Mark Pyke
dated March 4, 1996. (Incorporated herein by reference to Exhibit
10.19 to the Registrants Annual Report on Form 10-K for the year
ended December 31, 1999) **                   
|              
|              
|              
|              
|               |  |                                                                                                                                                                                                                                                                                
|              
|              
|              
|              
|10.20          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
|              
|              
|              
|              
|               |  |                                                                                                                                                                                                                                                                                
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|10.21          |  | Employment Agreement and Undertaking of Confidentiality between National
Processing Company and Thomas A. Wimsett dated December 12, 1997. (Filed
as Exhibit 10.21) **                                                                                                         
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|               |  |                                                                                                                                                                                                                                                                                
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|10.22          |  | Separation Agreement, Release and Waiver between National Processing,
Inc. and Thomas A. Wimsett dated September 29, 2002. (Filed as Exhibit
10.22) **                                                                                                                         
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|               |  |                                                                                                                                                                                                                                                                                
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|10.23          |  | Visa® U.S.A. Inc. Guaranty between National Processing, Inc. and Visa®
U.S.A. Inc. dated August 6, 2002. (Filed as Exhibit 10.23)                                                                                                                                              
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|               |  |                                                                                                                                                                                                                                                                                
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|10.24          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
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|               |  |                                                                                                                                                                                                                                                                                
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|10.25          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
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|               |  |                                                                                                                                                                                                                                                                                
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|10.26          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
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|               |  |                                                                                                                                                                                                                                                                                
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|10.27          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
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|               |  |                                                                                                                                                                                                                                                                                
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|10.28          |  | National Processing, Inc. 2000 Stock Option Plan. (Incorporated herein
by reference to Exhibit 10.28 to the Registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2000) **                                                                                 
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|               |  |                                                                                                                                                                                                                                                                                
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|10.29          |  | 1996 Stock Option Plan and Form of Stock Option Agreement. (B)**                                                                                                                                                                                                               
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|               |  |                                                                                                                                                                                                                                                                                
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|10.30          |  | Nonemployee Directors Stock Option Plan and Form of Stock Option
Agreement. (B)**                                                                                                                                                                                              
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|               |  |                                                                                                                                                                                                                                                                                
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|10.31          |  | Amended and Restated NPC Short-Term Incentive Compensation Plan for
Senior Executives, effective February 9, 2000. (Incorporated herein by
reference to Exhibit 10.31 to the Registrants Annual Report on Form 10-K
for the year ended December 31, 1999) **                  
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|               |  |                                                                                                                                                                                                                                                                                
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|10.32          |  | NPCs Long-Term Incentive Compensation Plan for Senior Officers,
effective January 1, 1998, as amended and restated January 1,
2000. (Incorporated herein by reference to Exhibit
10.32 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2000) **
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|               |  |                                                                                                                                                                                                                                                                                
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|10.33          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
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|               |  |                                                                                                                                                                                                                                                                                
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|10.34          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
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|               |  |                                                                                                                                                                                                                                                                                
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|10.35          |  | (Intentionally Omitted)                                                                                                                                                                                                                                                        
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|               |  |                                                                                                                                                                                                                                                                                
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|10.36          |  | Amendment to Building Lease between National City Bank of Kentucky and
NPC, dated July 3, 1996. (B)                                                                                                                                                                            

2



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##### Table of Contents



|               |  |                                                                                                                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION                                                                                                                                                                                                                
|               |  |                                                                                                                                                                                                                            
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|10.37          |  | Form of Severance Agreement between the Registrant and certain Senior
Vice Presidents. (Filed as Exhibit 10.37)**                                                                                                          
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|               |  |                                                                                                                                                                                                                            
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|10.38          |  | Form of Severance Agreement between the Registrant and certain
Executive Vice Presidents. (Filed as Exhibit 10.38)**                                                                                                       
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|               |  |                                                                                                                                                                                                                            
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|10.39          |  | Employment Agreement and Undertaking of Confidentiality between the
Registrant and David Fountain dated October 27, 1998. (Filed as
Exhibit 10.39)**                                                                       
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|               |  |                                                                                                                                                                                                                            
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|10.40          |  | (Intentionally Omitted)                                                                                                                                                                                                    
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|               |  |                                                                                                                                                                                                                            
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|10.41          |  | National Processing, Inc. 2001 Restricted Stock Plan (Incorporated
herein by reference to Exhibit A to National Processing, Inc.s Proxy
Statement on Form 14A #001-11905, dated March 31, 2001). **                       
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|               |  |                                                                                                                                                                                                                            
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|10.42          |  | National Processing, Inc.s U.S. Asset Purchase Agreement, dated July
11, 2001 (Incorporated herein by reference to Exhibit 10.42 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended June 30,
2001).  
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|               |  |                                                                                                                                                                                                                            
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|10.43          |  | National Processing, Inc.s Mexico Asset Purchase Agreement, dated July
11, 2001 (Incorporated herein by reference to Exhibit 10.43 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended June 30,
2001).
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|               |  |                                                                                                                                                                                                                            
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|10.44          |  | National Processing, Inc.s Stock Purchase Agreement, dated July 11,
2001 (Incorporated herein by reference to Exhibit 10.44 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended June 30,
2001).       



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|(A) |  | Exhibit is incorporated herein by reference to the applicable exhibit in
the Registrants Registration Statement on Form S-1 (Registration No.
333-05507) filed on June 7, 1996.                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(B) |  | Exhibit is incorporated herein by reference to the applicable exhibit in
the Registrants Amendment No. 1 to Form S-1 Registration Statement
(Registration No. 333-05507) filed on July 18, 1996.
|   
|   
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|   
|**  |  | Represents a management contract or compensatory plan required to be
filed pursuant to Item 14 of Form 10-K.                                                                                     

3