TABLE OF CONTENTS




|                                                                                      |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|INDEX                                                                                
|Consolidated Balance Sheets                                                          
|Consolidated Statements of Operations                                                
|Consolidated Statement of Changes in Shareholders Equity                            
|Consolidated Statements of Cash Flows                                                
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                           
|Managements Discussion and Analysis of Financial Condition and Results of Operations
|Part II  Other Information                                                          
|SIGNATURES                                                                           
|Exhibit 10.28                                                                        
|Exhibit 27.1                                                                         



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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 June 30, 2000

or

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

For the transition period from________________to___________

Commission File Number: 1-11905

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

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

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

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

The number of shares outstanding of the Registrants Common Stock as of July
31, 2000 was 50,825,653.





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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  June 30, 2000 and
December 31, 1999 |    |    | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Statements of Operations                           
|                             
|                             
|                             
|                             
|                              |                                                                                               | Three and Six Months Ended June 30, 2000 and 1999                 |    |    | 4 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Statement of Changes in Shareholders Equity       
|                             
|                             
|                             
|                             
|                              |                                                                                               | Six Months Ended June 30, 2000                                    |    |    | 5 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Statements of Cash Flows                           
|                             
|                             
|                             
|                             
|                              |                                                                                               | Six Months Ended June 30, 2000 and 1999                           |    |    | 6 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Notes to Consolidated Financial Statements                        |    |    | 7 | 
|                             
|                             
|                             
|                             
|                              | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                                   |    | 10 |  
|                             
|                             
|                             
|                             
|                              | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             |                                                                   |    | 17 |  
|                             
|                             
|                             
|                             
|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                                   |                                                                   |    | 18 |  
|                             
|                             
|                             
|                             
|                              | Item 5. Other Information (None)                                                             
|                             
|                             
|                             
|                             
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                   |    | 18 |  
|                             
|                             
|                             
|                             
|Signatures                    |                                                                                               |                                                                   | 19 |   

2



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##### Table of Contents






National Processing, Inc.  Consolidated Balance Sheets


|                                                |                                                                                                                                                       |   |         |         |             |   |         |         | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------- | ----------- | - | ------- | ------- | 
|                                                |                                                                                                                                                       |   | June 30 |         | December 31
|                                                |                                                                                                                                                       |   | 2000    |         | 1999       
|                                                |                                                                                                                                                       |   |         |         |            
|Assets                                         
|                                               
|                                               
|                                               
|                                               
|Current assets:                                
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                                                             |   | $       | 31,094  |             |   | $       | 32,042  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Securities available for sale                                                                                                                         |   |         | 96,000  |             |   |         | 60,000  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable  trade                                                                                                                           |   |         | 77,688  |             |   |         | 104,486 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  customer funds                                                                                                                  |   |         | 29,445  |             |   |         | 22,177  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |         | 546     |             |   |         | 812     | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other current assets                                                                                                                                  |   |         | 10,930  |             |   |         | 11,743  | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total current assets                            |                                                                                                                                                       |   | 245,703 |         |             |   | 231,260 |        
|                                               
|                                               
|                                               
|                                               
|Property and equipment:                        
|                                               
|                                               
|                                               
|                                               
|                                                | Furniture and equipment                                                                                                                               |   |         | 81,192  |             |   |         | 81,439  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Building and leasehold improvements                                                                                                                   |   |         | 18,852  |             |   |         | 21,006  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Software                                                                                                                                              |   |         | 20,913  |             |   |         | 18,027  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Property leased from affiliate                                                                                                                        |   |         | 4,173   |             |   |         | 4,173   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Land and improvements                                                                                                                                 |   |         | 2,436   |             |   |         | 2,851   | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|                                                |                                                                                                                                                       |   | 127,566 |         |             |   | 127,496 |        
|                                               
|                                               
|                                               
|                                               
|Accumulated depreciation and amortization       |                                                                                                                                                       |   | 66,252  |         |             |   | 62,408  |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|                                                |                                                                                                                                                       |   | 61,314  |         |             |   | 65,088  |        
|                                               
|                                               
|                                               
|                                               
|Other assets:                                  
|                                               
|                                               
|                                               
|                                               
|                                                | Goodwill, net of accumulated amortization of
$6,209 in 2000 and $5,040 in 1999                                                                        |   |         | 87,262  |             |   |         | 88,431  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other intangible assets                                                                                                                               |   |         | 32,102  |             |   |         | 34,628  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                   |   |         | 3,289   |             |   |         | 3,698   | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other assets                                                                                                                                          |   |         | 6,315   |             |   |         | 6,109   | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total other assets                              |                                                                                                                                                       |   | 128,968 |         |             |   | 132,866 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total assets                                    |                                                                                                                                                       | $ | 435,985 |         |             | $ | 429,214 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Liabilities and shareholders equity           
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                           
|                                               
|                                               
|                                               
|                                               
|                                                | Restricted deposits  client funds                                                                                                                    |   | $       | 29,445  |             |   | $       | 22,177  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable  trade                                                                                                                              |   |         | 9,024   |             |   |         | 12,262  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued bankcard assessments                                                                                                                          |   |         | 18,802  |             |   |         | 20,122  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax payable                                                                                                                                    |   |         | 4,665   |             |   |         | 16,318  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other accrued liabilities                                                                                                                             |   |         | 31,724  |             |   |         | 35,963  | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total current liabilities                       |                                                                                                                                                       |   | 93,660  |         |             |   | 106,842 |        
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|Obligation under property leased from affiliate |                                                                                                                                                       |   | 2,058   |         |             |   | 2,123   |        
|                                               
|                                               
|                                               
|                                               
|Other long-term liabilities                     |                                                                                                                                                       |   | 332     |         |             |   | 796     |        
|                                               
|                                               
|                                               
|                                               
|Deferred tax liabilities                        |                                                                                                                                                       |   | 3,164   |         |             |   | 3,047   |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total liabilities                               |                                                                                                                                                       |   | 99,214  |         |             |   | 112,808 |        
|                                               
|                                               
|                                               
|                                               
|Shareholders equity:                          
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, without par value; 5,000,000 shares
authorized; no shares issued or outstanding                                                      |   |         |        |             |   |         |        | 
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, without par value; 95,000,000 shares
authorized; 50,820,653 and 50,644,651 shares issued and
outstanding in 2000 and 1999, respectively |   |         | 1       |             |   |         | 1       | 
|                                               
|                                               
|                                               
|                                               
|                                                | Contributed capital                                                                                                                                   |   |         | 177,305 |             |   |         | 176,964 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                                                                                                                                     |   |         | 159,465 |             |   |         | 139,441 | 
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total shareholders equity                      |                                                                                                                                                       |   | 336,771 |         |             |   | 316,406 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        
|Total liabilities and shareholders equity      |                                                                                                                                                       | $ | 435,985 |         |             | $ | 429,214 |        
|                                                |                                                                                                                                                       |   |         |         |             |   |         |        

See notes to consolidated financial statements

3



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##### Table of Contents






National Processing, Inc.  Consolidated Statements of Operations


|                                                         |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|-------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | -
|                                                         |  | Three Months Ended |         | Six Months Ended
|                                                         |  | June 30            |         | June 30         
|                                                         |  | 2000               |         | 1999             |  | 2000 |         | 1999
|                                                         |  |                    |         |                  |  |      |         |     
|Revenue                                                  |  | $                  | 104,513 |                  |  | $    | 109,813 |      |  | $ | 202,380 |  |  | $ | 234,276 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Operating expenses                                       |  |                    | 52,736  |                  |  |      | 57,314  |      |  |   | 100,200 |  |  |   | 117,811 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Wages and other personnel expenses                       |  |                    | 19,656  |                  |  |      | 24,059  |      |  |   | 38,874  |  |  |   | 55,155  |  
|                                                        
|                                                        
|                                                        
|                                                        
|General and administrative expenses                      |  |                    | 9,940   |                  |  |      | 12,672  |      |  |   | 22,121  |  |  |   | 29,479  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Depreciation and amortization                            |  |                    | 5,325   |                  |  |      | 4,746   |      |  |   | 10,698  |  |  |   | 11,832  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Impairment, restructuring and related expenses (credits) |  |                    | 1,500   |                  |  |      | (6,500  | )    |  |   | 1,500   |  |  |   | 69,666  |  
|                                                         |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|Operating profit (loss)                                  |  |                    | 15,356  |                  |  |      | 17,522  |      |  |   | 28,987  |  |  |   | (49,667 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|Net interest income                                      |  |                    | 1,878   |                  |  |      | 566     |      |  |   | 3,693   |  |  |   | 584     |  
|                                                         |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|Income (loss) before provision for income taxes          |  |                    | 17,234  |                  |  |      | 18,088  |      |  |   | 32,680  |  |  |   | (49,083 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|Provision for income taxes                               |  |                    | 6,758   |                  |  |      | 6,115   |      |  |   | 12,656  |  |  |   | 7,129   |  
|                                                         |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|Net income (loss)                                        |  | $                  | 10,476  |                  |  | $    | 11,973  |      |  | $ | 20,024  |  |  | $ | (56,212 | )
|                                                         |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  
|Basic and diluted net income (loss) per common share     |  | $                  | 0.21    |                  |  | $    | 0.24    |      |  | $ | 0.39    |  |  | $ | (1.11   | )
|                                                         |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         |  

See notes to consolidated financial statements

4



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##### Table of Contents






National Processing, Inc.  Consolidated Statement of Changes in Shareholders Equity


|                           |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 
|-------------------------- |  | ------ | - | ----------- |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                           |  | Common |   | Contributed |  | Retained
|                           |  | Stock  |   | Capital     |  | Earnings |         | Total
|                           |  |        |   |             |  |          |         |      
|Balance at January 1, 2000 |  | $      | 1 |             |  | $        | 176,964 |       |  | $ | 139,441 |  |  | $ | 316,406 | 
|                          
|                          
|                          
|                          
|Net income                 |  |        |  |             |  |          |        |       |  |   | 20,024  |  |  |   | 20,024  | 
|                          
|                          
|                          
|                          
|Stock options exercised    |  |        |  |             |  |          | 341     |       |  |   |        |  |  |   | 341     | 
|                           |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 
|Balance at June 30, 2000   |  | $      | 1 |             |  | $        | 177,305 |       |  | $ | 159,465 |  |  | $ | 336,771 | 
|                           |  |        |   |             |  |          |         |       |  |   |         |  |  |   |         | 

See notes to consolidated financial statements

5



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##### Table of Contents






National Processing, Inc.  Consolidated Statements of Cash Flows


|                                                     |                                                           |                       |                                                |         |                  |         |        |         |         |        |  
|---------------------------------------------------- | --------------------------------------------------------- | --------------------- | ---------------------------------------------- | ------- | ---------------- | ------- | ------ | ------- | ------- | ------ | -
|                                                     |                                                           |                       |                                                |         | Six Months Ended
|                                                     |                                                           |                       |                                                |         | June 30         
|                                                     |                                                           |                       |                                                |         | 2000             |         | 1999  
|                                                     |                                                           |                       |                                                |         |                  |         |       
|Operating activities                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income (loss)                                         |                       | $                                              | 20,024  |                  |         | $      | (56,212 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Items not requiring cash currently:                      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Depreciation and amortization                  |         |                  | 10,698  |        |         |         | 11,832 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Impairment, restructuring and related expenses |         |                  | 1,500   |        |         |         | 69,666 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Deferred income taxes                          |         |                  | 792     |        |         |         | (947   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Loss on disposition of fixed assets            |         |                  | 16      |        |         |         | 502    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Change in current assets and liabilities:                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Accounts receivable  trade                    |         |                  | 26,798  |        |         |         | 19,881 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Accounts payable  trade                       |         |                  | (1,238  | )      |         |         | 1,113  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Accrued bankcard assessments                   |         |                  | (1,320  | )      |         |         | (1,496 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Income taxes payable                           |         |                  | (11,653 | )      |         |         | 39,979 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Other current assets/liabilities               |         |                  | (2,049  | )      |         |         | 2,624  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                       | Other, net                                     |         |                  | (670    | )      |         |         | 340    |  
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|                                                     | Net cash provided by operating activities                 |                       |                                                | 42,898  |                  |         |        | 87,282  |        
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|Investing Activities                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                      |                       |                                                | (6,197  | )                |         |        | (5,896  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales of fixed assets                       |                       |                                                | 75      |                  |         |        | 420     |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of securities available for sale                |                       |                                                | (76,000 | )                |         |        | (60,000 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from maturities of securities
available for sale |                       |                                                | 40,000  |                  |         |        |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of business lines                      |                       |                                                |        |                  |         |        | 62,554  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other investing activities                                |                       |                                                | (2,000  | )                |         |        |        |        
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|                                                     | Net cash used by investing activities                     |                       |                                                | (44,122 | )                |         |        | (2,922  | )      
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|Financing Activities                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under property leased from affiliate   |                       |                                                | (65     | )                |         |        | (76     | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Exercise of stock options                                 |                       |                                                | 341     |                  |         |        |        |        
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|                                                     | Net cash provided by (used by) financing activities       |                       |                                                | 276     |                  |         |        | (76     | )      
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|Net increase (decrease) in cash and cash equivalents |                                                           |                       | (948                                           | )       |                  |         | 84,284 |        
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                           |                       | 32,042                                         |         |                  |         | 7,254  |        
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|Cash and cash equivalents, end of period             |                                                           | $                     | 31,094                                         |         |                  | $       | 91,538 |        
|                                                     |                                                           |                       |                                                |         |                  |         |        |        
|Supplemental cash flow information:                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Taxes paid (refunded) |                                                | $       | 21,905           |         |        | $       | (32,626 | )     

See notes to consolidated financial statements

6



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##### Table of Contents






NATIONAL PROCESSING, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|  
|  
|  
|   |  | The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, although the balance sheet at
December 31, 1999 has been derived from the audited consolidated
financial statements at that date, the accompanying consolidated
financial statements do not include all the information and footnotes
required by generally accepted accounting principles. These financial
statements should be read in conjunction with National Processing, Inc.s
(the Company) audited consolidated financial statements for the year
ended December 31, 1999 which include full disclosure of relevant
financial policies and information.
|  
|  
|  
|  
|   |  | In the opinion of management, the accompanying consolidated
financial statements have been prepared on a basis consistent with
accounting principles applied in the prior periods and include all
adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation of the financial position, results of
operations and cash flows 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.                                                                                                                                                                                                                                                   
|  
|  
|  
|  
|2. |  | IMPAIRMENT, RESTRUCTURING AND RELATED EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|  
|  
|  
|   |  | In the second quarter of 2000, a pre-tax charge of $1.5 million was
recorded for site consolidation initiatives. The charge totaled $1.0
million after-tax, or $0.02 per share, and related primarily to the
write-off of leasehold improvements and the accrual of future contractual
rent payments on abandoned facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|  
|  
|  
|   |  | During the quarter ended March 31, 1999, the Company recorded
nonrecurring restructuring charges of $2.2 million, including $1.9
million for severance pay for approximately 540 employees and $0.3
million for other costs. These charges related to two of the Companys
facilities which have been closed and consolidated into the Companys
other operating facilities. These charges decreased net income and
earnings per share by approximately $1.8 million and $.04, respectively.
At June 30, 2000, the remaining liability was $0.4 million and related
primarily to future severance payments for approximately 80 employees.                                                                                                                                                                                  
|  
|  
|  
|  
|   |  | During the first quarter of 1999, the Company committed to a formal
plan to dispose of its Freight, Payables, Remittance and Check Services
business lines and recorded impairment losses and related expenses of
$73.9 million related to the sale and wind-down of these business lines.
The charges decreased first quarter 1999 net income and earnings per
share by $72.0 million and $1.42, respectively. Effective April 1, 1999,
the Company sold its Freight and Payables business lines for $18.3
million. Effective June 1, 1999, the Company sold its Remittance and
Check business lines for $44.3 million. As a result of the final
dispositions of these business lines, the Company recorded a pre-tax                                                                                                      

7



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##### Table of Contents



|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|   |  | credit of $6.5 million to the impairment loss in the second quarter of
1999. At June 30, 2000, the Company had $2.7 million remaining related
to the final obligations of these dispositions recorded in other accrued
liabilities. The remaining obligations are primarily for future
severance payments, rent subsidies and processing subsidies. For the six
months ended June 30, 1999, these divested business units had revenues of
$57.3 million.
|  
|  
|  
|  
|3. |  | RECLASSIFICATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|  
|  
|  
|   |  | Certain 1999 amounts have been reclassified to conform with the 2000
presentation.                                                                                                                                                                                                                                                                                                                                                                      
|  
|  
|  
|  
|4. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|  
|  
|  
|   |  | In the normal course of business, the Company is involved in
litigation from time to time. In the opinion of management, the ultimate
liability, if any, arising from this litigation is not expected to have a
material adverse effect on the Companys financial condition, results of
operations or liquidity.                                                                                                                                       
|  
|  
|  
|  
|5. |  | NET INCOME PER COMMON SHARE                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|  
|  
|  
|   |  | The calculation of net income per common share follows (in
thousands, except per share amounts):                                                                                                                                                                                                                                                                                                                                                        

|        |                                              |  |                    |        |                  |  |      |        |  |  |   |        |      |  |  |  |  |  |   |         |  
|------- | -------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ |  |  | - | ------ | ---- |  |  |  |  |  | - | ------- | -
|        |                                              |  | Three Months Ended |        | Six Months Ended
|        |                                              |  | June 30            |        | June 30         
|        |                                              |  | 2000               |        | 1999             |  | 2000 |        |  |  |   |        | 1999
|        |                                              |  |                    |        |                  |  |      |        |  |  |   |        |     
|BASIC  
|       
|       
|       
|       
|        | Net income (loss)                            |  | $                  | 10,476 |                  |  | $    | 11,973 |  |  | $ | 20,024 |      |  |  |  |  |  | $ | (56,212 | )
|       
|       
|       
|       
|        | Average common shares
outstanding            |  |                    | 50,799 |                  |  |      | 50,645 |  |  |   | 50,792 |      |  |  |  |  |  |   | 50,645  |  
|       
|       
|       
|       
|        | Net income (loss) per
common
share  basic   |  | $                  | 0.21   |                  |  | $    | 0.24   |  |  | $ | 0.39   |      |  |  |  |  |  | $ | (1.11   | )
|       
|       
|       
|       
|DILUTED
|       
|       
|       
|       
|        | Net income (loss)                            |  | $                  | 10,476 |                  |  | $    | 11,973 |  |  | $ | 20,024 |      |  |  |  |  |  | $ | (56,212 | )
|       
|       
|       
|       
|        | Average common shares
outstanding            |  |                    | 50,799 |                  |  |      | 50,645 |  |  |   | 50,792 |      |  |  |  |  |  |   | 50,645  |  
|       
|       
|       
|       
|        | Stock option adjustment                      |  |                    | 166    |                  |  |      | 2      |  |  |   | 106    |      |  |  |  |  |  |   |       
|       
|       
|       
|       
|        | Average common shares
outstanding  diluted  |  |                    | 50,965 |                  |  |      | 50,647 |  |  |   | 50,898 |      |  |  |  |  |  |   | 50,645  |  
|       
|       
|       
|       
|        | Net income (loss) per
common
share  diluted |  | $                  | 0.21   |                  |  | $    | 0.24   |  |  | $ | 0.39   |      |  |  |  |  |  | $ | (1.11   | )

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. |  | SEGMENT REPORTING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|  
|  
|  
|   |  | National Processing, Inc. operates two business segments  Merchant
Services and Corporate Outsourcing Solutions. Merchant Services
authorizes, processes and settles credit and debit card transactions for
a variety of merchants. Corporate Outsourcing Solutions provides a
variety of financial and administrative processing solutions to large
corporate customers. These solutions include financial settlement, image
scanning, data capture, storage and retrieval, call center, and
value-added customer reporting.

8



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##### Table of Contents



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

|                                                         |  |          |         |             |  |           |        |       |  |              |         |   |  |   |         |  
|-------------------------------------------------------- |  | -------- | ------- | ----------- |  | --------- | ------ | ----- |  | ------------ | ------- | - |  | - | ------- | -
|                                                         |  |          |         |             |  | Corporate
|                                                         |  | Merchant |         | Outsourcing |  |           |        |       |  | Consolidated
|(Dollars in thousands)                                   |  | Services |         | Solutions   |  | Corporate |        | Total
|                                                         |  |          |         |             |  |           |        |      
|For the quarter ended June 30, 2000                     
|                                                        
|                                                        
|                                                        
|                                                        
|Revenue                                                  |  | $        | 76,104  |             |  | $         | 28,409 |       |  | $            |        |   |  | $ | 104,513 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Impairment, restructuring and related
expenses           |  |          |        |             |  |           | 1,500  |       |  |              |        |   |  |   | 1,500   |  
|                                                        
|                                                        
|                                                        
|                                                        
|Operating profit (loss)                                  |  |          | 13,450  |             |  |           | 3,623  |       |  |              | (1,717  | ) |  |   | 15,356  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Depreciation and amortization                            |  |          | 3,564   |             |  |           | 1,761  |       |  |              |        |   |  |   | 5,325   |  
|                                                        
|                                                        
|                                                        
|                                                        
|Net interest income                                      |  |          | 1,364   |             |  |           | 514    |       |  |              |        |   |  |   | 1,878   |  
|                                                        
|                                                        
|                                                        
|                                                        
|Net operating assets                                     |  |          | 103,004 |             |  |           | 51,001 |       |  |              | 182,766 |   |  |   | 336,771 |  
|                                                        
|                                                        
|                                                        
|                                                        
|For the quarter ended June 30, 1999                     
|                                                        
|                                                        
|                                                        
|                                                        
|Revenue                                                  |  | $        | 74,021  |             |  | $         | 35,792 |       |  | $            |        |   |  | $ | 109,813 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Impairment, restructuring and
related expenses (credits) |  |          | (9,336  | )           |  |           | 2,836  |       |  |              |        |   |  |   | (6,500  | )
|                                                        
|                                                        
|                                                        
|                                                        
|Operating profit                                         |  |          | 17,384  |             |  |           | 1,654  |       |  |              | (1,516  | ) |  |   | 17,522  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Depreciation and amortization                            |  |          | 2,921   |             |  |           | 1,825  |       |  |              |        |   |  |   | 4,746   |  
|                                                        
|                                                        
|                                                        
|                                                        
|Net interest income                                      |  |          | 358     |             |  |           | 208    |       |  |              |        |   |  |   | 566     |  
|                                                        
|                                                        
|                                                        
|                                                        
|Net operating assets                                     |  |          | 90,217  |             |  |           | 15,481 |       |  |              | 190,749 |   |  |   | 296,447 |  

|                                                    |  |          |         |             |  |           |         |       |  |              |         |   |  |   |         |  
|--------------------------------------------------- |  | -------- | ------- | ----------- |  | --------- | ------- | ----- |  | ------------ | ------- | - |  | - | ------- | -
|                                                    |  |          |         |             |  | Corporate
|                                                    |  | Merchant |         | Outsourcing |  |           |         |       |  | Consolidated
|(Dollars in thousands)                              |  | Services |         | Solutions   |  | Corporate |         | Total
|                                                    |  |          |         |             |  |           |         |      
|For the six months ended June 30, 2000             
|                                                   
|                                                   
|                                                   
|                                                   
|Revenue                                             |  | $        | 147,015 |             |  | $         | 55,365  |       |  | $            |        |   |  | $ | 202,380 |  
|                                                   
|                                                   
|                                                   
|                                                   
|Impairment, restructuring loss and related
expenses |  |          |        |             |  |           | 1,500   |       |  |              |        |   |  |   | 1,500   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Operating profit (loss)                             |  |          | 25,659  |             |  |           | 7,182   |       |  |              | (3,854  | ) |  |   | 28,987  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Depreciation and amortization                       |  |          | 7,096   |             |  |           | 3,602   |       |  |              |        |   |  |   | 10,698  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net interest income                                 |  |          | 2,783   |             |  |           | 910     |       |  |              |        |   |  |   | 3,693   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net operating assets                                |  |          | 103,004 |             |  |           | 51,001  |       |  |              | 182,766 |   |  |   | 336,771 |  
|                                                   
|                                                   
|                                                   
|                                                   
|For the six months ended June 30, 1999             
|                                                   
|                                                   
|                                                   
|                                                   
|Revenue                                             |  | $        | 147,813 |             |  | $         | 86,463  |       |  | $            |        |   |  | $ | 234,276 |  
|                                                   
|                                                   
|                                                   
|                                                   
|Impairment, restructuring and related
expenses      |  |          | 21,636  |             |  |           | 48,030  |       |  |              |        |   |  |   | 69,666  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Operating loss                                      |  |          | (6,712  | )           |  |           | (39,689 | )     |  |              | (3,266  | ) |  |   | (49,667 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Depreciation and amortization                       |  |          | 6,226   |             |  |           | 5,606   |       |  |              |        |   |  |   | 11,832  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net interest income                                 |  |          | 387     |             |  |           | 197     |       |  |              |        |   |  |   | 584     |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net operating assets                                |  |          | 90,217  |             |  |           | 15,481  |       |  |              | 190,749 |   |  |   | 296,447 |  

9



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##### Table of Contents






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

Components of Revenue and Expenses

Revenue.The Companys Merchant Services revenue is primarily derived from
fees paid by merchants for the authorization and settlement of credit and debit
card transactions. Revenue is recorded net of interchange fees charged by the
credit card associations. Corporate Outsourcing Solutions provides a variety
of financial and administrative processing solutions to large corporate
customers. These solutions include financial settlement, image scanning, data
capture, storage and retrieval, call center, and value-added customer
reporting. A portion of Corporate Outsourcing Solutions revenue is also
derived from an exclusive long-term contract with the Airlines Reporting
Corporation (ARC) under which the Company is compensated on a cost plus
basis. A small portion of revenue is derived from earnings on cash balances,
which are maintained by customers pursuant to contract terms.

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

Results of Operations

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

10



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##### Table of Contents



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

|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |         |       |         |     |      |      |     |  
|------------------------------------------ | ------------------------------- | ------------------------------- | -------------------------------------------------------- | -------- | ------ | ------- | ---- | -------- | ------ | ------ | ------ | ------ | ----- | ------- | -- | --- | -- | --- | ------ | ------- | ----- | ------- | --- | ---- | ---- | --- | -
|                                           |                                 |                                 |                                                          |          | 2000   |         | 1999 |          | Change
|                                           |                                 |                                 |                                                          |          |        |         |      |          |       
|(Dollars in thousands)                     |                                 |                                 |                                                          |          |        | % of    |      |          |        |        |        | % of  
|                                           |                                 | Amount                          |                                                          | Revenues |        | Amount  |      | Revenues |        | Amount |        | %     
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |   
|Revenue:                                  
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                 | $                                                        | 76,104   |        |         |      | 73       | %      |        | $      | 64,549 |       |         |    | 59  | %  |     | $      | 11,555  |       |         |     | 18   | %   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                 |                                                          | 28,409   |        |         |      | 27       |        |        |        | 27,678 |       |         |    | 25  |    |     |        | 731     |       |         |     | 3    |     
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|                                           |                                 |                                 | Total Core Revenue                                       |          |        | 104,513 |      |          |        | 100    |        |        |       | 92,227  |    |     |    | 84  |        |         |       | 12,286  |     |      |      | 13  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                 |                                                          |         |        |         |      |         |        |        |        | 17,586 |       |         |    | 16  |    |     |        | (17,586 | )     |         |     | (100 | )   
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|                                           |                                 |                                 | Total Revenue                                            |          |        | 104,513 |      |          |        | 100    |        |        |       | 109,813 |    |     |    | 100 |        |         |       | (5,300  | )   |      |      | (5  | )
|                                          
|                                          
|                                          
|                                          
|Operating Expenses:                       
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                 |                                                          | 62,654   |        |         |      | 82       |        |        |        | 56,497 |       |         |    | 88  |    |     |        | 6,157   |       |         |     | 11   |     
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                 |                                                          | 23,286   |        |         |      | 82       |        |        |        | 22,951 |       |         |    | 83  |    |     |        | 335     |       |         |     | 1    |     
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|                                           |                                 |                                 | Core Operating Expenses                                  |          |        | 85,940  |      |          |        | 82     |        |        |       | 79,448  |    |     |    | 86  |        |         |       | 6,492   |     |      |      | 8   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                 |                                                          |         |        |         |      |         |        |        |        | 17,827 |       |         |    | 101 |    |     |        | (17,827 | )     |         |     | (100 | )   
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|                                           |                                 |                                 | Total Operating Expenses                                 |          |        | 85,940  |      |          |        | 82     |        |        |       | 97,275  |    |     |    | 89  |        |         |       | (11,335 | )   |      |      | (12 | )
|                                          
|                                          
|                                          
|                                          
|Segment Profit (Loss):                    
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Merchant Services               |                                                          |          | 13,450 |         |      |          | 18     |        |        |        | 8,052 |         |    |     | 12 |     |        |         | 5,398 |         |     |      | 67   |    
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Corporate Outsourcing Solutions |                                                          |          | 5,123  | (2)     |      |          | 18     |        |        |        | 4,727 |         |    |     | 17 |     |        |         | 396   |         |     |      | 8    |    
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|                                           |                                 |                                 | Total Core Segment Profit                                |          |        | 18,573  |      |          |        | 18     |        |        |       | 12,779  |    |     |    | 14  |        |         |       | 5,794   |     |      |      | 45  |  
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Divested Business Lines         |                                                          |          |       |         |      |          |       |        |        |        | (241  | )(1)    |    |     | (1 | )   |        |         | 241   |         |     |      | (100 | )  
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|                                           |                                 |                                 | Total Segment Profit                                     |          |        | 18,573  |      |          |        | 18     |        |        |       | 12,538  |    |     |    | 11  |        |         |       | 6,035   |     |      |      | 48  |  
|                                          
|                                          
|                                          
|                                          
|Other General and Administrative
Expenses  |                                 |                                 | 1,717                                                    |          |        |         | 2    |          |        |        | 1,516  |        |       |         | 1  |     |    |     | 201    |         |       |         | 13  |     
|                                          
|                                          
|                                          
|                                          
|Net Interest Income                        |                                 |                                 | 1,878                                                    |          |        |         | 2    |          |        |        | 566    |        |       |         | 1  |     |    |     | 1,312  |         |       |         | 232 |     
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|Income Before Taxes and Nonrecurring
Items |                                 |                                 | 18,734                                                   |          |        |         | 18   |          |        |        | 11,588 |        |       |         | 11 |     |    |     | 7,146  |         |       |         | 62  |     
|                                          
|                                          
|                                          
|                                          
|Nonrecurring Items:                       
|                                          
|                                          
|                                          
|                                          
|                                           |                                 |                                 | Impairment, Restructuring and Related
(Expenses) Credits |          |        | (1,500  | )    |          |        | (1     | )      |        |       | 6,500   |    |     |    | 6   |        |         |       | (8,000  | )   |      |      | NM  |  
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|Income Before Taxes                        |                                 |                                 | 17,234                                                   |          |        |         | 16   |          |        |        | 18,088 |        |       |         | 16 |     |    |     | (854   | )       |       |         | (5  | )   
|                                          
|                                          
|                                          
|                                          
|Provision for Income Taxes                 |                                 |                                 | 6,758                                                    |          |        |         | 6    |          |        |        | 6,115  |        |       |         | 6  |     |    |     | 643    |         |       |         | 11  |     
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        
|Net Income                                 |                                 | $                               | 10,476                                                   |          |        |         | 10   |          |        | $      | 11,973 |        |       |         | 11 |     |    | $   | (1,497 | )       |       |         | (13 | )   
|                                           |                                 |                                 |                                                          |          |        |         |      |          |        |        |        |        |       |         |    |     |    |     |        |        

NM  Not meaningful



|(1) |  | Excludes $6.5 million impairment credit for the business lines divested in the first half of 1999
(Freight, Payables, Remittance and Check Services).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes $1.5 million charge for site consolidation initiatives.                                                                                     

|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |        |       |        |   |  |  |  |  |     |    |     |  
|----------------------------- | --------------------- | ------------------- | ------------------- | ------ | ------ | ------ | ---- | - | ------ | ------ |  | --- | -- | -- | - | ------ | ----- | ------ |  |  |  |  |  | --- | -- | -- | - | ------ | ----- | ------ | - |  |  |  |  | --- | -- | --- | -
|                              |                       |                     |                     |        | 2000   |        | 1999 |   | Change
|                              |                       |                     |                     |        |        |        |      |   |       
|(Dollars in thousands,       
|except per share amounts)     |                       | Amount              |                     |        |        |        |      | % |        | Amount |  |     |    |    |   | %      |       | Amount |  |  |  |  |  | %  
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |    
|Excluding Nonrecurring Items:
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income        |                     | $                   | 18,734 |        |        |      |   |        |        |  | 100 | %  |    | $ | 11,588 |       |        |  |  |  |  |  | 100 | %  |    | $ | 7,146  |       |        |   |  |  |  |  | 62  | % 
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | 7,283  |        |        |      |   |        |        |  | 39  |    |    |   | 3,336  |       |        |  |  |  |  |  | 29  |    |    |   | 3,947  |       |        |   |  |  |  |  | 118 |   
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|                              |                       | Net Income          |                     | $      | 11,451 |        |      |   |        |        |  |     | 61 |    |   | $      | 8,252 |        |  |  |  |  |  |     | 71 |    |   | $      | 3,199 |        |   |  |  |  |  |     | 39 |    
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|                              |                       | Per Share  Diluted |                     | $      | 0.22   |        |      |   |        |        |  |     |    |    |   | $      | 0.16  |        |  |  |  |  |  |     |    |    |   | $      | 0.06  |        |   |  |  |  |  |     | 38 |    
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|Nonrecurring Items:          
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income (Loss) |                     | $                   | (1,500 | )      |        |      |   |        |        |  | 100 | %  |    | $ | 6,500  |       |        |  |  |  |  |  | 100 | %  |    | $ | (8,000 | )     |        |   |  |  |  |  | NM  |   
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | (525   | )      |        |      |   |        |        |  | 35  |    |    |   | 2,779  |       |        |  |  |  |  |  | 43  |    |    |   | (3,304 | )     |        |   |  |  |  |  | NM  |   
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|                              |                       |                     | Net Income (Loss)   |        | $      | (975   | )    |   |        |        |  |     |    | 65 |   |        | $     | 3,721  |  |  |  |  |  |     |    | 57 |   |        | $     | (4,696 | ) |  |  |  |  |     |    | NM  |  
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|                              |                       |                     | Per Share  Diluted |        | $      | (0.02  | )    |   |        |        |  |     |    |    |   |        | $     | 0.08   |  |  |  |  |  |     |    |    |   |        | $     | (0.10  | ) |  |  |  |  |     |    | NM  |  
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|Total:                       
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income        |                     | $                   | 17,234 |        |        |      |   |        |        |  | 100 | %  |    | $ | 18,088 |       |        |  |  |  |  |  | 100 | %  |    | $ | (854   | )     |        |   |  |  |  |  | (5  | ) 
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | 6,758  |        |        |      |   |        |        |  | 39  |    |    |   | 6,115  |       |        |  |  |  |  |  | 34  |    |    |   | 643    |       |        |   |  |  |  |  | 11  |   
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|                              |                       |                     | Net Income          |        | $      | 10,476 |      |   |        |        |  |     |    | 61 |   |        | $     | 11,973 |  |  |  |  |  |     |    | 66 |   |        | $     | (1,497 | ) |  |  |  |  |     |    | (13 | )
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       
|                              |                       |                     | Per Share  Diluted |        | $      | 0.21   |      |   |        |        |  |     |    |    |   |        | $     | 0.24   |  |  |  |  |  |     |    |    |   |        | $     | (0.03  | ) |  |  |  |  |     |    | (13 | )
|                              |                       |                     |                     |        |        |        |      |   |        |        |  |     |    |    |   |        |       |        |  |  |  |  |  |     |    |    |   |       

NM  Not meaningful

11



---



##### Table of Contents



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

Merchant Services

Revenue for the core business line increased 18% to $76.1 million from
$64.5 million. Transaction and dollar volume processed increased 27% and 21%,
respectively, primarily due to new customer accounts, including the acquisition
of a merchant processing portfolio on December 31, 1999, and increased volume
from existing customers. Operating expenses for the core business line
increased 11% to $62.7 million from $56.5 million primarily due to the customer
base expansion and increased volume. Operating margins as a percentage of
revenue increased to 18% from 12%, primarily due to increased revenue from
higher-margin regional merchants, improved pricing related to vendor
renegotiations, and economies of scale based on increased volumes. In
addition, the 1999 period contained Year 2000 testing and remedition expenses
that did not recur in 2000. Due primarily to the factors outlined above,
segment profit for the quarter ended June 30, 2000 increased 67% to $13.5
million in 2000 from $8.1 million in 1999.

Corporate Outsourcing Solutions

Revenue for the core business lines increased 3% to $28.4 million from
$27.7 million. Revenue increased due to volume growth and pricing adjustments
in certain products within the Travel business line and volume growth in the
Healthcare Claims Processing Services business line. These increases were
partially offset by decreases in revenues resulting from the continuing
conversion from paper to electronic ticketing and reporting. Operating
expenses for the core business lines increased 1% to $23.3 million from $23.0
million due primarily to increased volumes. As a result of the items discussed
above, segment profit for the quarter ended June 30, 2000 increased 8% to $5.1
million from $4.7 million in 1999.

Other General and Administrative Expenses

Other general and administrative expenses are comprised of corporate
expenses that are not included in the determination of segment profit for the
business segments. For the quarter ended June 30, 2000, these expenses
increased 13% to $1.7 million from $1.5 million in 1999, due primarily to a new
performance incentive program instituted for certain exempt employees who were
not previously included under the Companys other performance incentive
programs.

Divested Business Lines

Divested business lines are comprised of the Remittance, Payables, Freight
(all formerly part of the Corporate Outsourcing Solutions segment) and Check
Services (formerly part of the Merchant Services segment) business lines that
were sold by the Company in the first half of 1999. Segment loss for the
divested business lines was $0.2 million in the second quarter of 1999.

12



---



##### Table of Contents



Net Interest Income

Net interest income for the second quarter increased to $1.9 million from
$0.6 million for the same period of 1999 due to the increased level of cash and
investments as well as rising interest rates. The increased levels of cash and
investments were due primarily to the receipt of sale proceeds from the
business lines that were divested in the second quarter of 1999, as well as
internal cash flow.

Nonrecurring Items

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

In the second quarter of 1999, a pre-tax credit of $6.5 million was
recorded related to the dispositions of the Freight, Payables, Remittance and
Check business lines. The credit, which totaled $3.7 million after-tax, or
$0.08 per share, represents favorable adjustments to the first quarter
estimated impairment loss for the disposition of these business lines, which
were completed during the second quarter of 1999.

Provision for Income Taxes

Excluding the impact of nonrecurring items, the effective tax rate was
38.9% for the second quarter of 2000 compared to 28.8% for the same period a
year ago. This increase was due primarily to recording income tax on all
foreign income at its U.S. statutory rate in 2000, as well as an increase in
U.S. income versus offshore income, which is additionally subject to state and
local taxation. The increase in the effective tax rate in the second quarter
of 2000 was partially offset by $0.3 million due to a reduction in the state
net operating loss carryforward valuation allowance.

13



---



##### Table of Contents



Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |         |        |         |     |      |      |     |  
|------------------------------------------ | ------------------------------- | ------------------------------- | ---------------------------------------------- | -------- | ------ | ------- | ---- | -------- | ------ | ------ | ------- | ------- | ------ | ------- | --- | --- | -- | --- | ------ | ------- | ------ | ------- | --- | ---- | ---- | --- | -
|                                           |                                 |                                 |                                                |          | 2000   |         | 1999 |          | Change
|                                           |                                 |                                 |                                                |          |        |         |      |          |       
|(Dollars in thousands)                     |                                 |                                 |                                                |          |        | % of    |      |          |        |        |         | % of   
|                                           |                                 | Amount                          |                                                | Revenues |        | Amount  |      | Revenues |        | Amount |         | %      
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |    
|Revenue:                                  
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                 | $                                              | 147,015  |        |         |      | 73       | %      |        | $       | 123,519 |        |         |     | 53  | %  |     | $      | 23,496  |        |         |     | 19   | %   
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                 |                                                | 55,365   |        |         |      | 27       |        |        |         | 53,422  |        |         |     | 23  |    |     |        | 1,943   |        |         |     | 4    |     
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|                                           |                                 |                                 | Total Core Revenue                             |          |        | 202,380 |      |          |        | 100    |         |         |        | 176,941 |     |     |    | 76  |        |         |        | 25,439  |     |      |      | 14  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                 |                                                |         |        |         |      |         |        |        |         | 57,335  |        |         |     | 24  |    |     |        | (57,335 | )      |         |     | (100 | )   
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|                                           |                                 |                                 | Total Revenue                                  |          |        | 202,380 |      |          |        |        |         |         |        | 234,276 |     |     |    | 100 |        |         |        | (31,896 | )   |      |      | (14 | )
|                                          
|                                          
|                                          
|                                          
|Operating Expenses:                       
|                                          
|                                          
|                                          
|                                          
|                                           | Merchant Services               |                                 |                                                | 121,356  |        |         |      | 83       |        |        |         | 109,165 |        |         |     | 88  |    |     |        | 12,191  |        |         |     | 11   |     
|                                          
|                                          
|                                          
|                                          
|                                           | Corporate Outsourcing Solutions |                                 |                                                | 46,683   |        |         |      | 84       |        |        |         | 44,184  |        |         |     | 83  |    |     |        | 2,499   |        |         |     | 6    |     
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|                                           |                                 |                                 | Core Operating Expenses                        |          |        | 168,039 |      |          |        | 83     |         |         |        | 153,349 |     |     |    | 87  |        |         |        | 14,690  |     |      |      | 10  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Divested Business Lines         |                                 |                                                |         |        |         |      |         |        |        |         | 57,662  |        |         |     | 101 |    |     |        | (57,662 | )      |         |     | (100 | )   
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|                                           |                                 |                                 | Total Operating Expenses                       |          |        | 168,039 |      |          |        | 83     |         |         |        | 211,011 |     |     |    | 90  |        |         |        | (42,972 | )   |      |      | (20 | )
|                                          
|                                          
|                                          
|                                          
|Segment Profit (Loss):                    
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Merchant Services               |                                                |          | 25,659 |         |      |          | 17     |        |         |         | 14,354 | (1)     |     |     | 12 |     |        |         | 11,305 |         |     |      | 79   |    
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Corporate Outsourcing Solutions |                                                |          | 8,682  | (4)     |      |          | 16     |        |         |         | 9,238  | (2)     |     |     | 17 |     |        |         | (556   | )       |     |      | (6   | )  
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|                                           |                                 |                                 | Total Core Segment Profit                      |          |        | 34,341  |      |          |        | 17     |         |         |        | 23,592  |     |     |    | 13  |        |         |        | 10,749  |     |      |      | 46  |  
|                                          
|                                          
|                                          
|                                          
|                                           |                                 | Divested Business Lines         |                                                |          |       |         |      |          |       |        |         |         | (327   | )(3)    |     |     | (1 | )   |        |         | 327    |         |     |      | (100 | )  
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|                                           |                                 |                                 | Total Segment Profit                           |          |        | 34,341  |      |          |        | 17     |         |         |        | 23,265  |     |     |    | 10  |        |         |        | 11,076  |     |      |      | 48  |  
|                                          
|                                          
|                                          
|                                          
|Other General and Administrative Expenses  |                                 |                                 | 3,854                                          |          |        |         | 2    |          |        |        | 3,266   |         |        |         | 1   |     |    |     | 588    |         |        |         | 18  |     
|                                          
|                                          
|                                          
|                                          
|Net Interest Income                        |                                 |                                 | 3,693                                          |          |        |         | 2    |          |        |        | 584     |         |        |         |    |     |    |     | 3,109  |         |        |         | 532 |     
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|Income Before Taxes and Nonrecurring
Items |                                 |                                 | 34,180                                         |          |        |         | 17   |          |        |        | 20,583  |         |        |         | 9   |     |    |     | 13,597 |         |        |         | 66  |     
|                                          
|                                          
|                                          
|                                          
|Nonrecurring Items:                       
|                                          
|                                          
|                                          
|                                          
|                                           |                                 |                                 | Impairment, Restructuring and Related
Expenses |          |        | (1,500  | )    |          |        | (1     | )       |         |        | (69,666 | )   |     |    | (30 | )      |         |        | 68,166  |     |      |      | NM  |  
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|Income (Loss) Before Taxes                 |                                 |                                 | 32,680                                         |          |        |         | 16   |          |        |        | (49,083 | )       |        |         | (21 | )   |    |     | 81,763 |         |        |         | NM  |     
|                                          
|                                          
|                                          
|                                          
|Provision for Income Taxes                 |                                 |                                 | 12,656                                         |          |        |         | 6    |          |        |        | 7,129   |         |        |         | 3   |     |    |     | 5,527  |         |        |         | NM  |     
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        
|Net Income (Loss)                          |                                 | $                               | 20,024                                         |          |        |         | 10   |          |        | $      | (56,212 | )       |        |         | (24 | )   |    | $   | 76,236 |         |        |         | NM  |     
|                                           |                                 |                                 |                                                |          |        |         |      |          |        |        |         |         |        |         |     |     |    |     |        |        

NM  Not meaningful



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

|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |        |       |        |  |    |    |    | 
|----------------------------- | --------------------- | ------------------- | ------------------- | ------ | ------ | ------ | - | --- | -- | ------ | ---- | ------- | ------ | ------- | - | --- | -- | --- | - | ------ | ----- | ------ |  | -- | -- | -- | 
|                              |                       |                     |                     |        | 2000   |        |   |     |    |        | 1999 |         | Change
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |       
|(Dollars in thousands,       
|except per share amounts)     |                       | Amount              |                     | %      |        | Amount |   | %   |    | Amount |      | %      
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |        
|Excluding Nonrecurring Items:
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income        |                     | $                   | 34,180 |        |        |   | 100 | %  |        | $    | 20,583  |        |         |   | 100 | %  |     | $ | 13,597 |       |        |  | 66 | % 
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | 13,181 |        |        |   | 39  |    |        |      | 6,657   |        |         |   | 32  |    |     |   | 6,524  |       |        |  | 98 |   
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|                              |                       | Net Income          |                     | $      | 20,999 |        |   |     | 61 |        |      | $       | 13,926 |         |   |     | 68 |     |   | $      | 7,073 |        |  |    | 51 |   
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|                              |                       | Per Share  Diluted |                     | $      | 0.41   |        |   |     |    |        |      | $       | 0.27   |         |   |     |    |     |   | $      | 0.14  |        |  |    | 50 |   
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|Nonrecurring Items:          
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income (Loss) |                     | $                   | (1,500 | )      |        |   | 100 |    |        | $    | (69,666 | )      |         |   | 100 | %  |     | $ | 68,166 |       |        |  | NM |   
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | (525   | )      |        |   | 35  |    |        |      | 472     |        |         |   | (1  | )  |     |   | (997   | )     |        |  | NM |   
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|                              |                       |                     | Net Income (Loss)   |        | $      | (975   | ) |     |    | 65     |      |         | $      | (70,138 | ) |     |    | 101 |   |        | $     | 69,163 |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|                              |                       |                     | Per Share  Diluted |        | $      | (0.02  | ) |     |    |        |      |         | $      | (1.38   | ) |     |    |     |   |        | $     | 1.36   |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|Total:                       
|                             
|                             
|                             
|                             
|                              | Pre-Tax Income (Loss) |                     | $                   | 32,680 |        |        |   | 100 | %  |        | $    | (49,083 | )      |         |   | 100 | %  |     | $ | 81,763 |       |        |  | NM |   
|                             
|                             
|                             
|                             
|                              | Taxes                 |                     |                     | 12,656 |        |        |   | 39  |    |        |      | 7,129   |        |         |   | (15 | )  |     |   | 5,527  |       |        |  | NM |   
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|                              |                       |                     | Net Income (Loss)   |        | $      | 20,024 |   |     |    | 61     |      |         | $      | (56,212 | ) |     |    | 115 |   |        | $     | 76,236 |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       
|                              |                       |                     | Per Share  Diluted |        | $      | 0.39   |   |     |    |        |      |         | $      | (1.11   | ) |     |    |     |   |        | $     | 1.50   |  |    |    | NM | 
|                              |                       |                     |                     |        |        |        |   |     |    |        |      |         |        |         |   |     |    |     |   |       

NM  Not meaningful

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Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

Merchant Services

Revenue for the core business line increased 19% to $147.0 million from
$123.5 million. Transaction and dollar volume increased 27% and 21%,
respectively, primarily due to new customer accounts, including the acquisition
of a merchant processing portfolio on December 31, 1999, and increased volume
from existing customers. Operating expenses for the core business line
increased 11% to $121.4 million from $109.2 million primarily due to the
customer base expansion and increased volume. Operating margins as a
percentage of revenue increased to 17% from 12%, primarily due to increased
revenue from higher-margin regional merchants, improved pricing related to
vendor renegotiations, and economies of scale based on increased volumes. In
addition, the 1999 period contained Year 2000 testing and remedition expenses
that did not recur in 2000. Due primarily to the factors outlined above,
segment profit for the six months ended June 30, 2000, increased 79% to $25.7
million in 2000 from $14.4 million in 1999.

Corporate Outsourcing Solutions

Revenue for the core business lines increased 4% to $55.4 million from
$53.4 million. This increase was principally related to volume growth in the
Healthcare Claims Processing Services business line and certain products within
the Travel business line. These increases were partially offset by decreases
in revenue resulting from the continuing conversion from paper to electronic
ticketing and reporting. Operating expenses for the core business lines
increased 6% to $46.7 million from $44.2 million due primarily to increased
volumes, as well as severance expense of $0.5 million recorded in the first
quarter of 2000. As a result of the items discussed above, segment profit for
the six months ended June 30, 2000 decreased 6% to $8.7 million in 2000 from
$9.2 million in 1999.

Other General and Administrative Expenses

Other general and administrative expenses are comprised of corporate
expenses that are not included in the determination of segment profit for the
business segments. For the six months ended June 30, 2000, these expenses
increased 18% to $3.9 million in 2000 from $3.3 million in 1999, due primarily
to a new performance incentive program instituted for certain exempt employees
who were not previously included under the Companys other performance
incentive program.

Divested Business Lines

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

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##### Table of Contents



Net Interest Income

Net interest income for the six months ended June 30, 2000 increased to
$3.7 from $0.6 million for the same period in 1999 due to the increased level
of cash and investments as well as rising interest rates. The increased levels
of cash and investments were due primarily to the receipt of sale proceeds from
the business lines that were divested in the second quarter of 1999, as well as
internal cash flow.

Nonrecurring Items

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

During the quarter ended March 31, 1999, the Company recorded nonrecurring
restructuring charges of $2.2 million, including $1.9 million for severance pay
for approximately 540 employees and $0.3 million for other costs. These
charges related to two of the Companys facilities which have been closed and
consolidated into the Companys other operating facilities. These charges
decreased net income and earnings per share by approximately $1.8 million and
$.04, respectively. At June 30, 2000, the remaining liability was $0.4 million
and related primarily to future severance payments for approximately 80
employees.

During the first half of 1999, the Company committed to a formal plan to
dispose of its Freight, Payables, Remittance and Check Services business lines
and recorded impairment losses and related expenses of $67.4 million related to
the sale and wind-down of these business lines. The charges decreased net
income and earnings per share for the six months ended June 30, 1999 by $68.3
million and $1.35, respectively. Effective April 1, 1999, the Company sold its
Freight and Payables business lines for $18.3 million. Effective June 1, 1999,
the Company sold its Remittance and Check business lines for $44.3 million. At
March 31, 2000, the Company had $2.7 million remaining related to the final
obligations of these dispositions recorded in other accrued liabilities. The
remaining obligations are primarily for future severance payments, rent
subsidies and processing subsidies. For the six months ended June 30, 1999,
these divested business units had revenues of $57.3 million.

Provision for Income Taxes

Excluding the impact of nonrecurring items, the effective tax rate was
38.6% for the six months ended June 30, 2000 compared to 32.3% for the same
period a year ago. This increase was due primarily to recording income tax on
all foreign income at its U.S. statutory tax rate in 2000, as well as an
increase in U.S. income versus offshore income, which is additionally subject
to state and local taxation. The increase in the effective tax rate in the
first six months of 2000 was partially offset by $0.6 million due to a
reduction in the state net operating loss carryforward valuation allowance.

The overall effective tax rate for 1999 included the effect of the
write-off of $65.7 million of nondeductible goodwill related to the divested
business lines.

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##### Table of Contents



Seasonality

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

Liquidity and Capital Resources

The Companys primary uses of capital include capital expenditures,
working capital and acquisitions. Future business acquisitions may be funded
through current liquidity, borrowed funds, and/or issuances of common stock.

The Companys capital expenditures include amounts for computer hardware
and software, scanning and other document processing equipment as well as
leasehold improvements to operating facilities. During the six month period
ended June 30, 2000, the Companys capital expenditures totaled $6.2 million.
Such expenditures were principally financed from operating cash flow, which
totaled approximately $42.9 million for the six month period. Operating cash
flow during the six month period ended June 30, 1999 totaled $87.3 million and
capital expenditures were $5.9 million. It is anticipated that future
expenditures will be funded with operating cash flow.

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

The Company maintains restricted cash balances held on behalf of clients
pending distribution to vendors which are shown on the balance sheet as assets
and equivalent offsetting liabilities. These cash balances totaled
approximately $29.4 million and $22.2 million as of
June 30, 2000 and December 31, 1999, respectively.

Forward Looking Statements

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

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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



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | On May 5, 2000, at the Annual Stockholders Meeting of the Registrant,
the shareholders took the following actions:



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | 1. Elected as directors all nominees designated in the proxy
statement of March 28, 2000 as follows:

|                     |  |                 |            |          |  |  |        | 
|-------------------- |  | --------------- | ---------- | -------- |  |  | ------ | 
|                     |  | Number of Votes
|                     |  |                
|                     |  | For             |            | Withheld
|                     |  |                 |            |         
|Jon L. Gorney        |  |                 | 50,640,315 |          |  |  | 41,227 | 
|                    
|                    
|                    
|                    
|Jeffrey P. Gotschall |  |                 | 50,641,715 |          |  |  | 39,827 | 
|                    
|                    
|                    
|                    
|Jeffrey D. Kelly     |  |                 | 50,643,797 |          |  |  | 37,745 | 
|                    
|                    
|                    
|                    
|J. Armando Ramirez   |  |                 | 50,642,815 |          |  |  | 38,727 | 



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. Approved the National Processing, Inc. 2000 Stock Option Plan:
47,416,339 votes cast for 1,963,685, votes cast against, and 4,800 votes
withheld.



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. Approved the selection of Ernst & Young LLP as independent auditors
for the Registrant for 2000: 50,655,142 votes cast for, 25,600 votes
cast against, and 800 votes withheld.

Item 5. Other Information (None)

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



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

10.28 National Processing, Inc. 2000 Stock Option Plan

27.1 Financial Data Schedule



|                      
|----------------------
|b. Reports on Form 8-K

April 17, 2000: On April 17, 2000, the Registrant issued a press release
reporting earnings for the quarter ended March 31, 2000.

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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: August 11, 2000 |  | By: /s/ Thomas A. Wimsett                                                                        
|                     
|                      |  | Thomas A. Wimsett
President and Chief Executive Officer
(Duly Authorized Signer)                 
|                     
|                      |  | By: /s/ David E. Fountain                                                                        
|                     
|                      |  | David E. Fountain
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

19