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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
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 1-14224
FIRST USA PAYMENTECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 75-2634185
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1601 ELM STREET, 8TH FLOOR
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 849-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
ON WHICH THE COMMON
TITLE OF EACH CLASS STOCK IS REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by a 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 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of September 6, 1996, the aggregate market value of the voting stock
held by non-affiliates of the Registrant computed by reference to the closing
price of First USA Paymentech, Inc. Common Stock as reported on the New York
Stock Exchange on such date was approximately $219,275,691. For purposes of such
calculation, shares owned by directors and executive officers of the Company
have been treated as owned by affiliates of the Company, although such treatment
is not an admission of the affiliate status of any of such parties. As of
September 6, 1996, there were outstanding 31,702,681 shares of First USA
Paymentech, Inc. Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Stockholders for the year ended June
30, 1996 are incorporated by reference into Parts II and IV. Portions of the
definitive Proxy Statement for the First USA Paymentech, Inc. Annual Meeting of
Stockholders to be held October 23, 1996 are incorporated by reference into Part
III.
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FIRST USA PAYMENTECH, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE
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ITEM 1. BUSINESS...................................................................................... 3
ITEM 2. PROPERTIES................................................................................... 15
ITEM 3. LEGAL PROCEEDINGS............................................................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................ 16
ITEM 6. SELECTED FINANCIAL DATA...................................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 17
ITEM 11. EXECUTIVE COMPENSATION....................................................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................. 20
SIGNATURES
Signatures.................................................................................................. 23
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PART I
ITEM 1. BUSINESS
First USA Paymentech, Inc. (the "Company"), incorporated in 1995, is a
Delaware corporation, which, through its wholly owned subsidiary First USA
Merchant Services, Inc. ("Merchant Services"), engages in the credit card
industry primarily as a payment processor of bankcard transactions. According to
published industry sources, the Company is the third largest payment processor
of bankcard transactions in the United States, with sales volume processed of
approximately $30.9 billion in approximately 574 million transactions in fiscal
1996. In addition, through its wholly owned subsidiary First USA Financial
Services, Inc. ("Financial Services"), the Company began in September 1995 to
actively market and issue commercial cards to businesses and other entities.
Commercial cards facilitate centralized business-to-business payment procedures
and reporting, replacing traditional direct payment methods.
First USA, Inc. ("First USA") is the beneficial owner of approximately 77%
of the outstanding common stock of the Company. First USA is also the beneficial
owner of all of the outstanding common stock of First USA Bank, the fourth
largest issuer of Visa and MasterCard credit cards in the United States, and
First USA Federal Savings Bank ("First USA FSB"), a thrift institution which
offers financial products other than credit cards, focusing on relationships
with existing Cardmembers of First USA Bank.
The address of the principal executive office of the Company is 1601 Elm
Street, Dallas, Texas 75201, and its telephone number is (214) 849-3700.
PAYMENT PROCESSING
General
According to published industry sources, the Company is the third largest
payment processor of bankcard transactions in the United States. During fiscal
1996, the Company processed approximately $30.9 billion in sales volume and
approximately 574 million transactions. The Company markets its services
directly to merchants and indirectly through financial institutions and sales
agents, which in turn market the processing services to merchants.
The principal operations of the Company are located in Dallas, Texas, with
a number of additional sales and sales support offices throughout the United
States. The principal corporate operations of the Company outside of Dallas,
Texas are located in Salem, New Hampshire; Tampa, Florida; Murray, Utah; New
York, New York; and Mentor, Ohio.
Payment Cycle
The payment cycle includes authorizing bankcard transactions at the point
of sale, capturing data related to transactions, settling transactions with the
card association on behalf of the merchant and providing transaction reporting
to the merchant. In the course of processing an electronic transaction, various
parties operate together and the authorization and capture process is usually
completed within 8-15 seconds. The authorization process includes obtaining
approval from the card issuing bank for the cardholder's purchase at the
merchant location. Authorization procedures confirm that the cardholder has the
available credit to cover the purchase, and verify that the card has not been
reported lost or stolen. In the event that the merchant is not able to connect
with the electronic draft capture ("EDC") network, the Company provides access
to a voice authorization and automated voice response unit that is available 24
hours a day, seven days a week.
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While the transaction is being authorized, the transaction data, including
dollar amount and card number, is captured in the EDC network and transmitted to
the Company for use in settling the transaction and preparing reports to the
merchant. Depending upon the merchant's EDC network, the merchant can capture
transactions at the terminal level or the network computer level. The Company's
internal proprietary data capture system is capable of managing multiple batches
of transactions and data per day from each merchant, which is an important
feature during peak sales periods. In addition, the Company's high-speed batch
deposit system allows direct response merchants to deliver transactions to the
Company and receive immediate authorization responses.
Settlement involves managing a record of each merchant's transactions and
transferring funds from the issuer of the card to the merchant for payment. The
Company transmits transaction information to the card issuing bank through Visa
and MasterCard and arranges for funds to be transferred to the merchant's bank
account via Automated Clearing House or Fedwire transfer, which is ultimately
credited to the merchant's account. The cardholder is then billed by the card
issuing bank. Settlement payments made to merchant accounts may reflect a
discount from the full transaction price, which generally includes the Company's
processing fee and Visa and MasterCard interchange and assessments. Each step in
the settlement process involves a number of procedures that must be completed in
accordance with Visa and MasterCard requirements. From the time of closing a
batch of transactions, the merchant's account will generally be credited within
24 to 72 hours.
The Company uses a number of proprietary and third party national networks
for its authorization, capture and merchant accounting services, including its
internal proprietary network and settlement system. The Company has entered into
agreements with several third party vendors who provide merchant accounting,
network and other processing services to the Company. Other services are
provided by the Company's internal data processing systems. The Company has
emphasized converting existing merchants to, and installing new merchants on,
the Company's internal data processing systems, which have operating costs that
are lower than the costs of obtaining data processing services from third party
vendors. The Company's internal network provides authorization, capture,
settlement and reporting capabilities to its merchants.
In furtherance of the Company's strategy of converting volume to internal
systems, in August 1996, the Company acquired GENSAR Holdings, Inc. ("GENSAR"),
the largest independent third party processor and one of the premier providers
of EDC and authorization services for financial institutions and sales agents,
processing approximately 300 million transactions annually. This acquisition
provided the Company with new and advanced capabilities and product offerings
which it previously outsourced. By converting more volume to its internal
systems, the Company believes it can develop and deliver unique products to the
merchant community.
Products
The Company offers a wide range of quality products and services related to
payment processing, which are known as Paymentech Solutions. The Company's
proprietary and third party licensed software applications and equipment permit
authorization and capture of Visa, MasterCard, Diners Club, Carte Blanche, JCB,
American Express and Discover transactions, as well as offering settlement for
Visa, MasterCard, Diners Club, Carte Blanche and JCB transactions. The Company
also provides value-added services in connection with its processing systems,
including on-line data access, electronic mail communication capabilities and
customized reporting features. The Company has the equipment and applications
which permit it to process credit, charge, debit and private label card
transactions.
Paymentech Solutions include products and PC-support software targeted to
specific industries. In addition to the general retail EDC programs, Paymentech
Solutions provide products that meet the unique needs of the lodging, dining and
direct response industries.
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Lodging Solutions enable hotels of all sizes to streamline front desk and
back office procedures by offering automatic re-authorization at checkout.
Through PC-support software and networking, they also enable hotels to
consolidate information from the gift shop, restaurant and front desk to a
single PC for night auditor or management review.
Dining Solutions is the line of specialized software applications for the
dining industry, designed to provide easy tip-editing and tab-opening functions
and integrated reporting packages which comply with the Internal Revenue Service
tip reporting requirements.
Direct Response Solutions is the Company's comprehensive batch
authorization and accounting system developed exclusively for non-face-to-face
transactions that provides fast transaction authorization and capture
capabilities and installment and deferred billing programs, combined with the
industry's most advanced fraud prevention and chargeback resolution
capabilities. The system also provides for automatic address verification which
reduces fraud. In addition to bankcard processing, the Company also offers
electronic check processing to merchants in the direct response and catalog
industries.
PC Passport is the Company's PC-support software that collects transaction
data from all terminals and all locations and stores it on a single PC, which
enables merchants to balance and review transactions and make one system-wide
batch deposit. The Company has also developed the capability to track frequent
shopper information from proprietary card data and transmit the data to the
merchant's PC. Targeted marketing and demographic reporting is being tested in
cooperation with First USA Bank. The Company also offers customized point of
sale solution packages for car rental agencies, health care providers,
governmental agencies, salons/spas, gas stations, supermarkets and other
commercial establishments that are just beginning to accept bankcards as
payment. The Company believes that its processing systems and services are among
the most comprehensive in the payment processing industry.
Net Revenue
The Company's net revenue is generated primarily from fee income earned
under processing agreements with merchants, financial institutions and sales
agents, which is partially offset by Visa and MasterCard interchange and
assessments. The Company also receives income for several value-added services
it provides, such as enhanced reporting options and terminal products it sells
and leases to merchants.
The processing fees charged to a particular merchant vary with the total
dollar amount processed, average purchase amount and number of transactions
processed for the merchant. There are two primary billing methods, each using a
per-transaction basis for calculating fees. The first billing method, the
discount rate method, is the traditional billing method and is most common for
smaller merchants. Under this billing method, a discount rate is charged for
each transaction. The other billing method is the per item or transaction fee
pricing method. Under this billing method, the merchant is billed a flat fee per
transaction, plus Visa and MasterCard interchange and assessments and certain
per item fees. Larger merchants often prefer this pass-through billing method to
the discount rate method. Financial institutions and sales agents are also
generally charged using the per item or transaction fee billing method.
The Company's principal transaction expenses are Visa and MasterCard
interchange and assessments. Interchange fees are stated fees charged by Visa
and MasterCard to reimburse card issuing banks for the risk of transaction
fraud, processing expenses and funding during the period from purchase to
payment. The fee schedules are set by Visa and MasterCard, and are based upon
the type of merchant, transaction type (electronic or paper-based) and
settlement time. Interchange fees generally range from 1.25% to 2.1% of the
transaction amount. Although interchange rates vary by merchant industry, they
are uniform among payment processors. Assessments
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are stated fees charged by Visa and MasterCard to fund their internal
operations. Assessments are also uniform among payment processors.
The following table provides an example of a transaction in the amount of
$100 in the Visa network in which the discount rate charged to the merchant is
2.0%, the interchange fee is 1.25% and the Visa assessment fee is 0.08%. These
fees can vary substantially among different merchant types.
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THE CARD ISSUING
PAYMENTS AND FEES MERCHANT COMPANY BANK VISA
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Transaction Amount ............... $100.00 $(100.00) -- --
Discount ......................... (2.00) 2.00 -- --
Interchange Fee .................. -- (1.25) $ 1.25 --
Assessment Fee ................... -- (0.08) -- $0.08
Payment by Card Issuing Bank ..... -- 100.00 (100.00) --
Payment by Cardholder ............ -- -- 100.00 --
------- -------- --------- -----
Net Revenue ............ $ 98.00 $ 0.67 $ 1.25 $0.08
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Operating Strategy
In order to remain competitive in the payment processing industry, the
Company continues to dedicate significant resources to acquiring and developing
unique products and services that will lower costs, generate new sales and
reduce customer attrition. The resulting proprietary products, along with
continuing systems enhancements and operating efficiencies, provide improved
services for its merchants, and the Company believes its dedication to
developing these products will allow it to remain highly competitive in the
industry.
The Company is committed to providing superior service and retaining its
current customer base. The Company provides an extensive package of high quality
service features to its merchants, including toll-free customer service and
terminal support 24 hours a day, seven days a week, 48-hour terminal
replacement, terminal set-up assistance and training for new merchants and
flexible reporting capabilities, both in frequency and format. Long-term
relationships are established through the continued support and interaction of
professional account managers.
The Company believes that its investment in open systems versus mainframe
technology has allowed it to implement business solutions in less time and at a
lower cost than its competitors. This approach provides a broad range of EDC
products and merchant accounting systems.
The Company has obtained a license for a new artificial intelligence system
that will significantly improve chargeback and retrieval processing. A
chargeback is an action initiated by a cardholder, or an issuing bank on behalf
of a cardholder, disputing a particular transaction. A chargeback requires a
prompt response and appropriate actions to avoid the merchant being debited for
the transaction amount. The system is called ACE (Automated Chargeback
Exchange), and its features will allow the Company to reduce the number of
chargebacks ultimately charged to its merchants as well as the back office time
and expense associated with chargeback resolutions. The new chargeback system
allows approximately 40% of all chargebacks to be resolved automatically,
without human intervention, and reduces resolution cycle times.
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The Company has developed an innovative on-line risk management program to
address the bankcard fraud concerns of merchants. The program is designed to
effectively detect and monitor potential fraudulent activity in merchant
accounts. Additional re-engineering projects currently in development which
management believes will enhance the Company's product offerings include remote,
on-line application processing, help desk automation, a project prioritization
system, accelerated account setup and virtual terminal on-line support.
During calendar 1995, the Company tested and implemented a new disaster
recovery planning system, a reliable recovery program designed to maintain
company operations in the event of emergencies, such as physical destruction to
office buildings, natural disasters, bomb threats or loss of network
capabilities. The plan entails a hierarchy of activities and procedures for each
department to implement in the event of such disasters that minimize service
interruption as well as improve financial security.
Growth Strategy
The Company focuses its sales and marketing efforts on four distinct areas
for obtaining new merchant customers: direct merchant sales, financial
institutions, sales agents and acquisitions. Additionally, the Company benefits
from the continuing expansion of the markets which now accept bankcards but have
traditionally been cash payment markets.
Direct Merchant Sales. One aspect of the Company's growth strategy relies
on sales volume growth from merchants that are solicited directly through the
Company's internal sales force. Direct merchants are the most profitable segment
of the Company's portfolio. The Company intends to continue to aggressively seek
new direct merchant customers of all sizes, especially within those industries
in which the Company's products and services exhibit a significant advantage,
including the dining, lodging, hospitality and direct response industries.
The Company is dedicated to increasing the effectiveness and efficiency of
its sales team. The Company has made a significant investment in a sales force
automation system which enables it to improve the productivity of its sales team
by providing sales tools, instant data access and remote on-line communication.
This allows the representatives to pursue prequalified prospects, and to reach
potential customers using various means of communication. The system utilizes
technology to streamline operations and contains modules which provide various
services and materials needed by the sales team. This system enables the Company
to address the many challenges inherent in a decentralized sales force.
The sales group includes 56 field representatives and 14 proactive sales
representatives. Proactive sales is the telemarketing arm of the Company and
provides the Company with the ability to reach unmanned markets in a cost
effective manner. This group also supports the field representatives in a broad
range of programs that increase the productivity of the entire team as well as
increase penetration in any given vertical or geographic market.
Financial Institutions. The Company markets to local, regional and
national financial institutions. The Company offers the financial institutions
dedicated account representatives who work directly with each financial
institution's staff to develop merchant business for the financial institution.
In this program, the Company generally assumes the marketing and support
functions.
Sales Agents. Sales agents solicit new customers on behalf of the Company.
The sales agents provide varying degrees of customer service to the merchants
which the Company approves for processing. The fees charged to sales agents by
the Company vary based upon level of service provided, allocation of risk of
loss and transaction volume. As part of the process of approving a new sales
agent, an analysis of the credit of the sales agent as well as its principals is
performed. This analysis encompasses a business and personal credit review and
contacting Visa and MasterCard regarding the sales agent's relationship with
prior processors. The Company is required to register all of its sales agents
with Visa and MasterCard and file quarterly sales and activity reports.
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Acquisitions. The Company has completed a number of acquisitions and
continues to consider acquisition opportunities as a component of its growth.
The Company acquired Litle & Company, Inc. ("Litle") and certain assets of
DMGT Corporation during the first quarter of fiscal 1996, both of which were
significant providers of processing services for the direct response industry.
Direct response processing is a highly specialized area with unique processing
requirements, particularly in the areas of risk management and chargeback
resolution. In connection with these acquisitions, the Company acquired
approximately $10.2 billion in annual sales volume processed, of which $4.3
billion represented additional sales volume processed for the Company. The
remaining sales volume was formerly processed by the Company for Litle as a
sales agent of the Company. As a result of the Litle acquisition, pricing of
merchants associated with Litle converted from a wholesale basis to a direct
basis and thus improved profitability for the Company.
In August 1996, the Company acquired GENSAR, the largest independent third
party processor and one of the premier providers of electronic draft capture and
authorization services for financial institutions and sales agents. GENSAR
processes approximately 300 million transactions annually. This acquisition
provided the Company with new and advanced capabilities and product offerings
which it previously outsourced. The Company expects to recognize cost savings
from efficiencies generated due to the consolidation of its internal systems
with GENSAR's existing network.
Merchant Portfolio
The Company serves a diverse portfolio of merchant clients that are
concentrated in a number of industries. The largest industry categories as of
June 30, 1996 were retail (34%), direct response (33%), travel and entertainment
(14%) and service stations (12%). The Company provides transaction processing
for large national accounts, as well as for many smaller, regional merchants. No
one merchant represents in excess of 5% of the Company's annual sales volume
processed.
Merchant attrition is a normal part of the payment processing business.
The Company believes that providing cost-effective, reliable and responsive
service is the most effective long-term strategy to attract and retain merchants
in a competitive industry. In addition to the occasional loss of merchants
experienced by the Company due to attrition, in certain cases the Company has
elected not to continue processing for merchants that were experiencing
financial difficulties. The Company has also lost merchant accounts to
competitors in situations in which the Company was unwilling to match a
competitor's rates in light of the credit risks associated with the particular
merchant or its industry. The Company believes that its attrition rates related
to customer dissatisfaction and pricing have not been material.
New Product Initiatives
Given the large market potential for Internet transactions, the Company is
exploring processing methods that are secure and effective on the Internet. The
Company is testing several alternative approaches to the conduct of on-line
commerce using bankcard accounts. There are several solutions designed to secure
information by providing an encryption program on-line to cardholders and
merchants for transacting business and transmitting bankcard information over
the Internet. Other solutions use off-line means to establish a user account and
verify and approve transactions using electronic mail. Each method provides a
potential solution to the immediate need for Internet transaction processing.
In fiscal 1996, the Company purchased for $4.0 million, shares of
convertible preferred stock which represent a minority interest in First Virtual
Holdings, Inc. ("First Virtual"), a privately-held company formed to facilitate
Internet commerce. First Virtual offers an off-line Internet payment system
which became fully operational in
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October 1994. The Company has been the payment processor for all of First
Virtual's bankcard transactions since its inception. The Company's President and
Chief Executive Officer serves as a director on the Board of Directors of First
Virtual.
Credit
Visa and MasterCard require that an in-depth examination of the merchant be
performed prior to processing for the merchant. The Company has established a
credit review policy that exceeds the minimum Visa and MasterCard standards and
examines other significant areas identified through its experience in the
payment processing business. For each merchant, the Company conducts a premises
inspection of the merchant location that includes verifying that the location,
the merchandise, the estimated sales volume and the average ticket appear
reasonable for the type of business. A review of the relationship with the
previous processor is conducted to determine the reason the merchant is changing
processors. An acceptable Combined Terminated Merchant File Report, which is a
report derived from a Visa and MasterCard database of merchants who have
violated Visa and MasterCard rules in the past, an acceptable credit bureau
report on principals of the business and acceptable financial statements for the
business are also required.
After merchants begin processing, the Company reviews unusual activity on a
daily basis. Visa and MasterCard have established minimum standards for weekly
review. The Company believes that its daily procedures generally exceed these
standards. Volume and average ticket variations are analyzed along with
excessive even dollar transactions, duplicate amounts, duplicate cardholder
transactions, keyed transactions and chargebacks. The Company has the ability to
hold a merchant's daily settlement if fraudulent activity is suspected. Security
analysts talk to cardholder banks, cardholders, Visa and MasterCard, as well as
the merchants to determine if the unusual activity is legitimate or fraudulent.
If fraudulent activity is discovered, the merchant is terminated and placed in
the Combined Terminated Merchant File so that future processors will be aware of
previous problems. The Company has had minimal losses due to merchant fraud
because of the initial credit review and the extensive monitoring procedures
that are in place.
The Company also reviews potential merchants based upon the merchant's
industry. According to Visa and MasterCard rules, the Company has contingent
liability for chargeback transactions. For most industry types, a chargeback and
potential Company liability is unlikely and limited because the product or
service charged by the cardholder is delivered upon payment. However, for
industries where the card is not present at the time of the transaction, such as
in the direct response industry, which includes the mail order and telephone
order businesses, the Company's potential liability is greater. The Company
takes these and other risks into account in making its credit determinations
with respect to potential new merchants. At June 30, 1996, the Company had cash
reserves from certain customers aggregating approximately $18.4 million as an
offset to potential contingent liabilities that are the responsibility of such
customers. These cash reserves are primarily related to merchants in the direct
response industry. Credit losses for merchant processing incurred by the Company
relating to such contingent liabilities were approximately $640,000, $310,000
and $390,000 in fiscal 1996, 1995 and 1994, respectively, compared to total
sales volume processed in such periods of $30.9 billion, $20.1 billion and $18.4
billion, respectively. The Company believes that this loss history is
significantly better than that of the industry. The Company is not exposed to
cardholder credit losses.
Competition
The payment processing market is highly competitive. Uniform interchange
requirements and Visa and MasterCard compliance rules limit significant pricing
variances among processors. Therefore, the Company competes on the basis of
customer service, product features, processing speed and systems reliability,
and the Company believes that these are the critical factors analyzed by
merchants when choosing a payment processor.
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As a result of its single purpose focus and many years of experience in
payment processing, the Company has been able to develop operating efficiencies
which the Company believes allow it to competitively bid for new business. In
addition, the Company has continually made technological improvements, and is
thus able to respond to the unique needs of merchants in various industries.
Furthermore, such single purpose focus allows the Company's workforce to provide
more responsive customer service to merchants.
Investment in open systems technology has allowed the Company to implement
business solutions in less time and at a lower cost than competitors utilizing
mainframe technology. This approach provides a broad range of EDC products and
merchant accounting systems. Through a combination of strategic acquisitions and
construction of custom solutions, the Company believes that it continues to
deliver more innovative choices than the competition. Responding to the changing
point of sale environment and rapidly evolving payment systems is an ongoing
requirement for payment processors.
The payment processing industry has consolidated significantly in the past
few years, due to the large investments required for the development of
technologically advanced systems and expanded business services. The Company
believes this trend will continue as the technological demand on processors
continues to increase, and believes it is well positioned to continue to grow in
terms of volume and the number of industries it serves.
COMMERCIAL CARDS
The Company's commercial card operations are located in Murray, Utah. The
Company markets and issues commercial cards to businesses and other entities
that facilitate centralized business-to-business payment procedures and
reporting, replacing traditional direct payment methods. The Company began to
actively market and issue its commercial cards in September 1995 following
receipt of an initial capital contribution of $16.1 million.
The Company's current operating and growth strategies are to aggressively
market its commercial card products and develop customer relationships that will
provide strategic business opportunities for growth. The Company believes that
it is in a unique position to benefit in its account origination and growth and
marketing efforts from the existing partnerships and relationships that the
Company, First USA Bank and the Company's other affiliates have established. In
addition to developing its own partnerships with financial institutions,
corporations and other entities, the Company expects to realize significant
synergies from existing customer relationships established by its affiliates,
and can rely upon its existing telemarketing and other sales and marketing
structures. The Company expects its commercial card operations to become
profitable in late fiscal 1997. The losses associated with this operation did
not have a material impact on the consolidated results of the Company in fiscal
1996 and the Company believes that its losses associated with this operation
will not have a material impact on the consolidated results of the Company in
fiscal 1997.
The Company offers various types of Visa and MasterCard cards to its
customers. The origination and servicing of Visa and MasterCard accounts is
subject to the terms and conditions of membership in Visa and MasterCard, and
the Company has agreed to comply with the By-laws and Operating Regulations of
Visa and MasterCard, which are subject to change.
The Company offers its products to its customers for use by officers,
directors, employees and other individuals designated by a customer in
connection with business expenditures by such individuals. Each account is
subject to an agreement with the customer governing the terms and conditions of
the related Visa or MasterCard account, as well as agreements with each
individual Cardmember.
The Company's product offerings include corporate cards, which are non-
revolving charge cards designed for use by medium to large companies for travel
and entertainment expenditures. Annual fees are negotiable based upon
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certain pricing assumptions made by the Company, including the number of cards
that will be issued for the account of the customer, the expected aggregate
charge volume for the cards issued, the length of the billing cycle, the
anticipated credit losses associated with the cards, the liability structure of
the card account agreements and other considerations. The Company also charges
other fees associated with corporate cards, including late, cash advance and
returned check fees. Customers generally pay daily, weekly or pursuant to other
billing options of 30 days or less from the billing date. A standard reporting
package is provided to each customer, with enhanced on-line packages available
at the customer's request. As an incentive to the customer to encourage use of
its corporate cards, the Company may in some instances pay rebates to the
customer if certain charge volume or other requirements are met.
In addition to corporate cards, the Company offers purchasing cards, which
are non-revolving charge cards designed for use by medium to large companies,
and are used by employees who are responsible for making regular purchases of
equipment, supplies and services on behalf of the customer. The purchasing card
permits the Cardmember to charge such items in a streamlined fashion without the
need for cumbersome and paper-intensive purchase orders and invoices. The
reporting package provided by the Company in connection with the purchasing card
provides detailed information regarding the products purchased and other
relevant information required for the customer's records, and thereby helping to
eliminate the need for purchase orders and invoices. As with corporate cards,
annual fees charged for purchasing cards are negotiable based upon certain
pricing assumptions made by the Company, and in certain instances the Company
may grant rebates if a customer meets certain charge volume or other
requirements. The Company may also charge other fees associated with the
purchasing cards, including late, cash advance and returned check fees. The
Company also offers access to a cardless account through which purchases can be
made by authorized users for specific types of charges or charges made with
specific vendors. The fees and charges associated with these accounts are
similar to those charged for corporate card and purchasing card accounts.
The Company's product offerings also include business cards designed for
use by small to medium companies for routine business purchases, including
travel and entertainment expenditures and equipment and supply purchases.
Business cards offer a revolving line of credit to Cardmembers at a floating
interest rate which adjusts monthly based upon the prime rate determined on a
specified date. Annual fees are charged to the customer based upon the number of
cards issued on the customer's account. The Company also charges other fees
associated with the business card, including late, cash advance, overlimit,
returned check and administrative fees. A standard reporting package is provided
to each customer, with enhanced reporting packages available at the customer's
request. In addition, Cardmembers have access to packages of discounts and other
services.
The Company competes with national, regional and other issuers of
commercial cards. In seeking funding from the public, the Company faces
competition from banks, savings institutions, money market funds, credit unions
and a wide variety of other entities that take deposits and/or sell debt
securities. The primary methods of funding Financial Services include issuing
certificates of deposit and other borrowings. Financial Services' liquidity is
invested in overnight reverse repurchase agreements and other short-term
investments. Financial Services' Asset and Liability Committee, consisting of
executive management, reviews and manages all funding and liquidity decisions.
The Company has an agreement with a third party vendor for data processing
services in connection with the Company's commercial card business.
11
<PAGE>
EMPLOYEES
At June 30, 1996, the Company and its subsidiaries had approximately 830
employees. A central part of the Company's philosophy is to attract and maintain
a highly capable staff. The Company views current employee relations to be
satisfactory. None of the Company's employees are covered under collective
bargaining agreements.
REGULATION OF FINANCIAL SERVICES
Financial Services is an industrial loan corporation chartered under the
laws of the State of Utah, the deposits of which are insured by the Bank
Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation
("FDIC"), up to applicable limits. Financial Services is subject to
comprehensive regulation and periodic examination by the Utah Department of
Financial Institutions and the FDIC, as administrator of the BIF. Financial
Services received FDIC approval for federal deposit insurance.
The federal and state banking laws contain numerous provisions affecting
various aspects of the business and operations of Financial Services. The
following description of statutory and regulatory provisions, which is not
intended to be a complete description of these provisions or their effects on
Financial Services, is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
Holding Company Status
Generally a company which controls a "bank," as defined in the Bank Holding
Company Act of 1956 (the "BHCA"), is required to register as a bank holding
company under the BHCA and becomes subject to regulation and examination as a
bank holding company by the Federal Reserve Board. The Company is not a bank
holding company under the BHCA, as a result of ownership of Financial Services,
and the Company's parent companies are not bank holding companies under the
BHCA, as a result of ownership of Financial Services, First USA Bank or First
USA FSB, because each of those three depository institutions meet criteria to
cause it to be exempt from the definition of "bank" under the BHCA. Accordingly,
if Financial Services, First USA Bank or First USA FSB failed to meet the
criteria for the exemption, the Company (in the case of Financial Services
failing to meet the criteria) and its holding companies (in the case of any one
of the institutions failing to meet the criteria) would become subject to the
provisions of the BHCA. The Company believes that becoming a bank holding
company would not restrict, curtail, or eliminate any of the Company's
operations or activities at current levels.
Liability for Commonly-Controlled Institutions
A depository institution insured by the FDIC can be held liable for any
loss incurred, or reasonably anticipated to be incurred, by the FDIC in
connection with the default of any commonly-controlled FDIC-insured institution,
or any assistance provided by the FDIC to such commonly-controlled institution
which is in danger of default. First USA Bank and First USA FSB are insured
depository institutions under common control with Financial Services for
purposes of this statutory provision.
Dividends and Transactions with Affiliates
There are various limitations under federal and Utah law on the extent to
which Financial Services can finance or otherwise supply funds, through
dividends, loans or otherwise, to the Company's and Financial Services' other
affiliates. These limitations include minimum regulatory capital requirements,
Utah requirements concerning the payment of dividends out of net profits or
surplus, and Section 23A and 23B of the Federal Reserve Act, governing
transactions between an insured depository institution and its affiliates.
12
<PAGE>
Capital Maintenance and FDICIA
Financial Services is currently subject to capital adequacy guidelines
adopted by the FDIC, which provide generally for a minimum ratio of Tier 1
capital to risk-weighted assets (which are the credit risk equivalents of both
balance sheet items and certain off balance sheet items, such as stand-by
letters of credit) of 4%, and a minimum ratio of total capital (Tier 1 capital
plus Tier 2 capital) to risk-weighted assets of 8%. In addition, the guidelines
provide for a minimum leverage ratio (Tier 1 capital to total assets) of 3% for
the most highly-rated institutions, and not less than 4% for all other
institutions. The FDIC's risk-based and leverage ratios are minimum supervisory
ratios generally applicable to banks that meet certain specified criteria,
including having the highest regulatory rating. Banks not meeting these criteria
are expected to operate with capital positions well above the minimum ratios.
Failure to meet applicable capital guidelines could subject Financial Services
to a variety of enforcement remedies available to federal regulatory
authorities, including, in the most severe cases, the termination of deposit
insurance by the FDIC or placing the institution into conservatorship or
receivership. As of June 30, 1996, Financial Services' total risk-based capital
ratio was 164%, its Tier 1 risk-based capital ratio was 163% and its leverage
ratio was 60%, which reflect the start-up nature of its operations.
In addition, under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), the federal bank regulatory agencies are empowered, and
in certain cases required, to take "prompt corrective action" with respect to
banks that do not meet minimum capital requirements, including, in the most
severe cases, placing an institution into conservatorship or receivership. The
extent of the agencies' powers depends upon whether the institution in question
is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Among other
things, an institution in one of the three undercapitalized categories is
required to submit a capital restoration plan to its appropriate federal
regulator, and the capital restoration plan will not be accepted without the
guaranty of the institution's parent company. As of June 30, 1996, Financial
Services met the capital requirements of a "well capitalized" institution.
Financial Services may accept brokered deposits as part of its funding.
Under FDICIA, only "well capitalized" and "adequately capitalized" banks may
accept brokered deposits. "Adequately capitalized" banks, however, must first
obtain a waiver from the FDIC before accepting brokered deposits, and there are
limitations on the rates that may be paid on such deposits. Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
Deposit Insurance Assessments
The deposits of Financial Services are insured by the BIF, up to applicable
limits. Under the FDIC's risk-based insurance system, BIF-insured institutions
are currently assessed premiums of between 0 and 27 cents per $100 of eligible
deposits, depending upon the institution's capital position and other
supervisory factors.
There are a number of proposals being considered by Congress to
recapitalize the Savings Association Insurance Fund of the FDIC, which insures
most thrift institution deposits. If enacted, these proposals could affect the
assessment rates imposed on all FDIC-insured institutions and the use of the
proceeds from such assessments.
Enforcement Powers of Federal and State Regulators
The FDIC has broad enforcement powers over the institutions it regulates,
including the power to terminate deposit insurance, impose substantial fines and
other civil penalties and, in the most severe cases, to appoint a conservator or
receiver. In addition, the Utah Commissioner of Financial Institutions also has
broad enforcement powers under state law, including the power to take possession
of an institution in certain circumstances.
13
<PAGE>
Lending Activities
Although Financial Services' activities are commercial and not consumer-
oriented, its activities as a credit card lender may be subject to regulation
under various federal laws including the Truth-in-Lending Act, the Equal Credit
Opportunity Act and the Soldiers' and Sailors' Civil Relief Act, as well as
state lending laws. Where applicable, regulators are authorized to impose
penalties for violations of these statutes and, in certain cases, to order
Financial Services to pay restitution to injured Cardmembers. Cardmembers may
also bring actions for up to treble damages for certain violations. Federal and
state bankruptcy and debtor relief laws may also affect Financial Services'
ability to collect outstanding balances owed by Cardmembers who seek relief
under these statutes.
Cautionary Statements
Information or statements provided by the Company from time to time may
contain certain "forward-looking information," including information relating to
anticipated growth in earnings per share, anticipated returns on equity,
anticipated growth in net revenue, account origination and growth, merchant or
Cardmember base, anticipated operations costs and employment growth, anticipated
marketing expense or anticipated credit and other losses. The cautionary
statements provided below are being made pursuant to the provisions of the
Private Securities Litigation Reform Act of 1995 (the "Act") and with the
intention of obtaining the benefits of the "safe harbor" provisions of the Act
for any such forward-looking information. Many of the following factors
discussed below as well as other factors have also been discussed in prior
filings made by the Company.
Factors which could cause the Company's actual financial and other results
to differ materially from any results that might be projected, forecast,
estimated or budgeted by the Company in forward-looking statements include, but
are not limited to the following:
Competition
. Intense and increasing competition from numerous providers of financial
products and services who may employ various competitive strategies.
Competitive pressures by other providers have made it difficult for payment
processors to pass through their costs, such as Visa and MasterCard interchange
and assessments, to customers and could require the Company to absorb increases
in costs to maintain its customer base. In addition, the Company competes
against issuers of commercial cards that are offering highly competitive and
attractive rates, including rates which are at or below rates charged by the
Company, in order to preserve or gain market share.
Industry Consolidation
. Industry consolidation which has enabled a few of the Company's
competitors to have access to significant capital, management, marketing and
technological resources that are equal to or greater than those of the Company.
The highly competitive nature of the payment processing industry combined with
the market's requirement that payment processors continue to invest in and
provide advanced and efficient technology to their customers has caused other
payment processors to leave the business or merge with other providers resulting
in significant consolidation in the industry.
Acquisitions
. The Company's ability to identify and consummate acquisitions of
merchant portfolios, operating businesses and payment processing assets upon
satisfactory terms and the Company's ability to achieve a smooth and timely
integration of newly acquired assets and operating businesses and to achieve
anticipated synergies. The Company has relied in part on such acquisitions in
order to achieve greater economies of scale and to develop new types of systems
and expertise. However, the Company faces competition within the industry for
future acquisition and similar growth opportunities.
Contingent Liabilities
. Increased chargeback and other losses due to the Company's contingent
liability for such losses through its merchants (such as where the cardholder is
dissatisfied with the product or service charged); costs associated with an
increase in the number of customers seeking protection under the bankruptcy
laws, resulting in chargeback and other losses; effects of fraud by third
parties or customers; and increased collection costs associated with such
occurrences.
Technology
. Systems delays, malfunctions and errors in the proprietary and third
party systems and networks used by the Company for its payment processing
services, which may lead to processing delays, additional costs to the Company
and, if not corrected in a timely fashion, customer dissatisfaction, which could
ultimately affect the Company's customer base and the level of service it is
able to provide to its customers.
New Products and Services
. The impact of difficulties or delays in the development, production,
testing and marketing of products or services, including the Company's new
commercial card operations, and the impact of the costs and losses associated
with such difficulties or delays. These may include, without limitation, a
failure to implement new product or service programs when anticipated, the
failure of customers to accept these products or services when planned, losses
associated with the testing of new products or services or financial, legal or
other difficulties that may arise in the course of such implementation.
Credit Card Acceptance
. The impact of a lack of growth or a decline in the number and scope of
card-based payment transactions, on a worldwide basis, and a lack of growth or a
decline in the types of industries and merchants that accept card-based
transactions as a method of payment.
Seasonality
. The impact of seasonality in the Company's business, typically realizing
higher net revenue in its second fiscal quarter, which includes the end of the
year holiday season.
Regulation
. The effects of, and changes in, monetary and fiscal policies, laws and
regulations (financial, regulatory or otherwise), other activities of
governments, agencies and similar organizations, and social and economic
conditions, such as inflation, and changes in taxation of the Company's
earnings. For example, in recent years, several pieces of legislation have been
proposed by members of Congress which, if adopted, would have had the effect of
limiting the interest rate that could be charged on credit card accounts by
credit card issuers.
14
<PAGE>
ITEM 2. PROPERTIES
First USA, Inc. provides the Company with its principal office space in
Dallas, Texas consisting of approximately 110,000 square feet, pursuant to an
intercompany agreement. The Company's right to use such space expires upon the
expiration of First USA's underlying leases therefor in June 2005, unless First
USA exercises its right to extend the leases for two successive five-year
periods. See Item 13, "Certain Relationships and Related Transactions." The
Company leases additional facilities from which certain other operations of the
Company are conducted.
ITEM 3. LEGAL PROCEEDINGS
Two subsidiaries of the Company ("Company Subsidiaries") and First USA
filed an action in the Dallas District Court of Texas against LitleNet L.L.C.
("LitleNet"), and LitleNet subsequently filed a companion case against the
Company Subsidiaries in the Superior Court of the State of New Hampshire. In the
Texas lawsuit, the Company Subsidiaries and First USA seek declaratory relief
that they committed no breach under an agreement entered into in September 1995
(the "Agreement") with LitleNet and relief relating to certain breaches of the
Agreement by LitleNet. In the New Hampshire lawsuit, LitleNet is seeking
declaratory relief, injunctive relief and damages based upon its claim that the
Company Subsidiaries breached the Agreement. Pursuant to the Agreement, the
Company Subsidiaries provided certain software programs to LitleNet to assist it
in the development of a communication platform. LitleNet claims that the Company
Subsidiaries failed to deliver to LitleNet all of the software required by the
Agreement and related documents. Discovery on the merits has begun in both
cases. In the New Hampshire action, a temporary restraining order has been
issued against termination of the relationship between the parties.
The Company believes it and its subsidiaries fully complied with the terms
of the Agreement. Accordingly, the Company intends to vigorously defend against
the action in New Hampshire and vigorously pursue the action in Texas. While it
is impossible to predict the outcome of the lawsuits, the Company believes that
they will not have a material adverse effect on the consolidated financial
position of the Company.
In addition, the Company has been named as a defendant in various
additional legal actions arising from the conduct of its normal business
activities. Although the amount of any liability that could arise with respect
to these actions cannot be accurately predicted, in the opinion of the Company,
any such liability will not have a material impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1996, no matters were submitted to a
vote of the stockholders of the Company.
15
<PAGE>
PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The section entitled "Common Stock" of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference and filed as part of Exhibit
13.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Five Year Statistical Summary" of the Company's 1996
Annual Report to Stockholders is incorporated herein by reference and filed as
part of Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference and filed as part of Exhibit
13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Accompanying Notes and the
sections entitled "Report of Independent Auditors" and "Quarterly Financial
Information" of the Company's 1996 Annual Report to Stockholders is incorporated
herein by reference and filed as part of Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Incumbent Directors" of
the Company's definitive Proxy Statement are incorporated herein by reference.
The following table sets forth certain information regarding the executive
officers of the Company and its subsidiaries as of September 2, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - -------------------- --- --------------------------------------------------
<S> <C> <C>
John C. Tolleson 48 Chairman of the Board
Pamela H. Patsley 39 President, Chief Executive Officer and Director
David W. Truetzel 39 Chief Financial Officer and Secretary
Elena R. Anderson 36 Group Executive of Portfolio Management
James W. Baumgartner 36 President and Director of Financial Services
Susan H. Cerpanya 45 Group Executive of Marketing
Jeffrey C. Connelly 55 Group Executive of Network Sales
Michael P. Duffy 37 Group Executive of Direct Marketing Operations
Raymond J. McArdle 57 Group Executive of Technology
Thomas J. McHugh 49 Group Executive of Network Operations
Gary T. Staub 38 Group Executive of Business Development
</TABLE>
John C. Tolleson. Mr. Tolleson has been Chairman of the Board of the
Company since December 1995, and Chairman of the Board of Merchant Services
since May 1985. Mr. Tolleson has also served as Chairman of the Board and Chief
Executive Officer of First USA since August 1989, and of First USA's predecessor
since its formation in May 1985. Mr. Tolleson has been a Director of First USA
Bank since May 1985 and a Director of First USA FSB since March 1996. Mr.
Tolleson currently serves on the Boards of Visa USA, Inc., Visa International,
Inc., Capstead Mortgage Corporation and Jayhawk Acceptance Corporation and on
the Executive Board of the Cox School of Business at Southern Methodist
University.
Pamela H. Patsley. Ms. Patsley has been President, Chief Executive Officer
and a Director of the Company since December 1995. She has also served as
President and Chief Executive Officer of Merchant Services since December 1991
and Executive Vice President and Manager since July 1990, and as Chairman of the
Board of Financial Services since August 1994. Ms. Patsley has also served as
Executive Vice President and Secretary of First USA since July 1989. She has
been a Director of First USA Bank since November 1993 and a Director of First
USA FSB since March 1996. Ms. Patsley was Chief Financial Officer of First USA
and its predecessor from January 1987 to April 1994 and a Senior Vice President
prior to such time. Ms. Patsley originally joined First USA's predecessor as its
Vice President and Controller in February 1985. Ms. Patsley currently serves on
the VisaNet Services Advisors' Committees of Visa USA, Inc. and Visa
International, Inc. Ms. Patsley is also a Director of First Virtual.
David W. Truetzel. Mr. Truetzel has been Chief Financial Officer and
Secretary of the Company since December 1995. From June 1985 to December 1995,
Mr. Truetzel was affiliated with A.G. Edwards & Sons, Inc., where he most
recently served as a Vice President in the firm's Corporate Finance Department.
Mr. Truetzel was
17
<PAGE>
formerly employed by KPMG Peat Marwick, L.L.P. and Deloitte, Touche, L.L.P. He
is also a Director of National Home Centers, Inc.
Elena R. Anderson. Ms. Anderson has been Group Executive of Portfolio
Management since December 1995. Ms. Anderson also served as Senior Vice
President of Accounting/Finance and Risk Management of Merchant Services from
July 1992 to December 1995, and has been employed by the Company and Merchant
Services since May 1985. Ms. Anderson is responsible for credit, risk
monitoring, chargeback processing, merchant settlement and portfolio
acquisitions. Ms. Anderson also serves on the Acquirer's Council of Visa USA,
Inc. and the Client Advisory Board of the Northern Trust Company.
James W. Baumgartner. Mr. Baumgartner has been President and a Director of
Financial Services since June 1996. From 1992 to June 1996, Mr. Baumgartner was
Senior Vice President and General Manager of the commercial card business and
merchant bankcard business at First Bank System, Inc. From 1989 to 1992, Mr.
Baumgartner was Vice President and Controller of the Electronic Banking Division
at First Bank System, Inc. Mr. Baumgartner was formerly a Senior Manager at
Ernst & Young LLP, where he was employed from 1982 to 1989.
Susan H. Cerpanya. Ms. Cerpanya has been Group Executive of Marketing
since December 1995. Ms. Cerpanya also served as Senior Vice President--
Marketing and Product Development of Merchant Services from June 1994 to
December 1995. Her responsibilities include marketing, product development,
training, network sales and operations. Ms. Cerpanya has been employed by the
Company and Merchant Services since January 1989. Ms. Cerpanya also serves on
the Acquirer's Committee of MasterCard International, Inc.
Jeffrey C. Connelly. Mr. Connelly has been Group Executive of Network
Sales since August 1996. From July 1994 to August 1996, Mr. Connelly served as
Executive Vice President of Sales and Marketing for GENSAR Technologies Inc. He
was Senior Vice President at Visa USA from April 1989 to July 1994, where he was
general manager of the business unit responsible for all point of sale
processing in the United States.
Michael P. Duffy. Mr. Duffy has served as Group Executive of Direct
Marketing Operations since December 1995. From August 1992 to December 1995, Mr.
Duffy served as Vice President--Finance of Litle. Mr. Duffy also served as Vice
President and Assistant Group Controller at Equifax Credit Information Services
from November 1991 to August 1992, and Assistant Vice President--Finance and
Administration at Equifax Credit Bureau Marketing from June 1990 to October
1991.
Raymond J. McArdle. Mr. McArdle has served as Group Executive of
Technology since December 1995. Mr. McArdle also served as Senior Vice
President--Operations for Merchant Services from May 1991 to December 1995. In
these positions, he has been responsible for back office and field operations
and the application of open systems architecture to increase the operational
efficiency and product implementation of the Company. Mr. McArdle also serves on
the Customer Advisory Board of Verifone, Inc. and has served on various ad hoc
committees of Visa USA, Inc. and MasterCard International, Inc.
Thomas J. McHugh. Mr. McHugh has been Group Executive of Network
Operations since August 1996. From March 1993 to August 1996, Mr. McHugh was
Executive Vice President and Chief Operating Officer of GENSAR Technologies Inc.
From June 1982 to March 1993, Mr. McHugh was Senior Vice President at CoreStates
Financial Corp., responsible for technology and operations for electronic
payment services.
Gary T. Staub. Mr. Staub has been Group Executive of Business Development
since August 1996. From August 1992 to August 1996, Mr. Staub was Executive Vice
President of GENSAR, serving as business manager for merchant processing
services and manager of strategic initiatives and acquisitions. From 1990 to
1992, Mr. Staub was First Vice President at Mellon Bank (Network Services
Division) responsible for merchant and ATM business management, and served in
various other positions at Mellon Bank from 1981 to 1990.
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's definitive
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the Company's definitive
Proxy Statement is incorporated herein by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
a. Index to Financial Statements:
(1) The following financial statements of first USA Paymentech, Inc.
and its subsidiaries are incorporated by reference from the Company's 1996
Annual Report to Stockholders:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets at June 30, 1996 and 1995............................. 25
Consolidated Statements of Income for each of the three years in
the period ended June 30, 1996.................................................... 26
Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended June 30, 1996..................... 27
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1996................................................. 28
Notes to Consolidated Financial Statements........................................ 29
Report of Independent Auditors.................................................... 36
</TABLE>
(2) The following consolidated financial statement schedule of first
USA Paymentech, Inc. and its subsidiaries is included in item 14(d):
No financial statement schedules are required to be filed.
(3) LISTING OF EXHIBITS
The following exhibits are incorporated by reference or filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
2 Agreement and Plan of Merger, dated as of July 19, 1996, by and among
First USA, the Company, First USA Management Resources, Inc., First USA
Opportunity III, Inc., GENSAR and Golder Thoma Cressey Fund III Limited
Partnership and the other stockholders of GENSAR, filed as Exhibit 2.1
to the Company's Current Report on Form 8-K filed September 3, 1996 and
incorporated by reference herein.
3.1 Certificate of Incorporation of the Company, as amended, filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(No. 333-262) (the "Registration Statement") and incorporated by
reference herein.
3.2 By-Laws of the Company, filed as Exhibit 3.2 to the Registration
Statement and incorporated by reference herein.
10.1 Intercompany Services Agreement between the Company and First USA
Management, Inc., filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, and
incorporated herein by reference.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
10.2 Registration Rights Agreement between the Company and First USA, filed
as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 and incorporated herein by reference.
10.3 Tax Sharing Agreement between the Company and First USA, filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 and incorporated herein by reference.
10.4 1996 Stock Option Plan of the Company, filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 and incorporated herein by reference.
10.5 1996 Restricted Stock Plan of the Company, filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 and incorporated herein by reference.
10.6 Revolving Credit Agreement dated February 21, 1996 among the Company,
the lenders listed therein and NationsBank of Texas N.A., as Agent,
including the notes and guaranty related thereto, filed as Exhibit 10.6
to the Registration Statement and incorporated by reference herein.
10.7 Deferred Compensation Plan of First USA, filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (No. 333-06979) and
incorporated by reference herein.
10.8* Employee Stock Purchase Plan of the Company.
10.9 First USA Paymentech Retirement Savings Plan, filed as Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (No. 333-11249) and
incorporated by reference herein.
10.10* First USA Paymentech Supplemental Executive Retirement Plan.
10.11* First USA Paymentech Savings Restoration Plan.
11 Computation of Net Income Per Share (included in Note D to the
Accompanying Notes to the Consolidated Financial Statements in
the Company's 1996 Annual Report to Stockholders, filed herewith as
Exhibit 13 and incorporated by reference herein).
13* Sections entitled "Common Stock", "Five Year Statistical Summary",
"Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Report of Independent Auditors", and "Quarterly
Financial Information" and the Consolidated Financial Statements and
Accompanying Notes in the Company's 1996 Annual Report to Stockholders.
21* Subsidiaries of the Company.
23* Consent of Ernst & Young LLP.
27* Financial Data Schedule.
</TABLE>
_________________
* Filed herewith
b. Reports on Form 8-K filed in the fourth quarter of fiscal year ended
June 30, 1996:
21
<PAGE>
None.
Reports on Form 8-K filed subsequent to the fourth quarter of fiscal
year ended June 30, 1996:
Report on Form 8-K filed September 3, 1996
Item 2. Acquisition or Disposition of Assets.
Item 7. Financial Information and Exhibits--Exhibits:
Agreement and Plan of Merger
c. Exhibits -- Such exhibits as are indicated in the Listing of Exhibits as
being filed herewith are filed as exhibits to this report.
d. Financial Statement Schedule -- No financial statement schedules are
required or filed herewith.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST USA PAYMENTECH, INC.
Dated: September 18, 1996 By: /s/ Pamela H. Patsley
-------------------------------------
Pamela H. Patsley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on September 18, 1996.
SIGNATURE TITLE
--------- -----
/s/ John C. Tolleson Chairman of the Board
- - --------------------------------
JOHN C. TOLLESON
/s/ Pamela H. Patsley President, Chief Executive Officer
- - -------------------------------- and Director (Principal Executive Officer)
PAMELA H. PATSLEY
/s/ David W. Truetzel Chief Financial Officer and Secretary
- - -------------------------------- (Principal Financial and Accounting Officer)
DAVID W. TRUETZEL
/s/ Richard W. Vague Director
- - --------------------------------
RICHARD W. VAGUE
/s/ Gene H. Bishop Director
- - --------------------------------
GENE H. BISHOP
/s/ Rupinder S. Sidhu Director
- - --------------------------------
RUPINDER S. SIDHU
23
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- - ------ ----------- --------
2 Agreement and Plan of Merger, dated as of July 19,
1996, by and among First USA, the Company, First
USA Management Resources, Inc., First USA Opportunity
III, Inc., GENSAR and Golder Thoma Cressey Fund III
Limited Partnership and the other stockholders of
GENSAR filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K filed September 3, 1996 and
incorporated by reference herein.
3.1 Certificate of Incorporation of the Company, as
amended, filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 333-262) (the
"Registration Statement") and incorporated by reference
herein.
3.2 By-Laws of the Company, filed as Exhibit 3.2 to the
Registration Statement and incorporated by reference
herein.
10.1 Intercompany Services Agreement between the Company and
First USA Management, Inc., filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 and incorporated herein
by reference.
10.2 Registration Rights Agreement between the Company and
First USA, filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996 and incorporated herein by reference.
10.3 Tax Sharing Agreement between the Company and First
USA, filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1996 and incorporated herein by reference.
10.4 1996 Stock Option Plan of the Company, filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated
herein by reference.
10.5 1996 Restricted Stock Plan of the Company, filed as
Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 and
incorporated herein by reference.
10.6 Revolving Credit Agreement dated February 21, 1996
among the Company, the lenders listed therein and
NationsBank of Texas N.A., as Agent, including the
notes and guaranty related thereto, filed as Exhibit
10.6 to the Registration Statement and incorporated by
reference herein.
10.7 Deferred Compensation Plan of First USA, filed as
Exhibit 4.3 to the Company's Registration Statement on
Form S-8 (No. 333-06979) and incorporated by reference
herein.
10.8* Employee Stock Purchase Plan of the Company.
1
<PAGE>
10.9 First USA Paymentech Retirement Savings Plan, filed as Exhibit 99.1
to the Company's Registration Statement on Form S-8
(No. 333-11249) and incorporated by reference herein.
10.10* First USA Paymentech Supplemental Executive Retirement
Plan.
10.11* First USA Paymentech Savings Restoration Plan.
11 Computation of Net Income Per Share (included in Note D to the
Accompanying Notes to the Consolidated Financial Statement in the
Company's 1996 Annual Report to Stockholders, filed herewith as
Exhibit 13 and incorporated by reference herein).
13* Sections entitled "Common Stock", "Five Year
Statistical Summary", "Management's Discussion and
Analysis of Financial Condition and Results of
Operations", "Report of Independent Auditors" and
"Quarterly Financial Information" and the Consolidated
Financial Statements and Accompanying Notes in the Company's
1996 Annual Report to Stockholders.
21* Subsidiaries of the Company.
23* Consent of Ernst & Young LLP.
27* Financial Data Schedule.
________
* Filed herewith
2
<PAGE>
EXHIBIT 10.8
EMPLOYEE STOCK PURCHASE PLAN OF
FIRST USA PAYMENTECH, INC.
--------------------------
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Affiliates with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company that the Plan qualify as an "Employee Stock Purchase
Plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as
amended, and the provisions of the Plan shall be construed in a manner
consistent with the requirements of such Section of the Code.
2. Definitions.
(a) "Affiliate" shall mean with respect to any person, any person that
controls, is controlled by or is under common control with such person, within
the meaning of the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
(b) "Agent" shall have the meaning set forth in paragraph 11 hereof.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Common Stock" shall mean the Common Stock, $.01 par value, of the
Company.
(f) "Company" shall mean First USA Paymentech, Inc., a Delaware
corporation.
(g) "Committee" shall have the meaning set forth in paragraph 11
hereof.
(h) "Compensation" shall mean the total compensation received from the
Company for personal services rendered by an Employee in respect of a particular
Offering Period, including an Employee's portion of the salary deferral
contributions pursuant to Section 401(k) of the Code, bonus, commissions,
incentive pay (other than long-term incentive payments), overtime pay and any
amount excludable pursuant to Section 125 of the Code, but excluding any long-
term incentive payments, imputed income, severance pay, expenses or other
special emolument or any credit or benefit under any employee plan maintained by
the Company.
(i) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company (including, but not limited to, a military
or sick leave), provided that such leave is for a period of not more than 90
days or if reemployment upon the expiration of such leave is guaranteed by
contract or statute.
1
<PAGE>
(j) "Designated Affiliates" shall mean the Affiliates which have been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(k) "Employee" shall mean any person, including an officer, who is
regularly employed by the Company or one of its Designated Affiliates.
(l) "Exercise Date" shall mean the last business day of each Offering
Period under the Plan.
(m) "Fair Market Value" per share as of a particular date shall mean
(i) the closing sales price per share of Common Stock on the national securities
exchange on which the Common Stock is principally traded, for the last preceding
date on which there was a sale of Common Stock on such exchange, or (ii) if the
shares of Common Stock are then traded in an over-the-counter market, the
average of the closing bid and asked prices for the shares of Common Stock in
such over-the-counter market for the last preceding date on which there was a
sale of such Common Stock in such market, or (iii) if the shares of Common Stock
are not then listed on a national securities exchange or traded in an over-the-
counter market, such value (as defined in Section 3 hereof) as the Committee, in
its sole discretion, shall determine.
(n) "Initial Valuation Date" shall mean December 1, March 1, June 1
and September 1 of each Plan Year, or with respect to the first Offering Period,
such dates the Committee shall determine.
(o) "Offering Period" shall mean each calendar quarter during the
effectiveness of the Plan, commencing on each January 1, April 1, July 1 and
October 1 following an Initial Valuation Date, provided that the Committee shall
have the power to change the duration of Offering Periods.
(p) "Plan" shall mean this Employee Stock Purchase Plan as amended
from time to time.
(q) "Plan Year" shall mean the calendar year.
(r) "Reserves" shall have the meaning set forth in paragraph 16
hereof.
(s) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
2
<PAGE>
3. Eligibility.
(a) Subject to the requirements of paragraph 4(b) hereof, any person
who is an Employee as of the commencement of an Offering Period shall be
eligible to participate in the Plan for such Offering Period, provided that he
or she continues to be an Employee through the last payroll deduction date in
such Offering Period.
(b) Notwithstanding any provisions of the Plan to the contrary, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or together with any other person whose stock would be
attributed to such Employee pursuant to Section 424(d) of the Code) would own
stock and/or hold outstanding options to purchase stock possessing five percent
(5%) or more of the total combined voting power or value of all classes of stock
of the Company or of any Subsidiary, or (ii) which permits his or her right to
purchase stock under all employee stock purchase plans (described in Section 423
of the Code) of the Company and its Subsidiaries to accrue at a rate which
exceeds twenty-five thousand dollars ($25,000) of Fair Market Value of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Grant of Option; Participation.
(a) On each Initial Valuation Date the Company shall commence an offer
by granting each eligible Employee an option to purchase such number of shares
of Common Stock as may be purchased with the amount elected by such Employee
under paragraph 4(b), subject to the limitations set forth in paragraph 10
hereof,
(b) Each eligible Employee may elect to participate in the Plan with
respect to an offer, only by filing a subscription agreement with the Company by
the fifteenth day of the month prior to the Offering Period, indicating the
amount of such Employee's Compensation (not to exceed 20% of such Compensation)
which such Employee elects to use to purchase shares of Common Stock and
authorizing payroll deductions (as set forth in paragraph 5 hereof) throughout
the Offering Period. Such subscription agreement shall also set forth such
Employee's election (i) to receive certificates in his or her name representing
the number of whole shares purchased hereunder as promptly as practicable
following exercise of his or her option or to have such certificates held by a
nominee for such participant and (ii) to have distributed to him or her
dividends on shares of Common Stock purchased hereunder in cash or reinvested in
shares of Common Stock. Such subscription agreement shall remain in effect for
subsequent Offering Periods unless modified or terminated by the participant by
the fifteenth day of the month prior to any such subsequent Offering Period.
(c) The option price per share of the Common Stock subject to an
offering shall be the lesser of: (i) 85% of the Fair Market Value of a share of
Common Stock on the Initial Valuation Date immediately preceding the applicable
Offering Period; or (ii) 85% of the Fair Market Value of a share of Common Stock
on the Exercise Date.
3
<PAGE>
5. Payroll Deductions.
(a) During an Offering Period, the Company shall withhold from the
Compensation of each Employee participating in the offer, the amount elected by
such Employee under paragraph 4(b) (the "Aggregate Purchase Price").
(b) The Aggregate Purchase Price shall be withheld in approximately
equal installments from each paycheck during the Offering Period.
(c) All payroll deductions made by a participant shall be credited to
his or her account under the Plan. A participant may not make any additional
payments into such account.
6. Exercise of Option. Unless a participant withdraws from the Plan as
provided in paragraph 8, his or her election to purchase shares will be
exercised automatically on the Exercise Date, and the maximum number of whole
and/or fractional shares (up to four decimal places) subject to such option will
be purchased for him or her at the applicable option price with the accumulated
payroll deductions in his or her account. The shares purchased upon exercise of
an option hereunder shall be deemed to be transferred to the participant on the
Exercise Date. During his or her lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
7. Delivery. Certificates representing shares purchased upon exercise of
a participant's option shall be held for the account of such participant, or
delivered as promptly as practicable to such participant following such
exercise, in accordance with the participant's subscription agreement as
provided in Section 4(b) hereof. No shares shall be delivered until full
payment therefore has been made.
8. Withdrawal; Termination of Employment; Insiders.
(a) A participant may withdraw all, but not less than all, the payroll
deductions credited to his or her account under the Plan at any time prior to
the Exercise Date of an Offering Period by giving written notice to the Company.
All of the payroll deductions credited to such participant's account will be
paid to him or her promptly after receipt of his or her notice of withdrawal and
his or her option for the current period will be automatically terminated. No
further payroll deductions for the purchase of shares will be made for such
participant during such Offering Period.
(b) Upon termination of a participant's Continuous Status as an
Employee prior to the Exercise Date of the Offering Period on account of
retirement, disability or death, the payroll deductions credited to his or her
account will be used to purchase shares on the next succeeding Exercise Date
unless the participant (or his or her estate, as the case may be) elects to
withdraw such deductions in cash prior to such Exercise Date. Upon termination
of a participant's Continuous Status as an Employee for any other reason, such
deductions shall be refunded to such participant in cash. Thereafter, so long
as such participant's Continuous Status as an Employee shall continue to be
terminated, such participant's participation in the Plan shall cease.
4
<PAGE>
9. Interest. No interest shall accrue on or be payable with respect to
the payroll deductions of a participant in the Plan.
10. Stock.
(a) The maximum number of shares of Common Stock which shall be
reserved for sale under the Plan shall be 150,000, subject to adjustment upon
changes in capitalization of the Company as provided in paragraph 16. If the
total number of shares which would otherwise be subject to options granted
pursuant to paragraph 4(a) hereof on an Initial Valuation Date exceeds the
number of shares then available under the Plan (after deduction of all shares
for which options have been exercised or are then outstanding), the Committee
shall make a pro rata allocation of the shares remaining available for option
grant in as uniform a manner as shall be practicable and as it shall determine
to be equitable. In such event, the Committee shall give written notice to each
Employee of such reduction of the number of option shares affected thereby and
shall similarly reduce the rate of payroll deductions, if necessary. The Plan
shall terminate if all shares of Common Stock reserved for sale hereunder shall
have been purchased. Shares of Common Stock available for purchase pursuant to
this Plan may be purchased on the open market or directly from the Company. The
Company shall pay all brokerage commissions or fees incurred in connection with
the purchase of shares of Common Stock hereunder.
(b) The participant will not have rights as a shareholder with respect
to shares covered by his or her option until such shares shall have been
purchased for his or her account in accordance with the provisions of the Plan.
(c) Shares of Common Stock to be delivered to a participant under the
Plan will be registered in the name of the participant.
11. Administration.
(a) The Plan shall be administered by a committee (the "Committee")
established by the Board. The Committee shall have full power and authority,
subject to the provisions of the Plan, to promulgate such rules and regulations
as it deems necessary for the proper administration of the Plan, to interpret
the provisions and supervise the administration of the Plan, and to take all
action in connection therewith or in relation to the Plan as it deems necessary
or advisable. Decisions of the Committee shall be made by a majority of its
members and shall be final. Any decision reduced to writing and signed by all
of the members of the Committee shall be fully effective as if it had been made
at a meeting duly held. The Company will pay all expenses incurred in the
administration of the Plan.
(b) An agent (the "Agent") may be appointed by the Board to perform
the functions and have the responsibilities assigned to the Agent in this
paragraph 11 with respect to the purchase of Common Stock. The Board shall have
the right to change the Agent at any time. Notwithstanding any other provision
to the contrary contained herein, to the extent that shares of Common Stock are
purchased on the open market the Agent shall have all authority to determine the
times of purchases of Common Stock, the prices as which such purchases are made,
the manner of such purchases and the selection of brokers or dealers (which may
include
5
<PAGE>
the Agent) to make such purchases. If Common Stock is purchased at varying
market prices, an average price will be allocated to the account of each
Employee.
12. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash remaining in such participant's account under
the Plan in the event of the participant's death subsequent to the end of an
Offering Period but prior to delivery to him or her of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Exercise Date of an Offering Period.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
13. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in paragraph 12 hereof) by the participant. Any
such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with paragraph 8.
14. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
15. Reports. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to participating Employees as
soon as practicable following each Exercise Date, which statements will set
forth the amounts of payroll deductions, the per share purchase price, the
number of shares purchased and the remaining cash balance, if any.
16. Effect of Certain Changes. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised and the number of
shares of Common Stock which have been authorized for issuance under the Plan
but have not yet been placed under option (collectively, the "Reserves"), as
well as the price per share of Common Stock covered by each option under the
Plan which has not yet been exercised, shall be proportionately adjusted for any
increase or
6
<PAGE>
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock or similar capital adjustment, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the
Company, the Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, each option under the Plan shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation, unless the Committee determines, in the exercise of
its sole discretion and in lieu of such assumption or substitution, that the
participant shall have the right to exercise the option as to all of the
optioned shares, including shares as to which the option would not otherwise be
exercisable. If the Committee makes an option fully exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Committee shall notify the participant that the option shall be fully
exercisable for a period of thirty (30) days from the date of such notice, and
the option will terminate upon the expiration of such period.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
17. Amendment or Termination. The Board may at any time terminate, suspend
or amend the Plan and any provision thereof. Except as provided in paragraph
16, no such termination can affect options previously granted, nor may an
amendment make any change in any option heretofore granted which adversely
affects the rights of any participant, nor may an amendment be made without
prior approval of the shareholders of the Company (obtained in the manner
described in paragraph 19) if such amendment would:
(a) Materially increase the number of shares that may be issued under
the Plan;
(b) Change the designation or the class of employees eligible for
participation in the Plan; or
7
<PAGE>
(c) Materially increase the benefits which may accrue to participants
under the Plan;
provided, however, that prior approval of the shareholders of the Company shall
be required only to the extent required by any other law, regulation or stock
exchange rule.
18. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company to the location, or by
the person, designated by the Company for the receipt thereof.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted.
20. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreignincluding, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment without
any present intention to sell or distribute shares if, in the opinion of counsel
for the Company, such a representation is required by any of the aforementioned
applicable provisions of law.
21. Effective Date. The Plan shall be effective as of the date determined
by Company subject to the approval of the Plan by the shareholders of the
Company.
8
<PAGE>
EXHIBIT 10.10
FIRST USA PAYMENTECH
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(EFFECTIVE AS OF MARCH 22, 1996)
<PAGE>
EXHIBIT 10.10
PREAMBLE
The First USA Paymentech Supplemental Executive Retirement Plan (hereinafter
referred to as the "Plan") shall become effective on March 22, 1996. The
purpose of the Plan is to permit certain Employees of the Employer to receive
supplemental retirement income from the Employer when benefits cannot be paid
from the First USA Paymentech Pension Plan due to the limitations of Sections
401(a)(17) and 415 of the Code.
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 DEFINITIONS 1
1.1 "Annuity Starting Date" 1
1.2 "Basic Plan" 1
1.3 "Basic Plan Retirement Income" 1
1.4 "Board of Directors" 1
1.5 "Cash Balance Account" 1
1.6 "Code" 1
1.7 "Committee" 1
1.8 "Company" 1
1.9 "Compensation" 1
1.10 "Effective Date" 1
1.11 "Employee" 1
1.12 "Employer" or "Participating Employer" 2
1.13 "Participant" 2
1.14 "Plan" 2
1.15 "Plan Year" 2
1.16 "Prior Plan" 2
1.17 "Supplemental Cash Balance Account" 2
1.18 "Supplemental Retirement Income" 2
1.19 "Total and Permanent Disability" or "Disability" 2
ARTICLE 2 PARTICIPATION AND VESTING 3
2.1 Participation 3
2.2 Vesting 3
2.3 Cessation of Participation 3
2.4 Forfeiture for Cause 3
2.5 Special Rules for Employees of First USA Financial, Inc. 4
2.6 Transfer to First USA Financial, Inc. 4
2.7 Transfer from First USA Financial, Inc. 5
ARTICLE 3 RETIREMENT DATE 6
3.1 Retirement Date 6
3.2 Normal Retirement Date 6
3.3 Early Retirement Date 6
3.4 Postponed Retirement Date 6
ARTICLE 4 SUPPLEMENTAL RETIREMENT INCOME 7
4.1 Supplemental Normal Retirement Income 7
4.2 Supplemental Early Retirement Income 7
4.3 Supplemental Postponed Retirement Income 8
<PAGE>
4.4 Supplemental Vested Retirement Income 8
4.5 Effect of Vested Status under the Basic Plan 9
ARTICLE 5 MODES OF BENEFIT PAYMENT 10
5.1 Mode of Payment 10
5.2 Date of Payment 10
ARTICLE 6 DEATH BENEFITS 11
6.1 In-Service Death Benefit 11
6.2 Supplemental Cash Balance Account 12
ARTICLE 7 DISABILITY BENEFITS 13
7.1 Disability Benefit 13
7.2 Determination 13
7.3 Termination 14
7.4 Recovery 14
7.5 Age 65 15
ARTICLE 8 LIABILITY OF THE COMPANY 16
8.1 Funding of Plan 16
8.2 Participant as Creditor of Plan 16
ARTICLE 9 ADMINISTRATION OF THE PLAN 17
9.1 Administration by Committee 17
9.2 Powers of the Committee 17
9.3 Reliance on Professionals 18
9.4 Payment of Expenses 18
ARTICLE 10 AMENDMENT OR TERMINATION OF THE PLAN 20
10.1 Power to Amend, Terminate 20
ARTICLE 11 GENERAL PROVISIONS 21
11.1 Plan Not Contract of Employment 21
11.2 Nonalienation of Benefits 21
11.3 Incapacity 21
11.4 Sole Source of Benefits 22
11.5 Address of Payee Unknown 22
11.6 Governing Law 22
<PAGE>
ARTICLE 1
DEFINITIONS
1.1 "Annuity Starting Date" means the date a benefit is paid under the Plan.
1.2 "Basic Plan" means the First USA Paymentech Pension Plan, as amended.
1.3 "Basic Plan Retirement Income" means the benefit paid to a Participant
under the Basic Plan and includes retirement income payable upon Normal
Retirement, Early Retirement or Postponed Retirement.
1.4 "Board of Directors" means the Board of Directors of the Company, or any
person or committee duly authorized to act for and represent the Board.
1.5 "Cash Balance Account" is as defined in the Basic Plan.
1.6 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
1.7 "Committee" means the Committee composed of persons appointed under the
provisions of Article XIII of the Basic Plan.
1.8 "Company" means First USA Paymentech, Inc., a Delaware Corporation.
1.9 "Compensation" is as defined in the Basic Plan without applying the
limitation of Section 401(a)(17) of the Code.
1.10 "Effective Date" means March 22, 1996.
1.11 "Employee" means a person who is an employee of an Employer.
-1-
<PAGE>
1.12 "Employer" or "Participating Employer" means the Company or other
corporation affiliated with the Company which, with the consent of the
Company has adopted this Plan.
1.13 "Participant" means an Employee who is eligible to participate in this
Plan pursuant to the provisions of Article 2 of the Plan.
1.14 "Plan" means the First USA Paymentech Supplemental Executive Retirement
Plan, as herein set forth, and as it may hereafter be amended from time
to time.
1.15 "Plan Year" means the period beginning July 1 and ending on the next
June 30. However, there will be an initial short Plan Year beginning
March 22, 1996 and ending June 30, 1996.
1.16 "Prior Plan" means the First USA Supplemental Executive Retirement Plan,
as amended from time to time.
1.17 "Supplemental Cash Balance Account" is as defined in Section 6.2 hereof.
1.18 "Supplemental Retirement Income" means the retirement benefits provided
to Participants and their joint or contingent annuitants and
beneficiaries in accordance with the applicable provisions of this Plan
and shall include Supplemental Normal Retirement Income, Supplemental
Early Retirement Income and Supplemental Postponed Retirement Income,
and Supplemental Deferred Vested Retirement Income as defined in
Article 4.
1.19 "Total and Permanent Disability" or "Disability" means totally and
permanently disabled as defined in Section 7.2 hereof.
-2-
<PAGE>
References to males shall be construed to include females, the singular shall be
construed to include the plural, and vice versa, wherever appropriate.
-3-
<PAGE>
ARTICLE 2
PARTICIPATION AND VESTING
2.1 Participation
An Employee shall be eligible to participate in this Plan if such Employee
meets the eligibility requirements in Section 3.01 of the Basic Plan; if
such Employee's benefits under the Basic Plan are reduced by reason of the
application of the limitations imposed by Section 401(a)(17) of the Code or
Section 415 of the Code; and if such Employee is a highly compensated or
management employee within the meaning of Section 201(a), 301(a)(3) and
401(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA).
2.2 Vesting
Once an Employee becomes a Participant in the Plan he shall have a
nonforfeitable right to his accrued Retirement Income except as provided in
Section 2.4.
2.3 Cessation of Participation
The Company may from time to time remove an Employee from participation in
this Plan; provided, however, that except as otherwise provided in Section
2.4, such removal will not reduce the amount of Retirement Income accrued
by the Employee under this Plan, as determined as of the date of such
Employee's removal. An Employee so removed shall remain a Participant
until his benefits are distributed in accordance with the provisions of
this Plan, but shall accrue no further benefits under this Plan after his
date of removal.
2.4 Forfeiture for Cause
The accrued Retirement Income of a Participant may be forfeited if the
Participant is discharged for willful, deliberate, or gross misconduct as
determined by the Board of Directors in its sole discretion.
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2.5 Special Rules for Employees of First USA Financial, Inc.
Employees who participated in the Prior Plan as of March 21, 1996 and who
transferred employment from First USA Financial, Inc. (or its subsidiaries
or affiliates) to the Employer as of the Effective Date shall become
Participants in this Plan as of the Effective Date.
As of the Effective Date, such a Participant's accrued benefit in the Prior
Plan shall be transferred to this Plan. Such accrued benefit shall be
determined by applying the terms of the Prior Plan as if the Participant
had terminated employment or retired (if eligible for retirement) on March
21, 1996. The accrued benefit transferred from the Prior Plan on behalf of
a Participant pursuant to this Section shall be held, administered and
disbursed under the terms of this Plan on and after the Effective Date, and
the Participant's accrued benefit under the Plan shall not be less than
such Participant's accrued benefit transferred in accordance with this
Section 2.5.
An Employee who transfers employment from First USA Financial, Inc. or one
of its subsidiaries or affiliates as described in this Section 2.5 shall be
credited with the service for eligibility, vesting and benefit accrual
purposes that was credited to such Employee under the terms of the Prior
Plan as of the date of transfer to covered employment under this Plan.
2.6 Transfer to First USA Financial, Inc.
If, after the Effective Date, a Participant transfers employment to First
USA Financial, Inc. or one of its subsidiaries or affiliates which is a
member of the same controlled group as First USA Financial, Inc., as
determined under Code Sections 414(b), (c), (m) or (o):
(1) such Participant shall not be considered to have terminated employment
or retired for purposes of being eligible for a distribution under the
Plan;
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(2) benefits and benefit liabilities attributable to such Participant's
accrued benefit under this Plan shall be transferred to the Prior Plan;
provided that the Prior Plan accepts such transfer at such time; and
(3) such Participant's accrued benefit under the Plan shall be cancelled
when the transfer described in (2) above is made.
For this purpose, a Participant's accrued benefit under the Plan shall be
determined as if he had terminated employment or retired (if eligible for
retirement) on the date of such Participant's transfer of employment.
2.7 Transfer from First USA Financial, Inc.
If, after the Effective Date, an Employee transfers employment to an
Employer from First USA Financial, Inc. or one of its subsidiaries or
affiliates which is a member of the same controlled group as First USA
Financial, Inc., as determined under Code Sections 414(b), (c), (m) or (o):
(1) the Plan shall accept a transfer of benefits and benefit liabilities
attributable to such Employee's accrued benefit under the Prior Plan,
if any; and
(2) upon such transfer of benefits and benefit liabilities, the Employee
shall have an accrued benefit under this Plan at least equal to the
accrued benefit transferred from the Prior Plan.
An Employee who transfers employment from First USA Financial, Inc. or one
of its subsidiaries or affiliates as described in this Section 2.7 shall be
credited with the service for eligibility, vesting and benefit accrual
purposes that was credited to such Employee under the terms of the Prior
Plan as of the date of transfer to covered employment under this Plan;
provided, however, that service shall not be credited in accordance with
the foregoing if such Employee was a participant in the Prior Plan and
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no transfer of benefits and benefit liabilities is made from the Prior Plan
on behalf of such Employee in accordance with the foregoing.
-7-
<PAGE>
ARTICLE 3
RETIREMENT DATE
3.1 Retirement Date
Participant's Retirement Date shall be his date of actual Retirement which
may be his Normal, Early, or Postponed Retirement Date, whichever is
applicable to him pursuant to the following Sections of this Article 3.
3.2 Normal Retirement Date
A Participant's Normal Retirement Age shall be the later of (i) the
Participant's 65th anniversary of his birth or (ii) five (5) years of
participation in the Plan and/or the Prior Plan. Such Participant's Normal
Retirement Date shall be the first day of the month coincident with or next
following the attainment of Normal Retirement Age while in the service of
the Employer.
3.3 Early Retirement Date
A Participant may retire on an Early Retirement Date, which may be the
first day of any month coincident with or subsequent to the 55th
anniversary of his birth and his completion of at least ten (10) Years of
Credited Service. A Year of Credited Service shall be equal to a "Year of
Credited Service" as defined under the Basic Plan.
3.4 Postponed Retirement Date
If a Participant continues in the employment of an Employer beyond his
Normal Retirement Date, the first day of any month coincident with or
subsequent to his termination of employment after his Normal Retirement
Date shall be known as his Postponed Retirement Date.
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ARTICLE 4
SUPPLEMENTAL RETIREMENT INCOME
4.1 Supplemental Normal Retirement Income
The Supplemental Normal Retirement Income payable to an eligible
Participant in the form of a single life annuity shall, commencing on his
Normal Retirement Date, be equal to the difference between (a) and (b) as
stated below:
(a) the monthly amount of the Basic Plan Retirement Income payable upon
Normal Retirement to which the Participant would have been entitled
under the Basic Plan, if such benefit were calculated under the Basic
Plan without giving effect to the limitations imposed by the
application of Code Sections 401(a)(17) and 415.
(b) The monthly amount of Basic Plan Retirement Income payable upon Normal
Retirement actually payable to the Participant under the Basic Plan
after the limitations imposed by the application of Code Sections
401(a)(17) and 415.
4.2 Supplemental Early Retirement Income
The Supplemental Early Retirement Income payable to an eligible Participant
in the form of a single life annuity shall, commencing on his Early
Retirement Date or on the first day of any month thereafter up to his
Normal Retirement Date, be equal to the difference between (a) and (b) as
stated below:
(a) The monthly amount of the Basic Plan Retirement Income payable upon
Early Retirement to which the Participant would have been entitled
under the Plan, if such benefit were calculated under the Basic Plan
without giving effect to the limitations imposed by the application of
Code Sections 401(a)(17) and 415.
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(b) The monthly amount of Basic Plan Retirement Income payable upon Early
Retirement actually payable to the Participant under the Basic Plan
after the limitations imposed by the application of Code Sections
401(a)(17) and 415.
4.3 Supplemental Postponed Retirement Income
The Supplemental Postponed Retirement Income payable to an eligible
Participant in the form of a single life annuity shall, commencing on his
Postponed Retirement Date, be equal to the difference between (a) and (b)
as stated below:
(a) The monthly amount of the Basic Plan Retirement Income payable upon
Postponed Retirement to which the Participant would have been entitled
under the Basic Plan, if such benefit were calculated under the Basic
Plan without giving effect to the limitations imposed by the
application of Code Sections 401(a)(17) and 415.
(b) The monthly amount of Basic Plan Retirement Income payable upon
Postponed Retirement actually payable to the Participant after the
limitations imposed by the application of Code Sections 401(a)(17) and
415.
4.4 Supplemental Vested Retirement Income
The Supplemental Vested Retirement Income payable to an eligible
Participant in the form of a single life annuity shall, commencing the
first day of the month following termination of employment, or the first
day of any month thereafter, up to his Normal Retirement Date, be equal to
the difference between (a) and (b) as stated below:
(a) The monthly amount of the Basic Plan Retirement Income payable upon the
Participant's date of termination which the Participant would be
entitled to receive, assuming the Participant has a nonforfeitable
right to a benefit under the Basic Plan, if such benefit were
calculated under the Basic Plan without giving effect to the limitation
imposed by the application of Code Sections 401(a)(17) and 415.
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(b) the monthly amount of Basic Plan Retirement Income payable upon the
date the participant elects for benefits to commence, assuming the
Participant had a nonforfeitable right to a benefit under the Basic
Plan, actually payable under the Basic Plan after the limitations
imposed by the application of Code Sections 401(a)(17) and 415.
4.5 Effect of Vested Status under the Basic Plan
The calculations described in Section 4.1, 4.2, 4.3, and 4.4 shall all be
made treating the Participant as vested under the Basic Plan regardless of
the Participant's actual vested status under the Basic Plan.
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<PAGE>
ARTICLE 5
MODES OF BENEFIT PAYMENT
5.1 Mode of Payment
Any Retirement Income payable under this Plan to a Participant or a
beneficiary shall be paid as a single-sum amount which is the actuarial
equivalent of a single life annuity. For this purpose, actuarial
equivalence shall be determined utilizing the actuarial equivalent factors
stated in the Basic Plan for determining single-sum amounts. No
Participant's benefit shall be less than his Supplemental Cash Balance
Account as defined in Section 6.2.
5.2 Date of Payment
Payment of Retirement Income due under the Plan, if any, shall be made as
soon as administratively possible after the Participant's retirement or
termination of employment, as the case may be.
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ARTICLE 6
DEATH BENEFITS
6.1 In-Service Death Benefit
(a) Except as otherwise provided herein, in the event of a married
Participant's death prior to the Participant's Annuity Starting Date,
the Surviving Spouse shall receive a single sum amount equal to the
Participant's Supplemental Cash Balance Account.
This death benefit shall only be payable if (i) the Participant dies
while in active employment with the Employer; (ii) the Participant dies
after ceasing active employment with an Employer but prior to his
Annuity Starting Date; or (iii) while the Participant is accruing a
benefit under Article 7.
(b) In the event of the death of a single Participant prior to the
Participant's Annuity Starting Date, the Participant's Beneficiary
shall receive a single-sum amount equal to the Participant's
Supplemental Cash Balance Account.
This death benefit shall only be payable if (i) the Participant dies
while in active employment with the Employer; (ii) the Participant dies
after ceasing active employment with an Employer but prior to his
Annuity Starting Date; or (iii) while the Participant is accruing a
benefit under Article 7.
(c) Any beneficiary designation made by a single Participant or by a
married Participant with the consent of such Participant's Spouse under
the provisions of Section 6.01 and Section 13.12 of the Basic Plan
shall be controlling under this Plan. Therefore, any death benefit
payable under this Section 6.1 shall be payable to the same person(s)
or entity as the death benefit payable under Section 6.01 of the Basic
Plan.
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(d) Payment of the death benefit provided hereunder shall be made as soon
as administratively possible after the death of the Participant is
established to the satisfaction of the Committee in accordance with
rules and procedures established by the Committee.
6.2 Supplemental Cash Balance Account
For purposes of this Article 6, a Participant's Supplemental Cash Balance
Account is equal to the difference between (a) and (b) as stated below:
(a) The Cash Balance Account calculated under the Basic Plan without giving
effect to the limitations imposed by the application of Code Sections
401(a)(17) and 415.
(b) The Cash Balance Account calculated under the Basic Plan after giving
effect to the limitations imposed by the application of Code Sections
401(a)(17) and 415.
If an accrued benefit is transferred on behalf of a Participant from the
Prior Plan in accordance with Section 2.5 or Section 2.7, the opening
balance of such Participant's Supplemental Cash Balance Account shall be
equal to such Participant's Supplemental Cash Balance Account in the Prior
Plan as of the date of transfer of employment of such Participant.
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ARTICLE 7
DISABILITY BENEFITS
7.1 Disability Benefit
A Participant who, while in the employment of his Employer, becomes Totally
and Permanently Disabled prior to his Normal Retirement Date, shall, any
other provision of the Plan to the contrary notwithstanding, continue to be
considered a Participant and an Employee in the employment of his Employer,
and shall be entitled:
(a) To continue to accrue Supplemental Retirement Income benefits pursuant
to Article 4 until the early of his Normal Retirement Date or the
cessation of his Total and Permanent Disability. Such accruals shall be
based upon his Compensation in the calendar quarter prior to the
calendar quarter in which he became Totally and Permanently Disabled;
(b) To receive, beginning on his Normal Retirement Date, the Supplemental
Retirement Income benefit accrued by him pursuant to Article 4 (prior
to becoming Totally and Permanently Disabled) and pursuant to paragraph
(a) of this Section 7.1; provided, however, that a Participant who has
completed at least ten (10) years of Credited Service as of the date he
became Totally and Permanently Disabled shall be entitled to receive
his benefits anytime on or after the date he attains age 55, in which
event his accruals pursuant to this Section 7.1 shall cease at that
time and his Supplemental Retirement Income shall be reduced for early
commencement in accordance with factors specified in the Basic Plan for
such purpose.
7.2 Determination
A Participant shall be deemed to be Totally and Permanently Disabled, and
entitled to receive Disability benefits from the Plan, only if, on the
basis of a medical examination by a qualified physician or clinic
acceptable to the Committee, the Committee finds that
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the Participant has a condition which totally and presumably permanently
prevents him from engaging in any substantial or gainful employment with a
Participating Employer. Notwithstanding any other provision of this Section
7.2, no Participant shall be deemed to be Totally and Permanently Disabled
if the Committee determines that his incapacity results from chronic
alcoholism, self-addiction to narcotics, an injury suffered while engaged
in a felonious or criminal act or enterprise, or service in the armed
forces of the United States which entitles the Participant to a veteran's
disability pension. The determination of the Committee shall be final and
binding upon all persons and for all purposes.
7.3 Termination
No provision of this Article shall prevent a Participant from electing to
receive his benefit under any other provisions of this Plan should he
determine not to return as an Employee of the Employer; however, the value
of all payments, if any, previously made to him as Disability payments
shall be deducted from the value of the benefits to which he would be
otherwise entitled by virtue of such other provisions.
7.4 Recovery
Upon receipt of evidence that a Participant is no longer Totally and
Permanently Disabled prior to his attaining age sixty-five (65), the
Participant shall receive no additional accruals under Section 7.1. Should
the Participant return to work and/or later become entitled to any benefits
under the Plan, the value of all Disability benefits, if any, previously
received by him shall be deducted from the value of the benefits to which
he would otherwise be entitled. In order to continue to be eligible to
receive accruals under Section 7.1, a Participant must submit such evidence
as the Committee shall require that he continues to be Totally and
Permanently Disabled. In order to determine whether the Participant
continues to be Totally and Permanently Disabled, the Committee may require
a Participant submit to a physical exam at its expense, but not more
frequently than annually.
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7.5 Age 65
Upon attainment of age sixty-five (65), a Participant who had previously
retired by reason of Disability shall be conclusively presumed to be
Totally and Permanently Disabled and shall receive his monthly benefits
payable under Section 7.1.
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ARTICLE 8
LIABILITY OF THE COMPANY
8.1 Funding of Plan
The benefits of this Plan shall be paid by the Employer and shall not be
funded prior to the time paid to the Participant, beneficiary or joint or
contingent annuitant designated by the Participant, unless and except as
expressly provided otherwise by the Company.
8.2 Participant as Creditor of Plan
A Participant who is vested in a benefit under this Plan shall be an
unsecured creditor of the Employer as to the payment of any benefit under
this Plan.
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ARTICLE 9
ADMINISTRATION OF THE PLAN
9.1 Administration by Committee
Except for the functions reserved to the Company or the Board of Directors
of the Company, the administration of the Plan shall be the responsibility
of the Committee.
9.2 Powers of the Committee
The Committee shall have the power and the duty to take all actions and to
make all decisions necessary or proper to carry out the Plan. The
determination of the Committee as to any question involving the general
administration and interpretation of the Plan shall be final, conclusive
and binding. Any discretionary actions to be taken under the Plan by the
Committee shall be uniform in their nature and applicable to all persons
similarly situated. Any Committee member who is employed under the Plan
shall be deemed to have resigned from the Committee at the time of his
termination of employment unless expressly provided to the contrary in
writing at such time. Without limiting the generality of the foregoing,
the Committee shall have the following powers and duties:
(a) To furnish to all Participants, upon request, copies of the Plan; and
to require any person to furnish such information as it may request for
the purpose of the proper administration of the Plan as a condition to
receiving any benefits under the Plan;
(b) To make and enforce such rules and regulations and prescribe the use of
such forms as it shall deem necessary for the efficient administration
of the Plan;
(c) To interpret the Plan, and to resolve ambiguities, inconsistencies and
omissions, which findings shall be binding, final and conclusive;
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(d) To decide on questions concerning the Plan in accordance with the
provisions of the Plan;
(e) To determine the amount of benefits which shall be payable to any
person in accordance with the provisions of the Plan; and to provide a
full and fair review to any Participant whose claim for benefits has
been denied in whole or in part;
(f) To allocate any such powers and duties to or among individual members
of the Committee; and
(g) To designate persons other than Committee members to carry out any duty
or power which would otherwise be a responsibility of the Committee,
under the terms of the Plan.
9.3 Reliance on Professionals
To the extent permitted by law, the Committee and any person to whom it may
delegate any duty or power in connection with administering the Plan, the
Employer, and the officers and directors thereof, shall be entitled to rely
conclusively upon, and shall be fully protected in any action taken or
suffered by them in good faith in the reliance upon, any actuary, counsel,
accountant, other specialist, or other person selected by the Committee, or
in reliance upon any tables, valuations, certificates, opinions or reports
which shall be furnished by any of them. Further, to the extent permitted
by law, no member of the Committee, nor the Employer, nor the officers or
directors thereof, shall be liable for any neglect, omission or wrongdoing
of any other members of the Committee, agent, officer or employee of an
Employer. Any person claiming under the Plan shall look solely to the
Employer for redress.
9.4 Payment of Expenses
All expenses incurred prior to the termination of the Plan that shall arise
in connection with the administration of the Plan, including, but not
limited to administrative
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expenses, proper charges and disbursements, compensation and other expenses
and charges of any actuary, counsel, accountant, specialist, or other
person who shall be employed by the Committee in connection with the
administration thereof, shall be paid by the Company.
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ARTICLE 10
AMENDMENT OR TERMINATION OF THE PLAN
10.1 Power to Amend, Terminate
The Board of Directors shall have the power to suspend or terminate this
Plan in whole or in part at any time, and from time to time to extend,
modify, amend, revise, or terminate this Plan in such respects as the Board
of Directors by resolution may deem advisable; provided that no such
extension, modification, amendment, revision, or termination shall deprive
a Participant or any beneficiary designated by a Participant of the vested
portion of any benefit under this Plan.
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ARTICLE 11
GENERAL PROVISIONS
11.1 Plan Not Contract of Employment
This Plan shall not be deemed to constitute a contract between the Employer
and any Employee or other person whether or not in the employ of the
Employer, nor shall anything herein contained be deemed to give any
Employee or other person whether or not in the employ of the Employer any
right to be retained in the employ of the Employer, or to interfere with
the right of the Employer to discharge any Employee at any time and to
treat him without any regard to the effect which such treatment might have
upon him as a Participant of the Plan.
11.2 Nonalienation of Benefits
Except as may otherwise be required by law, no distribution or payment
under the Plan to any Participant, beneficiary, or joint or contingent
annuitant, shall be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance or charge, whether
voluntary or involuntary, and any attempt to so anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge the same shall be void; nor
shall any such distribution or payment be in any way liable for or subject
to the debts, contracts, liabilities, engagements or torts of any person
entitled to such distribution or payment. If any Participant, beneficiary,
or joint or contingent annuitant is adjudicated bankrupt or purports to
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge
any such distribution or payment, voluntarily or involuntarily, the
Committee, in its discretion, may cancel such distribution or payment or
may hold or cause to be held or applied such distribution or payment or any
part thereof to or for the benefit of such Participant, beneficiary, or
joint or contingent annuitant in such manner as the Committee shall direct.
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11.3 Incapacity
If the Employer determines that any person entitled to payments under the
Plan is an infant or incompetent by reason of physical or mental
disability, it may cause all payments thereafter becoming due to such
person to be made to any other person for his benefit, without
responsibility to follow application of amounts so paid. Payments made
pursuant to this provision shall completely discharge the Plan, the
Employer and the Committee.
11.4 Sole Source of Benefits
The Employer shall be the sole source of benefits under this Plan, and each
Employee, Participant, joint or contingent annuitant, beneficiary, or any
other person who shall claim the right to any payment or benefit under this
Plan shall be entitled to look only to the Employer for payment of
benefits.
11.5 Address of Payee Unknown
If the Employer is unable to make payment to any Participant or other
person to whom a payment is due under the Plan because it cannot ascertain
the identity or whereabouts of such Participant or other person after
reasonable efforts have been made to identify or locate such person
(including a notice of the payment so due mailed to the last known address
of such Participant or other person shown on the records of the Employer),
such payment and all subsequent payments otherwise due to such Participant
or other person shall be forfeited twenty-four (24) months after the date
such payment first became due; provided, however, that such payment and any
subsequent payments shall be reinstated retroactively, no later than sixty
(60) days after the date on which the Participant or person is identified
or located.
11.6 Governing Law
The provisions of the Plan shall be construed, administered and governed
under applicable Federal laws and the laws of the State of Delaware.
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EXHIBIT 10.11
FIRST USA PAYMENTECH SAVINGS RESTORATION PLAN
(EFFECTIVE JULY 1, 1996)
<PAGE>
PREAMBLE
The First USA Paymentech Savings Restoration Plan (hereinafter referred to as
the "Plan") shall become effective as of July 1, 1996 (hereinafter referred to
as the "Effective Date") to provide a program of deferred compensation and
matching contributions for a select group of management or highly compensated
employees. Participating employees have the opportunity to participate in the
Plan under which they can elect to have a portion of their salary deferred
directly into the Plan on their behalf by the Company. Participant salary
deferrals are matched by their Employer up to a specified limit.
In addition, this Plan is established for the purpose of accepting a transfer of
benefits and liabilities from the First USA Savings Restoration Plan accrued as
of June 30, 1996 under the terms of such plan by Participants who transferred
employment from First USA Financial, Inc. and its subsidiaries or affiliates to
First USA Paymentech, Inc. prior to July 1, 1996.
This Plan is unfunded and is intended to meet the requirements of a "top hat"
nonqualified deferred compensation arrangement under the Employee Retirement
Income Security Act of 1974 ("ERISA") and the Internal Revenue Code.
<PAGE>
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TABLE OF CONTENTS
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<C> <S> <C>
ARTICLE 1 DEFINITIONS 1
1.1 Account 1
1.2 Beneficiary 1
1.3 Board of Directors 1
1.4 Code 1
1.5 Committee 1
1.6 Company 2
1.7 Compensation 2
1.8 Deferral Election 2
1.9 Deferred Salary Account 2
1.10 Deferred Salary Contribution 2
1.11 Effective Date 2
1.12 Employee 3
1.13 Employer or Participating Employer 3
1.14 Employer Matching Contributions 3
1.15 Employer Matching Contribution Account 3
1.16 Fund 3
1.17 Financial Hardship 3
1.18 Qualified Plan 4
1.19 Normal Retirement Age (Date) 4
1.20 Plan Year 4
1.21 Prior Plan 4
1.22 Year of Service 4
1.23 Valuation Date 4
ARTICLE 2 PARTICIPATION 5
2.1 Participation Requirements 5
2.2 Plan Entry Date 5
2.3 Loss of Participant Status 6
2.4 Special Rules for Employees of First USA Financial, Inc. 6
2.5 Transfer to First USA Financial, Inc. 7
2.6 Transfer from First USA Financial, Inc. 7
ARTICLE 3 DEFERRED SALARY CONTRIBUTIONS 9
3.1 Deferred Salary Election 9
3.2 Amount of Deferred Salary Contribution 9
ARTICLE 4 EMPLOYER CONTRIBUTIONS 11
4.1 Employer Matching Contributions 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
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<C> <S> <C>
ARTICLE 5 PARTICIPANTS' ACCOUNTS 12
5.1 Separate Accounts 12
5.2 Crediting Earnings to Participant Accounts 12
5.3 Statements 12
ARTICLE 6 DEATH BENEFITS AND BENEFICIARY DESIGNATION 13
6.1 Distribution Upon Death 13
6.2 Designation of Beneficiary 13
ARTICLE 7 VESTING AND TERMINATION OF EMPLOYMENT 14
7.1 Vesting in Deferred Salary Contributions 14
7.2 Vesting in Employer Matching Contribution Account 14
7.3 Forfeitures 14
7.4 Distribution of Vested Benefits 15
ARTICLE 8 DISTRIBUTION OF BENEFITS 16
8.1 Normal Form of Benefit 16
ARTICLE 9 WITHDRAWALS WHILE EMPLOYED; LOANS 17
9.1 Hardship Withdrawals 17
9.2 Loans 17
ARTICLE 10 THE FUND 18
10.1 Commingled Fund 18
10.2 Fund as a Company Asset 18
ARTICLE 11 ADMINISTRATION OF THE PLAN 19
11.1 Administration of the Plan 19
11.2 Committee Procedures 19
11.3 Powers of the Committee 20
11.4 Selection of Professional Counselors 21
11.5 Reliance on Professional Counselors 22
11.6 Plan Claim Procedure 22
11.7 Source of Payment of Expenses 24
11.8 Compensation of the Committee 24
ARTICLE 12 GENERAL PROVISIONS 25
12.1 Amendment and Termination 25
12.2 Nonalienation of Benefits 25
12.3 No Contract of Employment 25
12.4 Withholding Taxes 25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
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<S> <C> <C>
12.5 Notices 26
12.6 Severability of Provisions 26
12.7 Headings and Captions 26
12.8 Applicable Law 26
</TABLE>
<PAGE>
ARTICLE 1
DEFINITIONS
The following words and phrases used herein shall have the following meanings;
and the masculine, feminine, and neuter gender shall be deemed to include the
others, unless a different meaning is plainly required by the context:
1.1 ACCOUNT
To the extent applicable to a Participant, the total of his Deferred
Salary Account and Employer Matching Contribution Account, including
respective contributions and the investment earnings credited on such
amounts.
1.2 BENEFICIARY
The person, persons, or entity designated in writing by a Participant or
otherwise determined in accordance with the Qualified Plan to be the
Participant's Beneficiary under the Qualified Plan shall be entitled to
receive as Beneficiary any death benefit which may be, or may become,
payable under this Plan.
1.3 BOARD OF DIRECTORS
The Board of Directors of the Company, as constituted from time to time.
1.4 CODE
The Internal Revenue Code of 1986, as amended from time to time.
1.5 COMMITTEE
The Committee composed of persons appointed under the applicable
provisions of the Qualified Plan and responsible for the administration of
the Qualified Plan shall also be responsible for the administration of
this Plan.
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1.6 COMPANY
Means First USA Paymentech, Inc., a Delaware corporation, and any
successor thereto.
1.7 COMPENSATION
Shall mean the total compensation received from the Employer for personal
services rendered by an eligible Participant to the Employer during the
Plan Year as reported on the Participant's federal income tax withholding
statement (Form W-2), including base salary, bonuses, commissions,
incentive pay, overtime, but excluding directors' fees, expense
allowances, and other special payments and any benefits paid under the
Qualified Plan or this Plan. In determining Compensation hereunder, any
election by a Participant to reduce his Compensation pursuant to Section
125 or 401(k) of the Code shall be disregarded. Compensation for any Plan
Year shall include any amounts in excess of the limitation of Section
401(a)(17) of the Code (the $150,000 indexed limit).
1.8 DEFERRAL ELECTION
The means by which a Participant authorizes and elects to have his
Compensation deferred by his Employer and credited to his Deferred Salary
Account.
1.9 DEFERRED SALARY ACCOUNT
The Account into which Deferred Salary Contributions made on behalf of a
Participant and earnings on those contributions shall be credited.
1.10 DEFERRED SALARY CONTRIBUTION
The amount withheld from the Compensation of a Participant and credited to
his Deferred Salary Account pursuant to a Deferral Election.
1.11 EFFECTIVE DATE
Means July 1, 1996, the Effective Date of this Plan.
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1.12 EMPLOYEE
Any Employee who is receiving Compensation for personal services rendered
in the employment of an Employer.
1.13 EMPLOYER OR PARTICIPATING EMPLOYER
Means (i) the Company and (ii) any subsidiary or other affiliated
organization which, with the approval of the Board of Directors and
subject to such considerations as the Board of Directors may impose,
adopts this Plan.
1.14 EMPLOYER MATCHING CONTRIBUTIONS
The amounts contributed on behalf of a Participant pursuant to Article 4.
1.15 EMPLOYER MATCHING CONTRIBUTION ACCOUNT
The account into which Employer Matching Contributions are made on behalf
of a Participant and investment earnings credited to such account.
1.16 FUND
Means the Fund established for this Plan in which are deposited Deferred
Salary Contributions, Employer Matching Contributions and earnings
thereon, and from which benefits under the Plan are paid as described in
Article 10 hereof. The Fund is established for the convenience of the
Employer and is an asset of each Employer. The obligation of an Employer
to any Participant for benefits payable under the Plan exists
independently of the Fund.
1.17 FINANCIAL HARDSHIP
Means an unanticipated emergency that is caused by an event beyond the
control of the Participant that would result in a severe financial
hardship to the Participant if an early withdrawal is not permitted. The
Committee shall have sole discretion in determining whether or not a
Financial Hardship exists; provided that any early withdrawal approved by
the Committee must be limited to the amount necessary to meet such
unanticipated emergency.
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1.18 QUALIFIED PLAN
Means the First USA Paymentech Retirement Savings Plan, as it may be
amended from time to time.
1.19 NORMAL RETIREMENT AGE (DATE)
A Participant's Normal Retirement Age shall be the later of (i) the 65th
anniversary of birth or (ii) the Participant's completion of five (5)
Years of Service. A Participant's Normal Retirement Date shall be the
first day of the month coincident with or next following the attainment of
Normal Retirement Age.
1.20 PLAN YEAR
The period beginning January 1 and ending on the next December 31;
provided, however, that the first Plan Year shall begin July 1, 1996 and
end December 31, 1996.
1.21 PRIOR PLAN
The First USA Savings Restoration Plan as amended and in effect on June
30, 1996.
1.22 YEAR OF SERVICE
The term Year of Service and the related term Period of Service shall have
the same meaning as in the Qualified Plan.
1.23 VALUATION DATE
The last business day of each March, June, September, and December.
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ARTICLE 2
PARTICIPATION
2.1 PARTICIPATION REQUIREMENTS
The eligibility requirements for becoming a Participant in the Plan are as
follows:
(A) The attainment of age twenty-one (21);
(B) The Employee is a highly compensated employee within the meaning of
Section 414(q) of the Code of an Employer;
(C) The Employee is specifically approved for participation by the Chief
Executive Officer of the Company; and
(D) The Employee is a highly compensated or management employee of an
Employer within the meaning of ERISA Section 201(a), 301(a)(3), and
401(a)(1).
A Participant shall be entitled to make Deferred Salary Contributions and
to receive Employer Matching Contributions under the Plan only during the
period for which he continues to satisfy the requirements described in
this Section 2.1.
As of the Effective Date, no Employee has been approved for active
participation in the Plan pursuant to Section 2.1(C) above. The only
Participants in the Plan as of the Effective Date are as stated in Section
2.4.
2.2 PLAN ENTRY DATE
Each Employee who has satisfied the requirements specified in Section 2.1
prior to or on the Effective Date shall become a Participant in the Plan
provided he elects to make Deferred Salary Contributions under the Plan.
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Each other Participant who satisfies the requirements as provided in
Section 2.1 after the Effective Date shall become a Participant on the
first day of the payroll period following the date on which he satisfied
such requirements and has elected to make Deferred Salary Contributions to
the Plan.
2.3 LOSS OF PARTICIPANT STATUS
An Employee who becomes a Participant shall continue to be a Participant
in the Plan, whether or not he continues to make Deferred Salary
Contributions, until there are no longer any benefits remaining payable to
him.
2.4 SPECIAL RULES FOR EMPLOYEES OF FIRST USA FINANCIAL, INC.
As of the Effective Date, the only Participants in the Plan shall be
Employees who participated in the Prior Plan as of June 30, 1996 and who
transferred employment from First USA Financial, Inc. (or its subsidiaries
or affiliates) to the Employer prior to the Effective Date. However, any
such Participant shall not be eligible to make Deferred Salary
Contributions or receive Employer Matching Contributions on or after the
Effective Date unless and until such Participant is specifically approved
for active participation by the Chief Executive Officer of the Company
pursuant to Section 2.1(C) above.
As of the Effective Date, a Participant's Account in the Prior Plan shall
be transferred to this Plan. Such Account shall reflect adjustments under
the Prior Plan, including contribution credits, any applicable debits, and
an adjustment for earnings, through June 30, 1996. The Account transferred
from the Prior Plan on behalf of a Participant pursuant to this Section
shall be held, administered and disbursed under the terms of this Plan on
and after the Effective Date.
As of the Effective Date, a Participant who has transferred employment as
described in this Section 2.4 shall be credited with the Years of Service
and Period of Service that such Participant was credited with under the
terms of the Prior Plan as of June 30, 1996.
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2.5 TRANSFER TO FIRST USA FINANCIAL, INC.
If, after the Effective Date, a Participant transfers employment to First
USA Financial, Inc. or one of its subsidiaries or affiliates which is a
member of the same controlled group as First USA Financial, Inc., as
determined under Code Sections 414(b), (c), (m) or (o):
(1) such Participant shall not be considered to have terminated
employment or retired for purposes of being eligible for a
distribution under the Plan;
(2) benefits and benefit liabilities attributable to such Participant's
Account shall be transferred to the First USA Savings Restoration
Plan; provided that the First USA Savings Restoration Plan accepts
such transfer at such time; and
(3) such Participant's Account under the Plan shall be cancelled when the
transfer described in (2) above is made.
2.6 TRANSFER FROM FIRST USA FINANCIAL, INC.
If, after the Effective Date, an Employee transfers employment to an
Employer from First USA Financial, Inc. or one of its subsidiaries or
affiliates which is a member of the same controlled group as First USA
Financial, Inc., as determined under Code Sections 414(b), (c), (m) or
(o):
(1) the Plan shall accept a transfer of benefits and benefit liabilities
attributable to such Employee's Account under the First USA Savings
Restoration Plan, if any;
(2) upon such transfer of benefits and benefit liabilities, the Employee
shall have an Account under this Plan equal to the Account
transferred from the First USA Savings Restoration Plan.
An Employee who transfers employment from First USA Financial, Inc. or one
of its subsidiaries or affiliates as aforesaid shall be credited with the
Years of Service and
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Period of Service that was credited to such Employee under the terms of
the First USA Savings Restoration Plan as of the date of transfer to
covered employment under this Plan; provided, however, that service shall
not be credited in accordance with the foregoing if such Employee was a
participant in the First USA Savings Restoration Plan and no transfer of
benefits and benefit liabilities is made from such plan on behalf of such
Employee in accordance with the foregoing.
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ARTICLE 3
DEFERRED SALARY CONTRIBUTIONS
3.1 DEFERRED SALARY ELECTION
Each Participant may elect to make Deferred Salary Contributions to the
Fund for credit to his Participant Account for any Plan Year beginning on
or after the Effective Date by filing his election, on a form approved by
the Committee, at least fifteen (15) days preceding the first day of the
Plan Year in which the election is to be effective; provided, that in the
first year in which a Participant becomes eligible to participate in the
Plan, the Participant must file his election prior to the Participant's
initial Entry Date. A Participant may continue, modify, revoke, or resume
his election to make Deferred Salary Contributions with respect to
subsequent Plan Years by filing his written notice with the Committee, on
a form supplied by the Committee at least fifteen (15) days preceding the
first day of the Plan Year in which the continuation, modification,
revocation, or resumption is to be effective.
Notwithstanding any provision of the Plan, no election to make a Deferred
Salary Contribution may be made by a Participant with respect to
Compensation that has already been paid by the Employer to the Participant
or that has already been earned by the Participant.
3.2 AMOUNT OF DEFERRED SALARY CONTRIBUTION
The amount of the Participant's Deferred Salary Contribution for any Plan
Year shall equal the percentage of the Participant's Compensation elected
by such Participant in accordance with Section 3.1.
A Participant may elect to contribute a level percentage of Compensation
for any Plan Year following the procedures in Section 3.1. The maximum
contribution that may be made by any Participant for a Plan Year is equal
to the maximum amount allowed under Section 402(g) of the Code as applied
to the Qualified Plan.
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Each pay period, the Employer shall reduce each Participant's Compensation
by the amount of his Deferred Salary Contribution. As soon as practical
following the end of each calendar quarter, the Employer shall credit such
contribution to the Participant's Deferred Salary Account.
The amount of Deferred Salary Contributions for any Plan Year under this
Plan is not conditioned upon or subject to any adjustment for deferred
salary contributions made to the Qualified Plan for such Plan Year.
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ARTICLE 4
EMPLOYER CONTRIBUTIONS
4.1 EMPLOYER MATCHING CONTRIBUTIONS
The Employer shall credit an Employer Matching Contribution to the
Participant's Employer Matching Contribution Account for each Participant
who makes a Deferred Salary Contribution with respect to any Plan Year.
Employer Matching Contributions shall be credited as of the Valuation Date
to the Employer Matching Contribution Account of each Participant who made
Deferred Salary Contributions during the period since the preceding
Valuation Date and who is actively employed on the Valuation Date. The
amount of the Employer Matching Contribution shall be equal to fifty
percent (50%) of the Deferred Salary Contributions made by the Participant
excluding any Deferred Salary Contributions in excess of three percent
(3%) of the Participant's Compensation for such period. Deferred Salary
Contributions for such Participants in excess of three percent (3%) of
Compensation shall not be eligible for an Employer Matching Contribution.
The maximum Employer Matching Contribution for any Participant shall be
fifty percent (50%) of the maximum salary deferral amount allowed under
Section 402(g) of the Code as applied to the Qualified Plan.
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ARTICLE 5
PARTICIPANTS' ACCOUNTS
5.1 SEPARATE ACCOUNTS
The Committee shall maintain or cause to be maintained a separate Account
for each Participant which shall consist of his Deferred Salary Account
and his Employer Matching Contribution Account. Each such account shall be
considered a sub-account of the Participant's Account.
5.2 CREDITING EARNINGS TO PARTICIPANT ACCOUNTS
The Account of each Participant who has not received his entire
distribution under the Plan shall be credited at the end of each calendar
quarter with investment earnings (or losses) at the same rate credited for
such purposes in the Qualified Plan with respect to the Participant's
Qualified Plan account. At the discretion of the Committee, additional
interest credits may be granted to the accounts of Participants. If
additional interest is credited, each Participant shall be notified in
writing of the amount or percentage interest rate credited for the period.
Interest shall be credited on the sum of (a) the Participant's beginning
balance less any distributions during the period, plus (b) one-half of the
Deferred Salary Contributions made during the calendar quarter. Each
Participant (or Beneficiary) assumes the risk in connection with any
decrease in value of his Account as a result of investment losses, and
there shall be no liability to the Participant (or Beneficiary) under the
Plan in excess of the value of his vested Account.
5.3 STATEMENTS
At least once annually, the Committee shall cause to be furnished to each
Participant a statement showing the value of his Deferred Salary Account
and Employer Matching Contribution Account as of the most recent Valuation
Date and the additions or deductions from the Accounts since the date of
the last statement.
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ARTICLE 6
DEATH BENEFITS AND BENEFICIARY DESIGNATION
6.1 DISTRIBUTION UPON DEATH
If a Participant dies while an Employee or after becoming totally and
permanently disabled while an Employee, all amounts standing to the
deceased Participant's credit in his Participant's Account, if any, shall
be one hundred percent (100%) vested and nonforfeitable. In such case, a
Participant's Account shall be valued as of the Valuation Date coincident
with or next following his death and the value of such Account determined
on such Valuation Date shall be paid in a lump sum in cash as soon as
administratively feasible to his designated Beneficiary.
6.2 DESIGNATION OF BENEFICIARY
Each Participant shall designate one or more persons as Beneficiary to
receive his Account upon his death. If more than one Beneficiary is named,
the Participant may specify the sequence and/or proportion in which
payment shall be made to each Beneficiary. The designation shall be made
on a form prescribed by the Committee and shall become effective when
filed with the Committee. No Beneficiary designation shall be effective
unless it is filed with and received by the Committee. A Participant may
from time to time change his Beneficiary by filing a new Beneficiary
designation form with the Committee. Prior to the death of the
Participant, no designated Beneficiary shall acquire any interest in any
amounts held in the Participant's Account.
If there is no designated Beneficiary when a death benefit becomes
payable, the benefits shall be paid to the estate of the deceased
Participant. If the primary Beneficiary predeceases the Participant, the
balance of such payments shall be paid to the contingent Beneficiary. If
there is no contingent Beneficiary, the balance of such payments shall be
paid to the estate of the deceased Participant. A Participating Employer
is ineligible to be named as a Beneficiary.
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ARTICLE 7
VESTING AND TERMINATION OF EMPLOYMENT
7.1 VESTING IN DEFERRED SALARY CONTRIBUTIONS
A Participant shall at all times have a one hundred percent (100%) vested
and nonforfeitable interest in his Deferred Salary Account.
7.2 VESTING IN EMPLOYER MATCHING CONTRIBUTION ACCOUNT
A Participant whose employment under the Plan is terminated prior to his
Normal Retirement Age (and for any reason other than death or death
following total and permanent disability) shall have a vested and
nonforfeitable right in his Employer Matching Contribution Account in
accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Service Percentage Vested
---------------- -----------------
<S> <C>
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
</TABLE>
A Participant whose employment under the Plan is terminated on or after
attaining his Normal Retirement Age shall have a one hundred percent
(100%) vested and nonforfeitable right to his Employer Matching
Contribution Account.
If a Participant who is less than one hundred percent (100%) vested in his
Employer Matching Contribution Account receives a distribution from such
account and is subsequently rehired, his following vested interest in such
account shall be determined based on the formula adopted for such purposes
in the Qualified Plan.
7.3 FORFEITURES
If a Participant's employment under the Plan is terminated, any portion of
his Account in which the Participant does not have a nonforfeitable
interest shall be provisionally
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forfeited as of his date of termination. If the Participant becomes an
Employee again prior to incurring five (5) consecutive One-Year Breaks in
Service, the provisionally forfeited amount shall be reinstated to his
Account unadjusted for gains and losses which occurred during said One-
Year Breaks in Service. If the Participant is not rehired before incurring
five (5) consecutive One-Year Breaks in Service, the amount of his
provisional forfeiture shall be forfeited permanently. Forfeitures shall
be used, in the sole discretion of the Committee, to pay administrative
expenses of this Plan or to reduce future Employer Matching Contributions
to this Plan.
7.4 DISTRIBUTION OF VESTED BENEFITS
Benefits payable in the case of a Participant whose employment under the
Plan is terminated shall be paid in accordance with Article 6 in the case
of death, or Article 8, in the case of a Participant who retires or
otherwise terminates employment with a vested benefit.
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ARTICLE 8
DISTRIBUTION OF BENEFITS
8.1 NORMAL FORM OF BENEFIT
All distributions of amounts in a Participant's Account shall be made in
the form of a single lump-sum payment in cash equal to the vested balance
credited to the Participant's Account as of the Valuation Date next
following or coinciding with his date of termination, whether by
retirement or otherwise. A Participant's vested Account shall be
distributed as soon as administratively feasible following the Valuation
Date coincident with or next the occurrence of the Participant's date of
termination, whether by retirement or otherwise.
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ARTICLE 9
WITHDRAWALS WHILE EMPLOYED; LOANS
9.1 HARDSHIP WITHDRAWALS
At its sole discretion, the Committee may approve the distribution to a
Participant of all or a portion of his vested Account based on the
Committee's determination of Financial Hardship. Any such distribution
must first be paid from his Deferred Salary Account and then, if
necessary, from his vested Employer Matching Contribution Account. Such
Accounts shall then be reduced by their respective portions of the
withdrawal.
9.2 LOANS
Loans from a Participant's Account are not allowed.
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ARTICLE 10
THE FUND
10.1 COMMINGLED FUND
Contributions under the Plan and earnings and losses thereon may be
invested in one commingled Fund for the benefit of all Participants.
However, in order that the interest of each Participant may be accurately
determined and computed, separate Accounts shall be maintained for each
Participant and investment earnings (or losses) shall be credited to such
Accounts in accordance with Section 5.2. The Accounts represent the
Participants' individual interests in the Plan and the total of all
Accounts need not equal the amount of the Fund.
10.2 FUND AS A COMPANY ASSET
The Fund shall remain an asset of the Company and shall be subject to the
claims of its general, unsecured creditors. Each Participant shall have no
greater right or status than as an unsecured creditor of the Company with
respect to any amounts accumulated for such Participant under the Plan.
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ARTICLE 11
ADMINISTRATION OF THE PLAN
11.1 ADMINISTRATION OF THE PLAN
Except as to those functions reserved within the Plan to the Company or
the Board of Directors, the Committee shall control and manage the
operation and administration of the Plan. Any Committee member who is
employed under the Plan shall be deemed to have resigned from the
Committee at the time of his termination of employment, unless expressly
provided to the contrary in writing at such time.
11.2 COMMITTEE PROCEDURES
The Committee may act at a meeting or in writing without a meeting. The
Committee shall elect one of its members as a chairman and appoint a
secretary, who is not required to be a Committee member. Any written
memorandum signed by the secretary or any member of the Committee or one
or more individuals who have been authorized to perform specific acts on
behalf of the Committee shall have the same force and effect as a formal
resolution adopted in open meeting. Minutes of all meetings of the
Committee and a record of any action taken by the Committee shall be kept
in written form, such record to be kept by the secretary appointed by the
Committee. The Committee may adopt such bylaws and regulations as it deems
desirable for the conduct of its affairs. All decisions of the Committee
shall be made by the vote of the majority including actions in writing
taken without a meeting. A dissenting Committee member who, within a
reasonable time after he has knowledge of any action or failure to act by
the majority, registers his dissent in writing delivered to the other
Committee members and the Company shall not be responsible for any such
action or failure to act. A member of the Committee may not vote or decide
upon any matter relating solely to himself or vote in any case in which
his individual right or claim to any benefit under the Plan is involved.
If in any case in which an individual Committee member is so disqualified
to act, the remaining members cannot agree, the Board will appoint a
temporary substitute member to exercise all of the
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powers of a qualified member concerning the matter with respect to which
the disqualified member is not qualified to act.
11.3 POWERS OF THE COMMITTEE
The Committee, subject to the limitations herein contained and to such
other restrictions as the Board of Directors may make, shall have the
power and the duty to take all actions and to make all decisions necessary
or proper to carry out the provisions of the Plan. The determination of
the Committee as to any question involving the general administration and
interpretation of the Plan shall be final, conclusive, and binding. Any
discretionary actions to be taken under the Plan by the Committee with
respect to the classification of Employees, Participants, Beneficiaries,
contributions, or benefits shall be uniform in their nature and applicable
to all persons similarly situated. Without limiting the generality of the
foregoing, the Committee shall have the following powers and duties:
(A) To require any person to furnish such information as it may request
for the purpose of the proper administration of the Plan as a
condition of receiving any benefits under the Plan;
(B) To make and enforce such rules and regulations and prescribe the use
of such forms as it shall deem necessary for the efficient
administration of the Plan;
(C) To interpret the Plan, and to resolve ambiguities, inconsistencies
and omissions, which findings shall be binding, final, and
conclusive;
(D) To decide questions concerning the Plan and eligibility of any
Employee to participate in the Plan in accordance with Article 2 of
the Plan.
(E) To determine the amount of benefits which shall be payable to any
person in accordance with the provisions of the Plan. The Committee
may require claims for benefits to be filed in writing, on such forms
and containing such informa-
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tion as the Committee may deem necessary. Adequate notice shall be
provided in writing to an Employee, Participant, or Beneficiary
thereof whose claim for benefits under the Plan has been wholly or
partially denied. The Plan claim review procedure is more
particularly described in Section 11.6 of the Plan. Notice of denial
of a claim shall afford reasonable opportunity to the Participant or
his Beneficiary whose claim for benefits has been denied for a full
and fair review of the decision denying the claim;
(F) To allocate any such powers and duties to or among individual members
of any administrative committee;
(G) To designate persons other than the Committee members to carry out
any duty or power which would otherwise be a fiduciary responsibility
of the Committee under the terms of the Plan; and
(H) To make such administrative or technical amendments to the Plan as
may be necessary or appropriate to carry out the intent of the Board
of Directors.
11.4 SELECTION OF PROFESSIONAL COUNSELORS
(A) The Committee may employ legal counsel, a qualified public
accountant, a qualified actuary, a consultant, and such clerical,
medical, and other accounting services as it may require in carrying
out the provisions of the Plan.
(B) The Committee may appoint an investment manager or managers and
delegate investment responsibilities to manage any assets of the
Fund, including the power to acquire and dispose of fund assets and
to perform such other services as the Committee shall deem necessary
or desirable in connection with the management of Plan assets. Such
investment manager or managers shall (i) be registered as an
investment advisor under the Investment Advisors Act of 1940; (ii) be
a bank, as defined in the Investment Advisors Act of 1940; or (iii)
be an insurance company qualified to manage, acquire, or dispose of
qualified plan
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assets under the laws of more than one State; and shall acknowledge
in writing to the Committee that he is (or they are) a fiduciary with
respect to the Plan. Anything in this Article or elsewhere in the
Plan to the contrary notwithstanding, the Committee shall be relieved
of the authority and discretion to manage and solely control the
assets of the Plan to the extent that authority to acquire, dispose
of, or otherwise manage the assets of the Plan is delegated to one or
more investment managers in accordance with this Section.
11.5 RELIANCE ON PROFESSIONAL COUNSELORS
To the extent permitted by law, the Committee and any person to whom it
may delegate any duty or power in connection with administering the Plan,
the Employer, and the officers and directors thereof, shall be entitled to
rely conclusively upon, and shall be fully protected in any action taken
or suffered by them in good faith in reliance upon, any legal counsel,
accountant, other specialist, or other person selected by the Committee,
or in reliance upon any tables, valuations, certificates, opinions, or
reports which shall be furnished by any of them or by any investment
manager appointed pursuant to the preceding section.
11.6 PLAN CLAIM PROCEDURE
(A) Any claim for a Plan benefit hereunder shall be filed by a
Participant or Beneficiary (claimant) of this Plan on the form
prescribed for such purpose with the Committee, or in lieu thereof,
by written communication which is made by the claimant or the
claimant's authorized representative which is reasonably calculated
to bring the claim to the attention of the Committee.
(B) If a claim for a Plan benefit is wholly or partially denied, notice
of the decision shall be furnished to the claimant by the Committee
within ninety (90) days after receipt of the claim by the Committee.
(C) Any claimant who is denied a claim for a Plan benefit shall be
furnished written notice setting forth:
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(1) the specific reason or reasons for the denial;
(2) specific reference to the pertinent Plan provisions upon which
the denial is based;
(3) a description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary;
and
(4) an explanation of the Plan's claim review procedure.
(D) In order that a claimant may appeal denial of a claim, a claimant or
his duly authorized representative:
(1) may request a review by written application to the Committee not
later than sixty (60) days after receipt by the claimant of
written notification of denial of a claim;
(2) may review pertinent documents; and
(3) may submit issues and comments in writing.
(E) A decision on review of a denied claim shall be made not later than
sixty (60) days after the Plan's receipt of a request for review,
unless special circumstances require an extension of time for
processing, in which case a decision shall be rendered within a
reasonable period of time, but not later than one hundred twenty
(120) days after receipt of a request for review.
The decision on review shall be in writing and shall include the specific
reason(s) for the decision and the specific reference(s) to the pertinent
Plan provisions on which the decision is based.
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11.7 SOURCE OF PAYMENT OF EXPENSES
All expenses prior to the termination of the Plan that shall arise in
connection with the administration of the Plan, including but not limited
to administrative expenses and proper charges and disbursements of the
Committee and compensation and other expenses and charges of any legal
counsel, accountant, specialist or other person who shall be employed by
the Committee in connection with the administration thereof, shall be paid
by the Employer.
11.8 COMPENSATION OF THE COMMITTEE
The Committee shall serve without compensation for services as such (other
than any compensation a member of the Committee may receive as an employee
of the Employer), but all reasonable expenses incurred in the performance
of their duties shall be paid by the Employer.
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ARTICLE 12
GENERAL PROVISIONS
12.1 AMENDMENT AND TERMINATION
The Company reserves the right to amend this Plan at any time and from
time to time in any fashion and to terminate it at will. No amendment to
or discontinuance or termination of the Plan shall, without the written
consent of the Participant, adversely affect any rights of such
Participant with respect to amounts previously credited to such
Participant's Account.
12.2 NONALIENATION OF BENEFITS
All payments to persons entitled to benefits hereunder shall be made to
such persons and shall not be grantable, transferable, or otherwise
assignable in anticipation of payment thereof, in whole or in part, by the
voluntary or involuntary acts of any such persons, or by operation of law,
and shall not be liable or taken for any obligation of such person.
12.3 NO CONTRACT OF EMPLOYMENT
Nothing contained herein shall be construed as conferring upon any person
the right to be employed or continue in the employ of any Employer.
12.4 WITHHOLDING TAXES
The Employers shall have the right to withhold taxes from any payments
made pursuant to the Plan, or to make such other provisions as they deem
necessary or appropriate to satisfy their obligations to withhold federal,
state, local, or foreign income or other taxes incurred by reason of
payments pursuant to the Plan. In lieu thereof, the Employers shall have
the right, to the extent permitted by law, to withhold the amount of such
taxes from any other sums due or to become due to the Participant upon
such terms and conditions as the Committee may prescribe.
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12.5 NOTICES
Each Participant shall be responsible for furnishing the Committee with
the current and proper address for the mailing of notices and delivery of
agreements and payments. Any notice required or permitted to be given
shall be deemed given if directed to the person to whom addressed at such
address and mailed by regular United States mail, first-class and prepaid.
If any item mailed to such address is returned as undeliverable to the
addressee, mailing will be suspended until the Participant furnishes the
proper address.
12.6 SEVERABILITY OF PROVISIONS
If any provision of this Plan shall be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provisions
hereof, and this Plan shall be construed and enforced as if such
provisions had not been included.
12.7 HEADINGS AND CAPTIONS
The headings and captions herein are provided for reference and
convenience only, shall not be considered part of the Plan, and shall not
be employed in the construction of the Plan.
12.8 APPLICABLE LAW
This Plan shall be construed under the laws of the State of Delaware.
-26-
<PAGE>
IN WITNESS WHEREOF, the foregoing Plan is executed this 5th day of
---
August , 1996 but effective as of the 1st day of July 1996.
- - -------------
FIRST USA PAYMENTECH, INC.
By: /s/ Pam Patsley
-------------------------------
Attest: /s/ Philip E. Taken
---------------------
Assistant Secretary
-27-
<PAGE>
EXHIBIT 13
Sections from 1996 Annual Report to Stockholders
<TABLE>
<CAPTION>
<S> <C>
Five-Year Statistical Summary 18
- - --------------------------------------------------------------------------------
Common Stock Information 18
- - --------------------------------------------------------------------------------
Quarterly Financial Information 19
- - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations 20
- - --------------------------------------------------------------------------------
Consolidated Balance Sheets 25
- - --------------------------------------------------------------------------------
Consolidated Statements of Income 26
- - --------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity 27
- - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows 28
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 29
- - --------------------------------------------------------------------------------
Report of Independent Auditors 36
- - --------------------------------------------------------------------------------
</TABLE>
[GRAPH OF NET [GRAPH OF SALES [GRAPH OF ITEMS
REVENUE VOLUME PROCESSED PROCESSED
IN THOUSANDS IN MILLIONS IN THOUSANDS
APPEARS HERE] APPEARS HERE] APPEARS HERE]
92 $ 44,611 92 $ 8,291 92 $163,296
93 $ 51,287 93 $ 13,468 93 $237,740
94 $ 63,749 94 $ 18,426 94 $321,791
95 $ 86,628 95 $ 20,059 95 $358,705
96 $121,232 96 $ 30,876 96 $574,157
17
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
FIVE-YEAR STATISTICAL SUMMARY
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------------------------------------
[In thousands, except per share data] 1996 1995 1994 1993 1992
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income
Net revenue $ 121,232 $ 86,628 $ 63,749 $ 51,287 $ 44,611
Salaries and employee benefits expense 38,753 31,051 19,028 15,618 14,482
Data processing and communications expense 26,951 20,825 17,244 13,627 10,604
Occupancy and equipment expense 6,314 4,379 2,831 2,753 2,419
Depreciation and amortization expense 7,669 4,210 1,794 1,275 1,094
Other operating expense 20,530 16,263 14,335 12,210 10,439
Total operating expenses 100,217 76,728 55,232 45,483 39,038
Income from operations 21,015 9,900 8,517 5,804 5,573
Net interest income 2,737 1,310 323 29 143
Income before income taxes 23,752 11,210 8,840 5,833 5,716
Provision for income taxes 9,500 3,290 2,489 1,714 1,459
Net income $ 14,252 $ 7,920 $ 6,351 $ 4,119 $ 4,257
Net income per share $ 0.54 $ 0.32 $ 0.26 $ 0.17 $ 0.17
Balance Sheet Statistics
Purchased merchant portfolios
and goodwill, net $ 88,894 $ 40,024 $ 3,930 $ 2,290 $ 2,910
Total assets 290,221 84,038 37,805 24,500 20,511
Stockholders' equity $ 231,064 $ 47,232 $ 14,728 $ 11,683 $ 10,990
Other Data
Sales volume processed $30,875,857 $20,059,066 $18,425,550 $13,467,563 $8,291,377
Items processed 574,157 358,705 321,791 237,740 163,296
</TABLE>
- - --------------------------------------------------------------------------------
COMMON STOCK
- - --------------------------------------------------------------------------------
The common stock of the Company is listed for trading on the New York Stock
Exchange and began trading under the symbol PTI on March 22, 1996. The Company's
initial offering price was $21.00 per share. As of June 30, 1996, the Company
had 290 common stockholders of record. During fiscal 1996, the Company did not
declare or pay any dividends. On June 30, 1996, the closing market price was
$40. During fiscal 1996, the high, low and close sales prices on common stock
per share have been:
<TABLE>
<CAPTION>
Common Stock Prices
-----------------------------------------
High Low Close
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
Fourth fiscal quarter $47 3/8 $34 1/2 $40
Third fiscal quarter 37 1/4 30 1/8 35 1/4
</TABLE>
18
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
QUARTERLY FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal 1996
--------------------------------------------------
[In thousands, except per share data] 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $33,864 $31,607 $31,936 $23,825
Salaries and employee benefits expense 10,901 10,089 9,473 8,290
Data processing and communications expense 6,922 6,882 7,231 5,916
Occupancy and equipment expense 1,819 1,557 1,534 1,404
Depreciation and amortization expense 2,375 2,085 1,697 1,512
Other operating expense 4,852 4,820 5,134 5,724
Total operating expenses 26,869 25,433 25,069 22,846
Income from operations 6,995 6,174 6,867 979
Net interest income 2,009 188 262 278
Income before income taxes 9,004 6,362 7,129 1,257
Provision for income taxes 3,574 2,474 2,884 568
Net income $ 5,430 $ 3,888 $ 4,245 $ ,689
Net income per share $0.17 $0.16 $0.17 $0.03
Weighted average common and
common equivalent shares outstanding 32,080 24,816 24,411 24,411
Fiscal 1995
--------------------------------------------------
[In thousands, except per share data] 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- - ----------------------------------------------------------------------------------------------
Net revenue $22,726 $21,622 $22,445 $19,835
Salaries and employee benefits expense 8,368 8,113 7,834 6,736
Data processing and communications expense 5,449 4,918 5,452 5,006
Occupancy and equipment expense 1,152 1,056 1,242 929
Depreciation and amortization expense 1,212 1,135 1,006 857
Other operating expense 4,169 3,897 4,219 3,978
Total operating expenses 20,350 19,119 19,753 17,506
Income from operations 2,376 2,503 2,692 2,329
Net interest income 426 412 323 149
Income before income taxes 2,802 2,915 3,015 2,478
Provision for income taxes 832 696 1,074 688
Net income $ 1,970 $ 2,219 $ 1,941 $ 1,790
Net income per share $ 0.08 $ 0.09 $ 0.08 $ 0.07
Weighted average common and
common equivalent shares outstanding 24,411 24,411 24,411 24,411
</TABLE>
19
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - --------------------------------------------------------------------------------
General
First USA Paymentech, Inc. (the "Company") is a processor of merchant credit
card transactions and an issuer of commercial cards to businesses and other
entities. During the fiscal year ended June 30, 1996, the Company processed
approximately $30.9 billion in sales volume and approximately 574.2 million
transactions through its wholly owned subsidiary First USA Merchant Services,
Inc. ("Merchant Services"), making it the third largest processor of bankcard
transactions for merchants in the United States according to industry sources.
The Company's wholly owned subsidiary, First USA Financial Services, Inc.
("Financial Services"), began in fiscal 1996 to actively market and issue
commercial cards that facilitate business-to-business payment processing and
reporting. The results of operations and financial condition of the Company
include the results of Financial Services since its start-up in the first
quarter of fiscal 1996.
The Company is a 77%-owned indirect subsidiary of First USA, Inc. ("First
USA").
Business Combinations and Merchant Portfolio Purchases
In recent years, the Company has grown at a rate in excess of the industry and
its largest competitors. From January 1, 1991 through December 31, 1995, sales
volume processed increased 454%, a compound annual growth rate of 53%, compared
with a compound annual growth rate of 17% for the industry and 22% for the 10
largest payment processors, according to published industry sources. This
increase in sales volume processed reflects both internal growth and
acquisitions. Since the beginning of fiscal year 1994, the Company has been
active in making acquisitions.
In December 1995, the Company and First USA purchased the capital stock of
Mokarow & Associates, Inc. ("Mokarow"), a sales agent, for approximately $14.3
million; $12.0 million of First USA stock and $2.3 million in cash. First USA
contributed its investment in Mokarow to the Company as a capital contribution.
In a transaction accounted for as a pooling of interests, First USA issued
common stock in September 1995 valued at $85.0 million in exchange for all the
common stock of Litle & Company, Inc. ("Litle"). Litle, a participant in the
direct response payment processing business, was subsequently merged with a
subsidiary of the Company. Therefore the Company's consolidated financial
statements include its operations for all prior fiscal years presented. In
connection with the Litle acquisition, approximately $1.6 million of acqui-
sition costs ($1.0 million net of income taxes) were incurred and have been
recorded as an operating expense in 1996.
In August 1995, the Company paid $34.0 million in cash for certain assets of
DMGT Corporation ("DMGT"), a participant in the direct response payment
processing business. This acquisition was accounted for as a purchase.
During the third quarter of fiscal 1996, the Company began to combine the
operations of Litle and DMGT into a single facility. As a result of the
combination, over the next six months the Company expects to realize significant
cost savings, primarily from reduced salary and employee benefits and data
processing and communications costs. In addition to the benefits of combining
these two operations,the Company expects to realize additional synergies between
the combined direct response operations and its existing merchant processing
operations.
In fiscal 1995, the Company also acquired J. L. McKay Corporation ("J. L.
McKay") and Ask! Technical Group ("Ask!"). J. L. McKay, a credit card software
development company, offers specialized credit card processing applications for
the dining, lodging and retail industries. Ask! provides terminal and supply
sales, and repair and deployment services.
In July 1994, the Company paid $9.1 million in cash for the stock of
NationalCard Processing Systems, Inc. ("NCPS"), a sales agent. Also in July
1994, First USA issued shares of its common stock valued at $22.7 million in
exchange for the merchant contracts and certain other assets of Electronic
Processing Source, Inc. ("EPS"), a sales agent. First USA subsequently
contributed the merchant contracts of EPS to the Company as a capital
contribution.
In October 1993, First USA issued shares of its common stock valued at $10.5
million in exchange for all the outstanding common stock of MAGroup, Inc.
("MAGroup"), a sales agent and electronic draft cap-ture and authorization
provider, in a transaction accounted for as a pooling of interests. MAGroup was
subsequently merged with a subsidiary of the Company.
20
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
During fiscal years 1996, 1995 and 1994, the Company purchased merchant
portfolios for $4.7 million, $300,000 and $1.8 million, respectively.
On August 19, 1996, the Company purchased for approximately $170 million
all of the outstanding stock of GENSAR Holdings Inc. ("GENSAR") and its wholly
owned subsidiaries, GENSAR Technologies Inc. and GENSAR Merchant Processing Inc.
GENSAR is one of the nations' largest providers of electronic draft capture and
authorization services, processing approximately 300 million transactions and
servicing 120,000 merchant locations annually across the U.S. The acquisition
also included a merchant processing portfolio with approximately $1 billion in
annual sales volume. The acquisition will be accounted for as a purchase, and
accordingly, its results will be included in the Company's results of operations
from the effective date of the acquisition.
Results of Operations for the Fiscal Year Ended
June 30, 1996
Net income for the fiscal year ended June 30, 1996 increased 79.9% to $14.3
million, or $0.54 per share, compared with $7.9 million, or $0.32 per share, for
the fiscal year ended June 30, 1995. Net income for the fiscal year ended June
30, 1996 included a net charge of $1.0 million related to the Litle acquisition
offset by the reversal of certain accounting estimates related to Litle
expenses, and a net loss of $1.4 million related to the initial operations of
Financial Services. Net income includes the operating results of DMGT and
Mokarow since their acquisition dates of August 1995 and December 1995,
respectively.
Net revenue increased 39.9% to $121.2 million for the fiscal year ended
June 30, 1996, compared with $86.6 million for fiscal 1995. The Company
attributes the increase in net revenue to the increase in sales volume processed
as a result of its direct sales efforts and its acquisitions of merchant
portfolios and other processing-related companies. Sales volume processed
increased 53.9% to $30.9 billion for the fiscal year ended June 30, 1996,
compared with $20.1 billion for the fiscal year ended June 30, 1995. Items
processed increased 60.1% to 574.2 million, compared with 358.7 million for the
same periods.
Operating expenses, excluding the amortization of purchased merchant
portfolios and goodwill, increased 29.5% to $97.8 million for the fiscal year
ended June 30, 1996, compared with $75.5 million for the fiscal year ended June
30, 1995. The increase was primarily the result of the increase in sales volume
processed. Salaries and employee benefits increased 24.8% to $38.8 million for
the fiscal year ended June 30, 1996, compared with $31.1 million for the fiscal
year ended June 30, 1995. This resulted from an increase in the number of
employees to 831 from 686, primarily as a result of the DMGT acquisition and the
start-up of Financial Services. Data processing and communications, which
includes the cost of obtaining authorizations and processing transactions,
increased 29.4% to $27.0 million for the fiscal year ended June 30, 1996,
compared with $20.8 million for the fiscal year ended June 30, 1995. This was
due to the increase in sales volume processed partially offset by favorable
price renegotiations with communications and authorization vendors. The Company
has also emphasized converting existing merchants to, and installing new
merchants on, the Company's internal data processing systems, that have lower
operating costs than the costs of obtaining data processing services from third
party vendors.
Depreciation and amortization was $7.7 million for the fiscal year ended
June 30,1996, compared with $4.2 million for the same period of 1995. This
increase reflects the amortization of intangibles and goodwill, and depreciation
of property and equipment related to acquisitions as well as investments in
technology made during the year.
21
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
The following table presents, for the periods indicated, the percentage of
revenues represented by certain revenue and expense items in the Company's
consolidated statements of income:
<TABLE>
<CAPTION>
Percent Change
Fiscal Year Ended June 30, Increase (Decrease)
-------------------------- ------------------------------
1996 1995 1994 1996 vs. 1995 1995 vs. 1994
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenue 100.0% 100.0% 100.0% 0.0% 0.0%
Operating Expenses
Salaries and employee
benefits 32.0 35.8 29.8 (10.6) 20.1
Data processing and
communications 22.2 24.0 27.0 (7.5) (11.1)
Occupancy and equipment 5.2 5.1 4.4 2.0 15.9
Depreciation and
amortization 6.3 4.9 2.8 28.6 75.0
Other 17.0 18.8 22.6 (9.6) (16.8)
---- ---- ----
Total operating expenses 82.7 88.6 86.6 (6.7) 2.3
---- ---- ----
Income From Operations 17.3 11.4 13.4 51.8 (14.9)
Net Interest Income
(Expense)
Interest income 3.8 2.2 1.0 72.7 120.0
Interest expense 1.5 0.7 0.5 114.3 40.0
---- ---- ----
Income Before Income
Taxes 19.6 12.9 13.9 51.9 (7.2)
Provision For Income Taxes 7.8 3.8 3.9 105.3 (2.6)
---- ---- ----
Net Income 11.8% 9.1% 10.0% 29.7% (9.0)%
==== ==== ====
</TABLE>
For the fiscal year ended June 30, 1996, the Company's operating margin was
17.3%, versus 11.4% for the fiscal year ended June 30, 1995. This improvement is
primarily the result of increased net revenue and the achievement of operating
efficiencies.
Results of Operations for the Fiscal Year Ended June 30, 1995
Net income for fiscal 1995 was $7.9 million, or $0.32 per share, an increase
of 24.7% over fiscal 1994 net income of $6.4 million, or $0.26 per share. The
acquisitions of NCPS and EPS in July 1994 contributed $2.7 million to the fiscal
1995 results, which reflected the change from wholesale pricing for sales agents
to direct pricing for merchants. The increase in net income for fiscal 1995 was
partially offset by the conversion in July 1994 of one of the Company's largest
sales agents to another processor. Sales volume processed for this sales agent
was $0.3 billion for fiscal 1995, compared with $3.6 billion for fiscal 1994.
Net revenue increased 35.9% to $86.6 million for fiscal 1995, compared with
$63.7 million for fiscal 1994. The growth in net revenue was attributable to
merchant portfolio and other acquisitions and the Company's continued direct
sales efforts, offset by the conversion of one of the Company's largest sales
agents to another processor, as described previously. Sales volume processed
increased 8.9% to $20.1 billion for fiscal 1995, compared with $18.4 billion for
fiscal 1994. Sales volume processed, excluding the volume for the conversion as
noted previously, increased 32.9% to $19.7 billion for fiscal 1995, compared
with $14.9 billion for fiscal 1994.
Operating expenses, excluding the amortization of purchased merchant
portfolios and goodwill, were $75.5 million for fiscal 1995, compared with $55.1
million for fiscal 1994, an increase of 37.0%. This increase was primarily
related to the increase in sales volume processed. Salaries and employee
benefits increased 63.2% to $31.1 million for fiscal 1995, compared with $19.0
million for fiscal 1994 due to the 62.6% increase in employees to 686 for fiscal
1995, compared with 422 for fiscal 1994. Fiscal 1995 employee growth included
126 new employees hired as a result of the Company's acquisitions, the addition
of 42 employees to the Company's direct sales force and additional increases to
support the growth in sales volume processed. Data processing and communications
increased 20.8% to $20.8 million for fiscal 1995, compared with $17.2 million
for fiscal 1994 due to the increase in sales volume processed.
22
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
Depreciation and amortization for fiscal 1995 was $4.2 million, compared with
$1.8 million for fiscal 1994, reflecting an increase in amortization of
intangibles and depreciation of property and equipment related to recent
acquisitions.
Net interest income increased to $1.3 million for fiscal 1995 from $0.3
million for fiscal 1994 due to the investment of merchant deposits in higher
yielding overnight investments during fiscal 1995.
Seasonality
The Company's revenue generally reflects the seasonal fluctuations that are
typically associated with traditional peaks in consumer retail sales. As a
result, the Company generally experiences higher revenue during the December
quarter.
Financial Services
Financial Services began to actively market and issue commercial cards to
businesses and other entities in September 1995. The Company expects Financial
Services to become profitable in late fiscal 1997 and believes that the losses
of Financial Services did not have a material impact on the consolidated results
of the Company in fiscal 1996 and are not expected to have a material impact in
fiscal 1997.
Financial Services received an initial capital contribution of $16.1 million
from First USA during September 1995. Financial Services' liquidity is invested
in investments and overnight reverse repurchase agreements. At June 30, 1996,
Financial Services' investments totaled $12.4 million and consisted of variable
rate U.S. Government agency mortgage-backed securities. Financial Services'
policy is to hold securities until maturity. The average maturity is
approximately 6.77 years with a yield of 6.8%. As loan volume increases,
Financial Services' primary methods of funding will include issuing certificates
of deposit and other borrowings.
Financial Services is subject to the capital adequacy guidelines adopted by
the Federal Deposit Insurance Corporation ("FDIC"). As of June 30, 1996,
Financial Services' risk-based capital ratio exceeded the level required by the
FDIC to be classified as a well capitalized bank.
Liquidity and Capital Resources
The Company operates independently from First USA, generating cash flow from
its operating activities.
On March 27, 1996, the Company completed an initial public underwritten
offering of 5.9 million shares of common stock, issued 635,000 shares in a
direct placement and issued 790,000 shares pursuant to a stock loan program
funded by First USA (the "Offering"). The net proceeds from the Offering were
$141.4 million. The Company used $40.6 million of the proceeds to repay a loan
payable to First USA and has used the remainder for general corporate purposes,
which included product and technology development and funding of acquisitions,
of which $75 million was used for the GENSAR acquisition in August 1996.
The Company has 10.0 million shares of authorized preferred stock, of which
no shares have been issued and outstanding. The Board of Directors of the
Company has the authority to determine the principal rights, preferences and
privileges of the authorized preferred stock. The Company has no current plans
to issue such stock.
The Company has no current plans to pay dividends on the common stock. The
Company presently intends to retain earnings to support the growth of the
Company's business. The payment of any future dividends will be determined by
the Company's Board of Directors, in light of conditions then existing,
including the Company's results of operations, financial condition, capital
requirements, contractual restrictions and other factors deemed relevant at the
time by the Board of Directors. In addition, the payment of dividends may be
subject to certain restrictions under the Company's revolving credit facility.
Prior to the first quarter of fiscal 1996, it was the Company's policy to
dividend a portion of its net income to First USA. Subsequent to such quarter,
the Company has not paid dividends to First USA.
The Company generated $20.7 million and $17.3 million of cash flow from
operating activities for fiscal years ended June 30, 1996 and 1995,
respectively. During the fiscal years ended June 30, 1996 and 1995, the Company
used $41.4 million and $14.7 million to purchase merchant portfolios, processing
services and other acquisitions. The Company received noncash capital
contributions from First USA of $12.0 million and $22.6 million in fiscal years
ended June 30, 1996 and 1995, respectively, related to the acquisitions of
Mokarow and EPS. In addition, the Company received a $16.1 million capital
contribution in the form of cash from First USA to capitalize Financial Services
upon receiving FDIC approval in September 1995. In fiscal 1996, the Company
purchased for $4.0 million, shares of convertible preferred stock that represent
a
23
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
minority interest in First Virtual Holdings, Inc. ("First Virtual"), a
privately held company formed to facilitate Internet commerce. The Company
accounts for its investment in First Virtual using the cost method.
The Company entered into a $100 million three-year revolving credit facility
payable to a bank syndicate in February 1996 (the "Revolving Credit Facility").
The Revolving Credit Facility provides a source of additional liquidity to
manage cash flow, provide capital to subsidiaries for expansion and for other
corporate uses. At June 30, 1996, the Company had no borrowings under the
Revolving Credit Facility.
The Company's stockholders' equity was $231.1 million at June 30, 1996,
compared with $47.2 million at June 30, 1995. The increase in stockholders'
equity primarily reflects the result of the Offering, capital contributed to the
Company in the form of purchased merchant portfolios and cash and the results of
operations.
In August 1996, the Company funded the acquisition of GENSAR ($170 million)
and the subsequent payoff of GENSAR's debt ($30 million) with proceeds from the
Offering ($75 million), a loan from First USA ($25 million) and non-interest-
bearing notes payable to the previous shareholders of GENSAR ($100 million) due
on October 18, 1996. The Company plans to refinance the notes payable through
its Revolving Credit Facility. The Revolving Credit Facility allows the Company
to borrow an additional $50 million from First USA.
Income Taxes
The Company's consolidated provision for income taxes includes state and
federal income tax components. The Company's effective federal tax rate was
34.8%, 24.0% and 24.4% for the fiscal years ended June 30, 1996, 1995 and 1994,
respectively. As a result of the Offering, the Company began filing a separate
federal tax return and is no longer included in First USA's consolidated return.
The tax rate for the periods prior to the second quarter of fiscal 1996
reflects Litle as a Subchapter S corporation, which included no federal income
taxes in its financial statements since its income was taxed at the shareholder
level. As a result, the Company's effective tax rate increased to approximately
39% beginning with the second quarter of fiscal 1996.
Capital Expenditures
The Company spent $21.3 million and $9.2 million for capital expenditures in
fiscal 1996 and 1995, respectively. Capital expenditures are made generally to
accommodate growth in payment processing volume, provide for increased operating
efficiencies and support future growth in the commercial card market served by
Financial Services. Included in the 1996 capital expenditures are $11.0 million
related to facility expansions and additions.
Contingent Liabilities Through Merchants
Under the rules of Visa(R) and MasterCard(R), the Company has certain
contingent liabilities for the transactions it processes on behalf of merchants.
If a cardholder purchases a product or service and is dissatisfied after the
purchase, the cardholder is able to return the product and demand a refund. If
the merchant, after having received payment from the Company, refuses to pay the
refund or properly provide the product or service, a chargeback results.
Merchants must follow certain processing procedures in order to limit their
exposure to chargebacks. The payment processor must fund the chargeback if the
merchant does not have sufficient funds to repay the chargeback.
The Company conducts reviews of potential merchants based upon the merchant's
industry. The contingent liability risk is greater for direct response merchants
since the purchase is made before the product or service is delivered and the
applicable card is not typically present. The Company takes these and other
risks into account in making its credit determinations with respect to new
merchants. At June 30, 1996, the Company had cash deposits from certain
customers aggregating approximately $18.4 million as an offset to potential
contingent liabilities that are the responsibility of such customers. These cash
deposits are primarily related to merchants in the direct response industry.
Credit losses for merchant processing incurred by the Company relating to such
contingent liabilities were approximately $640,000, $310,000 and $390,000 for
fiscal 1996, 1995 and 1994, respectively, compared with total sales volume
processed in such periods of $30.9 billion, $20.1 billion and $18.4 billion,
respectively. Merchant Services is not exposed to cardholder credit losses.
24
<PAGE>
<TABLE>
<CAPTION>
First USA Paymentech, Inc. and Subsidiaries
- - ---------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - ---------------------------------------------------------------------------------------------
June 30,
---------------------
[Dollars in thousands, except per share data] 1996 1995
- - ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $105,804 $ 4,623
Receivables 25,952 18,182
Credit card loans, net 7,012 --
Terminal inventories 3,747 3,697
Prepaid expenses and other current assets 7,618 4,196
-------- -------
Total current assets 150,133 30,698
Investments (market value of $12,315) 12,379 --
Property and equipment, net 30,344 11,769
Purchased merchant portfolios, net 26,519 8,601
Goodwill, net 62,375 31,423
Other assets 8,471 1,547
-------- -------
$290,221 $84,038
======== =======
Liabilities And Stockholders' Equity
Current liabilities:
Merchant deposits $ 18,353 $16,854
Accounts payable 15,912 1,746
Other accrued expenses 11,455 5,669
Accrued assessments 7,273 4,324
Interest-bearing deposits 5,335 --
Payable to affiliates 139 4,213
-------- -------
Total current liabilities 58,467 32,806
Interest-bearing deposits 690 --
Loan payable to First USA -- 4,000
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000 shares authorized,
31,701,081 and 24,411,081 issued and outstanding at June 30, 1996
and 1995, respectively 317 244
Additional capital 210,433 40,878
Retained earnings 20,314 6,110
-------- ------
231,064 47,232
-------- ------
$290,221 $84,038
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------------
[Dollars in thousands, except per share data] 1996 1995 1994
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenue $ 121,232 $ 86,628 $ 63,749
Operating Expenses
Salaries and employee benefits 38,753 31,051 19,028
Data processing and communications 26,951 20,825 17,244
Occupancy and equipment 6,314 4,379 2,831
Depreciation and amortization 7,669 4,210 1,794
Other 20,530 16,263 14,335
---------- --------- ---------
Total operating expenses 100,217 76,728 55,232
---------- --------- ---------
Income From Operations 21,015 9,900 8,517
Net Interest Income
Interest income 4,579 1,899 630
Interest expense 1,842 589 307
---------- --------- ---------
2,737 1,310 323
---------- --------- ---------
Income Before Income Taxes 23,752 11,210 8,840
Provision For Income Taxes 9,500 3,290 2,489
---------- --------- ----------
Net Income $ 14,252 $ 7,920 $ 6,351
========== ========= =========
Net income per share $0.54 $0.32 $0.26
========== ========= =========
Weighted average common and
common equivalent shares outstanding 26,429,673 24,411,081 24,411,081
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Fiscal Years Ended June 30, 1996
-------------------------------------------------------
Common Stock
------------------- Additional Retained
[Dollars in thousands] Shares Amount Capital Earnings Total
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 24,411,081 $244 $ 7,708 $ 3,731 $ 11,683
Net income 2,327 4,024 6,351
Cash dividends to First USA (3,306) (3,306)
---------- --- ------ ------- -------
Balance at June 30, 1994 24,411,081 244 10,035 4,449 14,728
Net income 3,272 4,648 7,920
Capital contributions from First USA 27,571 27,571
Cash dividends to First USA (2,987) (2,987)
---------- --- ------ -------- -------
Balance at June 30, 1995 24,411,081 244 40,878 6,110 47,232
Net income 48 14,204 14,252
Capital contributions from First USA 28,143 28,143
Issuance of common stock, net 7,290,000 73 141,364 141,437
---------- ---- -------- ------- --------
Balance at June 30, 1996 31,701,081 $317 $210,433 $20,314 $231,064
========== ==== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------
[In thousands] 1996 1995 1994
- - ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 14,252 $ 7,920 $ 6,351
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 7,669 4,210 1,794
Changes in operating assets and liabilities:
Receivables (14,782) 2,292 (6,526)
Accounts payable 14,166 82 (702)
Payable to affiliates (4,074) 2,144 (364)
Accrued assessments 2,949 550 2,812
Other accrued expenses 5,786 456 536
Merchant deposits 1,499 6,497 7,978
Other operating activities (6,776) (6,814) (384)
-------- ------- ------
Net Cash Provided By Operating Activities 20,689 17,337 11,495
Investing Activities
Purchases of merchant portfolios, processing
services and other acquisitions (41,398) (14,665) (1,750)
Purchases of property and equipment (21,333) (9,229) (2,452)
Purchase of investments (12,949) -- --
Proceeds from maturities of investments 570 -- --
Other investing activities (4,000) -- --
------- ------- ------
Net Cash Used For Investing Activities (79,110) (23,894) (4,202)
Financing Activities
Proceeds from initial public offering 141,437 -- --
Borrowings from First USA 59,473 4,000 --
Payment on note payable to First USA (63,473) -- --
Capital contribution from First USA 16,140 5,000 --
Issuance of interest-bearing deposits 6,025 -- --
Dividends paid to First USA -- (2,987) (3,306)
Net Cash Provided By (Used For) Financing ------- ----- ------
Activities 159,602 6,013 (3,306)
------- ----- ------
Increase (Decrease) In Cash And Cash
Equivalents 101,181 (544) 3,987
Cash and cash equivalents at beginning of year 4,623 5,167 1,180
-------- ------- ------
Cash And Cash Equivalents At End Of Year $105,804 $ 4,623 $5,167
======== ======= ======
Supplemental Cash Flow Information
Noncash financing activity:
Capital contribution from First USA $ 12,002 $22,571 $ --
======== ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
- - ------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The consolidated financial statements include the accounts of First USA
Paymentech, Inc. and its wholly owned subsidiaries (the "Company"). The Company
is a 77%-owned indirect subsidiary of First USA, Inc. ("First USA"). All
significant intercompany balances and transactions have been eliminated. The
Company indirectly conducts its business through the two primary operating
subsidiaries, First USA Merchant Services, Inc. ("Merchant Services") and First
USA Financial Services, Inc. ("Financial Services"). Merchant Services began
payment processing in 1985 and Financial Services, a Utah industrial loan
corporation, began issuing commercial cards in September 1995. Merchant Services
is among the largest processors of merchant credit card transactions in the
United States. In addition, Financial Services during the past fiscal year has
begun to market and issue to businesses and other entities credit cards that
facilitate business-to-business payment solutions.
Cash and Cash Equivalents
The Company considers all highly liquid investments, with maturities of three
months or less when purchased, to be cash equivalents.
Receivables
Receivables primarily represent fee income earned under processing agreements
with merchants, agent banks and sales agents.
Credit Card Loans
Credit card loans represent Business, Corporate and Purchasing Visa cards.
Business cards are a revolving line of credit designed for small to medium-size
companies to make routine business purchases, including travel and
entertainment, equipment and supplies. Corporate cards are non-revolving charge
cards designed for use by medium to large companies primarily for travel and
entertainment expenditures. Purchasing cards are also non-revolving cards
designed for use by medium to large companies for purchases of equipment,
supplies and services.
Terminal Inventories
The Company maintains an inventory of point-of-sale terminals and printers
that are sold or leased to merchants. These terminals are valued at the lower of
cost or market on a specific identification basis. When leased under operating
leases, the terminals are reclassified to property and equipment and depreciated
over their estimated useful life.
Terminal Leases
Leases that are generally noncancelable by the merchant are accounted for as
operating leases. Income from the lease of point-of-sale terminals under
operating leases is recorded in accordance with the terms of the lease
agreements.
Investments
Investments are carried at cost, adjusted for amortization of premium and
accretion of discounts. The Company has both the ability and intent to hold
these investments to maturity.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation
and amortization. Depreciation is provided on a straight-line basis over periods
ranging from two to seven years for furniture and equipment, and three years for
point-of-sale terminals held for lease. Leasehold improvements are amortized
over the lesser of the economic useful life of the improvement or the term of
the lease.
Purchased Merchant Portfolios and Goodwill
Purchased merchant portfolios are amortized over the estimated period to be
benefited, primarily 25 years, on a straight-line basis. Purchased merchant
portfolios are evaluated by management for impairment at each balance sheet date
through review of actual cash flows generated by each merchant portfolio in
relation to the expected cash flows and the recorded amortization expense. If,
upon review, actual cash flows indicate an impairment of the value of the
purchased merchant portfolio, amortization will be accelerated.
Goodwill represents the excess of purchase price over identifiable assets
acquired, less liabilities assumed from business combinations, and is amortized
over the estimated period to be benefited, generally 40 years, on a straight-
line basis. Goodwill is reviewed for impairment whenever events indicate that
the carrying amount may not be recoverable. If estimates of future operating
results would be insufficient to recover future charges to goodwill
amortization, then the recorded value of goodwill balances would be reduced by
the estimated deficiencies in operating results.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("Statement No. 121"), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash
29
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement
No. 121 in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of adoption will be material.
Chargebacks and Merchant Fraud
Disputes between a cardholder and a merchant periodically arise due to
cardholder dissatisfaction with merchandise quality or a merchant's service and
the disputes may not be resolved in the merchant's favor. In some of these
cases, the transaction is "charged back" to the merchant and the purchase price
is refunded to the cardholder by Visa and MasterCard. If the merchant is unable
to fund the refund, the Company is liable for the full amount of the
transaction. The Company maintains merchant deposits from certain customers as
an offset to potential contingent liabilities that are the responsibility of
such customers. The Company evaluates its risk and estimates its potential loss
for chargebacks based on historical experience. The Company pays the customer
interest of generally 2.0% on the merchant deposits.
Net Revenue
Net revenue is primarily fees from merchants related to the processing of
transactions (including merchant discount fees) partially offset by interchange
fees payable to credit card issuing institutions and fees payable to credit card
associations and are recorded as services are performed. Net revenue also
includes fees earned from software maintenance and customer service and fees for
the deployment and repair of credit card terminals. In addition, net revenue
includes amounts from First USA Bank for soliciting agent bank card
relationships on First USA Bank's behalf.
Retirement Benefits
Eligible employees were transferred from the First USA noncontributory defined
benefit retirement plan in March 1996 to the Company's noncontributory defined
benefit retirement plan (the "Retirement Plan"). Effective July 1, 1996,
eligible employees were transferred from the First USA Retirement Savings Plan
(the "First USA Savings Plan") to the Company's Retirement Savings Plan (the
"Savings Plan").
Stock-Based Compensation
The Company accounts for stock option and stock purchase plans in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). In accordance with APB 25, no compensation expense is
recognized for stock options issued to employees since the options have an
exercise price equal to the market value of the common stock on the day of the
grant. In addition, the Company does not recognize compensation expense for its
employee stock purchase plan since it qualifies as a non-compensatory plan under
APB 25. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-
based compensation expense based on the fair value of the awards or continue to
account for stock-based compensation under APB 25 and disclose in the financial
statements the effects of SFAS No. 123 as if the recognition provisions were
adopted. Company has evaluated its alternatives available under the provisions
of SFAS No. 123 and has determined it will not adopt the recognition provisions
of the statement. Therefore, the adoption of SFAS No. 123 will have no impact on
the Company's consolidated financial statements.
Federal Income Taxes
Provision for income taxes includes a state and federal income tax component.
The income tax provision is provided for using the liability method. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE B
- - --------------------------------------------------------------------------------
OFFERING
On March 27, 1996, the Company completed an initial public underwritten
offering of 5.9 million shares of its common stock, $0.01 par value, at $21.00
per share and sold 635,000 shares in a direct placement at $19.53 per share, the
offering price less the underwriters' discount, and 790,000 shares pursuant to a
stock loan program funded by First USA (the "Offering"). The net proceeds from
the Offering were $141.4 million, of which the Company used $40.6 million of the
net proceeds for repayment of a loan payable to First USA.
30
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
NOTE C
- - --------------------------------------------------------------------------------
BUSINESS COMBINATIONS AND ASSET PURCHASES
The Company has completed the following business combinations and merchant
portfolio purchases (in millions):
<TABLE>
<CAPTION>
Consideration
----------------------------------
Business Combinations and First USA
Merchant Portfolio Common Stock
Purchases Date Total Cash Dollar Value
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year 1996:
Mokarow & Associates, Inc. December 1995 $ 14.3 $ 2.3 $12.0
Litle & Company, Inc. September 1995 85.0 -- 85.0
DMGT Corporation August 1995 34.0 34.0 --
Merchant Portfolios Various 4.7 4.7 --
------ ----- -----
$138.0 $41.0 $97.0
====== ===== =====
Fiscal Year 1995:
NationalCard Processing
Systems, Inc. July 1994 $ 9.1 $ 9.1 $ --
Electronic Processing
Source, Inc. July 1994 22.7 -- 22.7
Processing Services Various 5.3 5.3 --
Merchant Portfolios Various 0.3 0.3 --
------ ----- -----
$ 37.4 $14.7 $22.7
====== ===== =====
Fiscal Year 1994:
MAGroup, Inc. October 1993 $ 10.5 $ -- $10.5
Merchant Portfolios Various 1.8 1.8 --
------ ----- -----
$ 12.3 $ 1.8 $10.5
====== ===== =====
</TABLE>
The Litle and MAGroup transactions have been accounted for as poolings of
interests, and accordingly, the Company's consolidated financial statements
include their operations for all prior fiscal years presented. The DMGT
transaction was accounted for as a purchase, and accordingly, its operations
have been included in the Company's results of operations from August 31, 1995.
All other business combinations and asset purchases have been accounted for as
purchases, and accordingly, their results have been included in the Company's
results of operations from the effective dates of such acquisitions.
Net income for the first quarter of fiscal year 1996 and for the fiscal years
ended June 30, 1995 and 1994 reflects the effect of Litle as a Subchapter S
corporation and, accordingly, Litle included no federal income taxes in its
financial statements since its income was taxed at the shareholder level.
Separate results of the Company and Litle for the three fiscal years ended June
30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------
1996 1995 1994
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenue:
Company $117,080 $63,221 $45,238
Litle 4,152 24,209 19,100
Elimination of
intercompany revenue -- (802) (589)
-------- ------- -------
$121,232 $86,628 $63,749
======== ======= =======
Net Income:
Company $ 14,204 $ 4,649 $ 4,024
Litle 48 3,271 2,327
-------- ------- -------
$ 14,252 $ 7,920 $ 6,351
======== ======= =======
</TABLE>
31
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
In connection with the Litle acquisition, approximately $1.6 million of
acquisition costs ($1.0 million net of income taxes, or $0.04 per share) were
incurred and recorded as operating expense in the Company's first six months of
fiscal 1996.
First USA issued shares of its common stock in exchange for the merchant
contracts and certain other assets of EPS. First USA contributed the purchased
merchant portfolio of EPS to the Company as a capital contribution. The Company
and First USA also purchased the capital stock of Mokarow, a sales agent, for
approximately $14.3 million. First USA contributed its investment in Mokarow to
the Company as a capital contribution.
Amortization expense related to purchased merchant portfolios and goodwill was
$2.5 million, $1.2 million and $110,000 during fiscal 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
NOTE D
- - --------------------------------------------------------------------------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE
Net income per share is calculated as follows
(dollars in thousands, except per share data):
Fiscal Year Ended June 30,
---------------------------------------
1996 1995 1994
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 14,252 $ 7,920 $ 6,351
Weighted average =========== =========== ===========
common shares
outstanding 26,315,065 24,411,081 24,411,081
Common stock equivalents-
stock options 114,608 -- --
---------- ----------- -----------
Weighted average
common and common
equivalent shares
outstanding 26,429,673 24,411,081 24,411,081
=========== =========== ===========
Net income per share $0.54 $0.32 $0.26
=========== =========== ===========
</TABLE>
NOTE E
- - --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
A summary of property and equipment by major class is as follows (in
thousands):
<TABLE>
<CAPTION>
June 30,
----------------------
1996 1995
- - ----------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment $27,599 $16,341
Leasehold improvements 9,508 2,172
Credit card terminals held for lease 4,622 2,139
------- ------
41,729 20,652
Less: accumulated depreciation (11,385) (8,883)
------- ------
$30,344 $11,769
======= ======
</TABLE>
Depreciation expense was $5.2 million, $3.0 million and $1.7 million in fiscal
1996, 1995 and 1994, respectively.
NOTE F
- - --------------------------------------------------------------------------------
REVOLVING CREDIT FACILITY
On February 21, 1996, the Company entered into a $100 million revolving credit
facility payable to a bank syndicate ("Revolving Credit Facility"). The
Revolving Credit Facility bears interest based on the London Interbank Offering
Rate ("LIBOR") plus 0.35% to 0.90% and commitment fees ranging from 0.15% to
0.30% on the unused portion based on the Company's debt to capitalization ratio,
payable quarterly. The Revolving Credit Facility expires in February 1999, with
the option of two one-year extensions. First USA Financial, Inc. is guarantor to
the Revolving Credit Facility. The Company's ability to pay dividends is
conditioned upon the observance of certain financial covenants in the agreement.
The financial covenants require the Company to maintain specified (i) debt to
capitalization ratios, (ii) debt to cash flow ratios, (iii) minimum interest
coverage ratios, and (iv) minimum levels of consolidated stockholders' equity,
and additionally the debt due to First USA may not exceed $75 million. At June
30, 1996, the Company had no borrowings under the Revolving Credit Facility and
none of the covenants had the effect of restricting the Company's ability to pay
dividends.
The Company paid interest of $1.7 million in fiscal 1996, primarily related to
the Company's loan payable to First USA and merchant deposits. In fiscal 1995
and 1994, the Company paid $586,000 and $313,000, respectively, primarily
related to merchant deposits.
NOTE G
- - --------------------------------------------------------------------------------
PREFERRED STOCK
The Board of Directors of the Company has the authority to determine the
principal rights, preferences and privileges of 10.0 million shares of
authorized preferred stock. Provisions could be included in the shares of
preferred stock, such as extraordinary voting, dividend, redemption or
conversion rights, which could discourage an unsolicited tender offer or
takeover proposal. However, the Company has no current plans to include such
provisions.
32
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
NOTE H
- - --------------------------------------------------------------------------------
INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------
1996 1995 1994
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Federal income
taxes - current $7,610 $2,504 $2,052
State income taxes, net
of federal tax benefit - current 1,890 786 437
------ ------ ------
$9,500 $3,290 $2,489
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes due to the
following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------
1996 1995 1994
- - ----------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to
income before income taxes $8,313 $ 3,924 $3,094
State income taxes, net of
federal tax benefit 1,229 511 284
Subchapter S status of
Litle and other (42) (1,145) (889)
----- ------- ------
$9,500 $ 3,290 $2,489
====== ======= ======
</TABLE>
Prior to the Offering, the Company was included in the consolidated federal
income tax return filed by First USA in accordance with the tax sharing
agreement and income tax expense was provided based on earnings reported as if
the Company filed a separate income tax return.
Pursuant to the tax-sharing agreement, the Company is required to reimburse
First USA for its current tax liabilities. In accordance with this arrangement,
the Company paid federal income tax payments of $2.8 million, $3.2 million and
$2.0 million during fiscal 1996, 1995 and 1994, respectively.
NOTE I
- - --------------------------------------------------------------------------------
STOCK OPTIONS, STOCK PURCHASE AND
RESTRICTED STOCK PLANS
The Company has adopted the First USA Paymentech, Inc. 1996 Stock Option Plan
(the "1996 Option Plan"). The 1996 Option Plan took effect upon consummation of
the Offering and provides for grants of nonqualified stock options to certain
key employees of the Company and First USA and its subsidiaries. A maximum of
4,000,000 shares of common stock has been reserved under the 1996 Option Plan.
All stock options have an exercise price equal to the market value of the
Company's common stock on the date the option is granted and may not be
exercised more than 10 years from the date of grant.
In connection with the Offering, the Company granted special stock options
under the 1996 Option Plan relating to an aggregate of 745,000 shares of common
stock with an exercise price of $19.53, which is the initial offering price per
share (net of the per share underwriter's discount), and 45,000 shares of common
stock with an exercise price of $30.63, which is the closing price of the common
stock on the New York Stock Exchange on March 28, 1996. All of the special stock
options granted were exercised prior to June 30, 1996.
Members of the Board of Directors of the Company who are not employees of the
Company or First USA and its subsidiaries on the date they become a director
receive an option to purchase 5,000 shares of common stock at an option price
equal to the fair market value of the common stock on the date of grant. The
option is granted on the date the director joins the Board. Such directors will
also receive annual grants of options to purchase 2,500 shares of common stock
at an option price equal to the fair market value of the stock on the date of
grant. Options terminate if not exercised within 90 days after the director
ceases to be a member of the Board of Directors.
Under the 1996 Option Plan, 2,401,500 common shares were available for future
grants as of June 30, 1996.
<TABLE>
<CAPTION>
Number of Option Price Number of Shares
Shares Per Share Exercisable
--------- -------------- ----------------
<S> <C> <C> <C>
Granted 1,600,500 $19.53 - 30.63
Exercised 790,000 19.53 - 30.63
Forfeitures 2,000 19.53
-------- ---------------
Outstanding
June 30, 1996 808,500 $19.53 - 30.63 162,100
======== ===============
</TABLE>
Employees of the Company may participate in the First USA, Inc. Stock Purchase
Plan (the "Purchase Plan"). The Purchase Plan provides a means for employees to
purchase shares of First USA common stock at 85% of the fair market value
thereof.
Key officers and employees of the Company participate in the First USA, Inc.
1994 Restricted Stock Plan (the "First USA Restricted Stock Plan"). The First
USA Restricted Stock Plan authorizes the granting of awards in the form of
restricted shares of First USA common stock to key officers and employees of the
Company and First USA subject to risks of forfeiture that may be eliminated over
time based on performance criteria. Salaries and employee benefits for fiscal
1996 and 1995 includes $450,000 and $177,000 related to the First USA Restricted
Stock Plan.
33
<PAGE>
First USA Paymentech, Inc. and Subsidiaries
In March 1996, the Company adopted the First USA Paymentech, Inc. 1996
Restricted Stock Plan (the "Restricted Stock Plan"). The Restricted Stock Plan
authorizes the granting of awards in the form of restricted shares of the
Company's common stock to key officers and employees of the Company and First
USA subject to risks of forfeiture that may be eliminated over time based on
performance criteria. A maximum of 500,000 shares of common stock has been
reserved for issuance under the Restricted Stock Plan, subject to adjustment, of
which none had been issued at June 30, 1996.
NOTE J
- - --------------------------------------------------------------------------------
RETIREMENT BENEFITS
In March 1996, the Company adopted a noncontributory defined benefit
retirement plan (the "Retirement Plan") that provides retirement benefits for
eligible employees. The Company's funding policy is to annually contribute the
minimum amount required under the Employee Retirement Income Security Act of
1974 ("ERISA"). Contributions are intended to provide not only for benefits
attributed to compensation to date, but also for compensation increases to be
earned in the future. Each participant's cash balance account is credited with
an amount equal to 4% of the participant's compensation plus interest. Each
participant becomes fully vested in benefits under the plan after five years of
employment. Prior to that time, no portion of a participant's benefits is
vested.
Prior to the adoption of the retirement plan, eligible employees participated
in the First USA noncontributory defined benefit retirement plan. The plan
assets, which were transferred from the First USA plan effective March 22, 1996,
consist mainly of investments in mutual funds.
The statements of income include $322,000, $156,000 and $93,000 for
contributions to the Retirement Plan for fiscal 1996, 1995 and 1994,
respectively.
During fiscal 1996, the Company's employees participated in the First USA
Savings Plan, which provides savings and investment opportunities. The First USA
Savings Plan stipulates that eligible employees with at least one year of
service may elect to contribute to the First USA Savings Plan. Pre-tax
contributions up to 3% of an eligible employee's defined compensation are
matched 50% by the Company. The consolidated statements of income include
$211,000, $288,000 and $177,000 for the contributions to the First USA Savings
Plan for fiscal 1996, 1995 and 1994, respectively.
Effective July 1, 1996, the Company adopted the Retirement Savings Plan (the
"Savings Plan"), which provides savings and investment opportunities to
employees of the Company. Upon adoption of this plan, the employees of the
Company are no longer eligible to participate in the First USA Savings Plan and
all employee and employer contributions to the plan as well as the earnings on
these contributions were transferred from the First USA Savings Plan to the
Company's Savings Plan.
NOTE K
- - --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
The Company leases its office space and certain equipment under operating
leases with remaining terms ranging up to 10 years. The Company subleases its
principal office space from First USA. The office space leases contain renewal
options and generally requires the Company to pay certain operating expenses.
Future minimum lease commitments under noncancelable leases as of June 30, 1996,
are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 4,954
1998 4,365
1999 3,488
2000 3,078
2001 2,963
Thereafter 12,812
-------
$31,660
=======
</TABLE>
The consolidated statements of income include rental expense for operating
leases of $3.8 million, $2.0 million and $1.4 million for fiscal 1996, 1995 and
1994, respectively.
In the course of business, the Company is a defendant in various lawsuits.
Management believes that the resolution of these lawsuits will not have a
material impact on the Company.
34
<PAGE>
NOTE L
- - --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at June 30, 1996 and 1995 consist
primarily of cash and cash equivalents, investments and merchant deposits. At
June 30, 1995, the Company's financial instruments also included a loan payable
to First USA. Due to the short maturities of the cash and cash equivalents,
carrying amount approximates the respective fair value. The investments are
fixed rate debt securities with a market value of $12.3 million classified as
held to maturity. The merchant deposits are interest bearing and are on terms
that are standard for the industry. The loan payable to First USA is a variable
rate instrument at terms the Company believes would be available if similar
financing were obtained from a non-affiliated third party. As such, the carrying
amounts of both categories of liabilities approximate their respective fair
values.
NOTE M
- - --------------------------------------------------------------------------------
RELATED PARTIES
The Company solicits agent bank card issuing relationships for First USA Bank.
Net revenue includes $1.9 million, $1.9 million and $2.1 million in fees paid by
First USA Bank for fiscal 1996, 1995 and 1994, respectively.
First USA provides office space to the Company, allows the Company to
participate in insurance coverage and benefit plans and provides certain other
administrative services to the Company. The consolidated statements of income
include the allocation of these expenses incurred by First USA or one of its
subsidiaries to the Company based on specific identification, headcount or
square footage of leased properties. The Company believes this allocation is
reasonable and approximates costs that would have been incurred if the Company
was unaffiliated with First USA.
At June 30, 1995, the Company had $86.7 million invested in First USA Bank
certificates of deposit. These certificates of deposit earn interest at a market
rate and have initial maturities of less than 90 days.
NOTE N
- - --------------------------------------------------------------------------------
SUBSEQUENT EVENTS
On August 19, 1996, the Company purchased for approximately $170 million all
of the outstanding stock of GENSAR Holdings Inc. which owns 100% of GENSAR
Technologies Inc. and GENSAR Merchant Processing Inc. GENSAR is one of the
nation's largest providers of electronic draft capture and authorization
services, processing approximately 300 million transactions annually and
servicing 120,000 merchant locations across the U.S. The acquisition also
includes a merchant processing portfolio with approximately $1 billion in annual
sales volume. The acquisition will be accounted for as a purchase, and
accordingly, its results will be included in the Company's results of operations
from the effective date of the acquisition.
The Company funded the acquisition of GENSAR and the subsequent payoff of
GENSAR's debt with proceeds from the Offering ($75 million), a loan from First
USA ($25 million), and non-interest-bearing notes payable to the previous
shareholders of GENSAR ($100 million) due October 18, 1996. The Company plans to
refinance the notes payable through its Revolving Credit Facility. The Company
plans to pursue an increase of its line of credit under the Revolving Credit
Facility in fiscal 1997.
35
<PAGE>
- - --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- - --------------------------------------------------------------------------------
Stockholders and Board of Directors
First USA Paymentech, Inc.
We have audited the accompanying consolidated balance sheets of First USA
Paymentech, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First USA
Paymentech, Inc. and subsidiaries at June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
July 16, 1996 except for Note N,
as to which the date is August 19, 1996
36
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NAME OF ENTITY STATE OF INCORPORATION
- - -------------- ----------------------
First USA Management Resources, Inc. Delaware
First USA Financial Services, Inc. Utah
Gensar Holdings, Inc. Delaware
Litle & Company, Inc. Delaware
MAGroup, Inc. Arizona
First USA Merchant Services, Inc. Nevada
First USA Direct Marketing, Inc. Delaware
NationalCard Processing Systems, Inc. Delaware
First USA Technology, Inc. Delaware
Mokarow & Associates, Inc. Texas
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of First USA Paymentech, Inc. of our report dated July 16, 1996 except for Note
N, as to which the date is August 19, 1996, included in the 1996 Annual Report
to Stockholders of First USA Paymentech, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-11249) pertaining to the First USA Paymentech, Inc. Retirement
Savings Plan, the Registration Statement (Form S-8 No. 333-06979) pertaining to
the First USA, Inc. Deferred Compensation Plan, and the Registration Statement
(Form S-8 No. 333-02786) pertaining to the First USA Paymentech, Inc. 1996 Stock
Option Plan and the First USA Paymentech, Inc. 1996 Restricted Stock Plan of our
report dated July 16, 1996 except for Note N, as to which the date is August 19,
1996, with respect to the consolidated financial statements incorporated herein
by reference.
/s/ ERNST & YOUNG LLP
Dallas, Texas
September 16, 1996
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<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
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0
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