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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14224
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Paymentech, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2634185
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1601 Elm Street, 8th Floor, Dallas, Texas 75201
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(address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code 214-849-4770
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N/A
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Former Name, Former Address and former Fiscal Year, If Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
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Common Stock, $.01 par value 35,353,249 shares
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PAYMENTECH, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
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ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets -
September 30, 1997 (Unaudited) and June 30, 1997...................................... 3
Condensed Consolidated Statements of Income (Unaudited) -
Three Months Ended September 30, 1997 and 1996........................................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 30, 1997 and 1996........................................ 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited)................................................................ 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................... 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................................... 13
ITEM 2. Changes in Securities................................................................. 13
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K................................................................... 13
Index of Exhibits..................................................................... 14
SIGNATURES..................................................................................... 15
</TABLE>
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PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $108,948 $119,466
Receivables, net.............................................................. 30,347 45,563
Credit card loans, net........................................................ 22,684 19,902
Terminal inventories.......................................................... 3,949 6,646
Prepaid expenses and other current assets..................................... 13,591 14,953
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Total current assets....................................................... 179,519 206,530
Investments, at cost (market value of $9,274 and $10,143 at September 30, 1997
and June 30, 1997, respectively).............................................. 9,203 10,083
Notes receivable.................................................................. 10,120 9,169
Property and equipment, net....................................................... 47,442 44,103
Goodwill, net..................................................................... 255,635 253,255
Purchased merchant portfolios and other intangibles, net.......................... 96,941 99,248
Other assets...................................................................... 9,652 8,612
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$608,512 $631,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 85,796 $112,752
Interest-bearing deposits..................................................... 23,623 20,721
Merchant deposits............................................................. 18,430 18,852
Accrued assessments........................................................... 9,456 8,672
Other accrued expenses........................................................ 29,274 35,448
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Total current liabilities.................................................. 166,579 196,445
Notes payable to banks and other borrowings....................................... 75,104 75,140
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000 shares authorized, 35,328,711 and
35,090,395 issued and outstanding at September 30, 1997 and June 30, 1997,
respectively............................................................... 353 351
Additional paid-in capital.................................................... 338,675 335,435
Retained earnings............................................................. 27,801 23,629
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Total stockholders' equity................................................. 366,829 359,415
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$608,512 $631,000
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</TABLE>
See Accompanying Notes.
3
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PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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Revenues:
Revenue................................... $50,340 $41,130
Other income.............................. 1,201 253
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Total revenues........................... 51,541 41,383
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Expenses:
Operating.................................. 20,471 16,083
Salaries and employee benefits............. 15,451 11,690
Depreciation and amortization.............. 6,497 3,624
Interest................................... 1,649 500
Merger, integration and impairment......... - 15,544
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Total expenses............................ 44,068 47,441
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Income (loss) before income taxes..... 7,473 (6,058)
Income tax provision (benefit)................... 3,301 (2,774)
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Net income (loss)..................... $ 4,172 $(3,284)
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Net income (loss) per share...................... $ 0.12 $ (0.10)
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Weighted average common and
common equivalent shares outstanding....... 35,452 32,124
========== =========
</TABLE>
See Accompanying Notes.
4
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PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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Operating Activities
Net income (loss)................................................................... $ 4,172 $ (3,284)
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Noncash portion of merger, integration and impairment charge..................... - 7,497
Provision for depreciation and amortization...................................... 6,497 3,624
Gain on sale of assets........................................................... (899) -
Changes in operating assets and liabilities:
Receivables.................................................................... 14,496 (8,138)
Accounts payable............................................................... (27,312) 41,396
Other accrued expenses......................................................... (10,401) 17,325
Notes receivable............................................................... 302 -
Prepaid expenses and other current asset....................................... 1,265 789
Terminal inventories........................................................... 297 (1,561)
Accrued assessments............................................................ 784 (951)
Merchant deposits.............................................................. (711) (795)
Other operating activities..................................................... (2,509) (28)
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Net cash provided by (used for) operating activities........................ (14,019) 55,874
Investing Activities
Purchases of merchant portfolios, processing services and other acquisitions........ (687) (188,118)
Purchases of property and equipment, net............................................ (4,398) (6,131)
Proceeds from sale of assets........................................................ 2,216 -
Proceeds from maturities of investments............................................. 880 -
Purchases of investments............................................................ - 269
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Net cash used for investing activities...................................... (1,989) (193,980)
Financing Activities
Issuance of interest bearing deposits............................................... 2,866 3,548
Issuance of common stock, net....................................................... 2,624 52
Increase in notes payable to banks and other borrowings............................. - 76,556
Note payable to First USA........................................................... - 25,000
Other financing activities.......................................................... - (25)
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Net cash provided by financing activities................................... 5,490 105,131
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Decrease in cash and cash equivalents....................................... (10,518) (32,975)
Cash and cash equivalents at beginning of period...................................... 119,466 105,804
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Cash and cash equivalents at end of period.................................. $108,948 $ 72,829
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</TABLE>
See Accompanying Notes.
5
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PAYMENTECH, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
Paymentech, Inc. (f/k/a First USA Paymentech, Inc.; the "Company") is a
Delaware corporation, which engages in the credit card industry primarily as a
payment processor of credit and debit card transactions. According to published
industry sources, the Company is the third largest payment processor of bankcard
transactions in the United States. The Company also provides third-party credit
and debit authorization services to financial institutions, sales agents and the
Company's direct merchants. In addition, the Company markets and issues
commercial cards to businesses and other entities. Commercial cards facilitate
centralized business-to-business payment procedures and reporting, replacing
traditional direct payment methods. During the three months ended September 30,
1997, bankcard sales volume processed increased approximately 24.5% to $11.2
billion compared with $9.0 billion for the three months ended September 30,
1996. The Company processed 419.8 million total transactions for the quarter
ended September 30, 1997, an increase of approximately 59.2%, compared with
263.6 million total transactions for the same period in fiscal 1997.
The Company is a 57%-owned indirect subsidiary of First USA Financial, Inc.,
which is a wholly owned subsidiary of BANC ONE CORPORATION.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
NOTE B - BUSINESS COMBINATIONS, DIVESTITURES AND MERCHANT PORTFOLIO PURCHASES
During the quarter ended September 30, 1997, the Company sold its terminal
leasing portfolio to Northern Leasing Systems Inc. ("Northern Leasing") for cash
and a note receivable. This sale generated a pretax gain of $626,000, or $0.01
per share, which is included in other income. In addition, a deferred gain up
to $626,000 will be recognized when certain performance criteria are met with
respect to lease payments made by the Company's merchants to Northern Leasing.
The Company now leases terminals to merchants through a contract with Northern
Leasing which generates fee income.
In September 1997, the Company sold the assets of its Ask! Technical Group
unit, a non-core business, to TASQ Technology, Inc. ("TASQ") for cash and a note
to be paid December 31, 1997. In addition, TASQ has agreed to purchase certain
terminal inventories and supplies at book value. The sale generated a gain of
$273,000 which is included in other income. TASQ is an outsourcing provider of
information systems, inventory management services and logistics to the credit
card and processing industry. In connection with the sale, the Company also
entered into an ongoing servicing agreement with TASQ to provide deployment,
repair and inventory management services to the Company.
On August 11, 1997, the Company issued 46,634 shares of common stock to the
former sole stockholder of Merchant-Link, Inc. ("Merchant-Link") as a result of
the achievement of certain performance criteria following the Company's
acquisition of Merchant-Link in January 1997. Additional payments of up to $3.7
million in common stock may be paid if certain additional performance objectives
are met during fiscal 1998.
6
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On August 19, 1996, the Company purchased for approximately $170 million all
of the outstanding stock of GENSAR Holdings Inc. ("GENSAR"), which owns 100% of
Paymentech Network Services, Inc. (formerly GENSAR Technologies Inc.) and GENSAR
Merchant Processing Inc. The acquisition was accounted for as a purchase, and
accordingly, GENSAR's results have been included in the Company's results of
operations since acquisition.
After all market value adjustments, the purchase resulted in identifiable
intangible assets of approximately $35 million, which have lives of eight to ten
years and goodwill of approximately $175 million.
The following consolidated pro forma results give effect to the purchase of
GENSAR as if it had occurred on July 1, 1996 (in thousands, except per share
information):
<TABLE>
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THREE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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Total revenues.......................... $51,541 $43,808
Income (loss) before income taxes....... 7,473 (7,203)
Net income (loss)....................... 4,172 (3,990)
Net income (loss) per share............. $ 0.12 $ (0.12)
</TABLE>
The pro forma results include the effect of all material adjustments related
to the purchase transaction and have been prepared using calculations based on
assumptions and adjustments deemed reasonable by the Company.
The pro forma results do not purport to be indicative of the results of
operations that would have actually been obtained if the purchase had been
consummated as of the beginning of the period presented. In addition, the pro
forma results do not purport to be indicative of the results of operations which
may be achieved in the future.
During the first quarter of fiscal 1997, the Company recorded a merger,
integration and impairment charge related to the acquisition of GENSAR of $15.5
million, which reduced net income by $9.7 million. The charge includes costs
related to the conversion from third-party authorization networks to GENSAR's
authorization network, the closure of certain offices and employee severance.
The conversion costs consisted primarily of the incremental labor costs to
convert existing merchant customers to the GENSAR authorization network. The
charge related to office closings included lease termination costs as well as
the write-off of certain intangible assets related to systems that will no
longer be used. The employee related costs were primarily severance for
individuals displaced as a result of the office closings.
NOTE C - NOTES RECEIVABLE
As partial consideration for the sale of the Company's terminal leasing
portfolio during the quarter ended September 30, 1997, the Company accepted a
$1.3 million note receivable from Northern Leasing which earns a fixed market
rate which compounds quarterly. Principal and interest are payable once certain
performance criteria are met with respect to lease payments made by the
Company's merchants to Northern Leasing. Based on current information
available, the Company anticipates that the performance criteria will be met and
the first payment of principal and interest will be made during the quarter
ended March 1999 with the final payment expected during the second quarter of
fiscal 2000.
The Company has a $3.1 million note receivable which was the result of the
sale of non-core business agent bank contracts in fiscal 1997. The note matures
in 2000 and earns interest at a market rate with principal and interest payments
due quarterly.
The Company has a $6.4 million note from LitleNet L.L.C. as part of a
litigation settlement. This note is discounted to earn a market rate of
interest with principal and interest due in 2003.
7
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NOTE D - INCOME TAXES
The Company's consolidated provision for income taxes includes state and
federal income tax components. The Company's effective tax rate was 44.2% and
45.8% for the three months ended September 30, 1997 and 1996, respectively. The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes primarily due to
the Company's high level of nondeductible amortization of goodwill, purchased
merchant portfolios and other intangibles.
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
simplifies the standards for computing and presenting earnings per share. Under
the new standards, the presentation of primary earnings per share will be
replaced with a presentation of basic earnings per share. Basic earnings per
share is computed excluding dilution caused by common stock equivalents such as
stock options. The presentation of fully diluted earnings per share is replaced
with a presentation of diluted earnings per share which is calculated in a
similar fashion to the current computation method for fully diluted earnings per
share. The Company will adopt this pronouncement to report results of
operations for the second quarter of fiscal 1998. At that time, previously
reported earnings per share will be restated to conform to the new rules;
however, for the three months ended September 30, 1997, basic earnings per share
and diluted earnings per share would be $0.12 per share with no change from the
current calculation. This adoption is not expected to have a material impact
on future earnings per share.
NOTE F - SUBSEQUENT EVENTS
On October 10, 1997, a putative class action suit entitled Raffaele Branca v.
First USA Paymentech, Inc., Pamela H. Patsley, David W. Truetzel and Raymond J.
McArdle was commenced by a stockholder of the Company in the United States
District Court, Northern District of Texas, against the Company, an officer, and
certain former officers, as disclosed in a Form 8-K filed on October 20, 1997.
On October 17, 1997, a putative class action suit entitled Michael P. Fuchs v.
First USA Paymentech, Inc., Elena Anderson, Susan H. Cerpanya, Michael Duffy,
Raymond J. McArdle, Pamela H. Patsley and David W. Truetzel was commenced by a
stockholder of the Company in the United States District Court, Northern
District of Texas, against the Company, certain of its officers, and certain
former officers. The complaints allege, among other things, that the defendants
violated United States securities laws by publicly issuing false and misleading
statements and omitting to disclose material adverse information regarding the
Company's business. Both of the complaints seek to represent all stockholders
who purchased stock during the period from April 15, 1997, the date on which the
Company issued a press release announcing its financial results for the third
quarter of fiscal year 1997, to September 24, 1997, the date on which the
Company announced that it was restating and revising its previously announced
results for the fourth quarter of fiscal year 1997. The complaints claim that as
a result of such alleged improper actions, the price of the Company's common
stock was artificially inflated at the time stockholders in the classes acquired
their stock. The complaints also allege insider trading by one or more officers
of the Company. The complaints seeks monetary damages for the losses the
stockholders in the classes allegedly incurred. The Company has not yet answered
the complaints, but intends to defend these actions vigorously.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Paymentech, Inc. (f/k/a First USA Paymentech, Inc.; the "Company") is a
Delaware corporation, which engages in the credit card industry primarily as a
payment processor of credit and debit card transactions on behalf of merchants,
financial institutions and sales agents. The Company also provides third-party
credit and debit authorization services to financial institutions, sales agents
and the Company's direct merchants. According to published industry sources, the
Company is the third largest payment processor of bankcard transactions in the
United States. During the three months ended September 30, 1997, bankcard sales
volume processed increased approximately 24.5% to $11.2 billion compared with
$9.0 billion for the three months ended September 30, 1996. The Company
processed 419.8 million total transactions for the quarter ended September 1997,
an increase of approximately 59.2%, compared with 263.6 million total
transactions for the same period in fiscal 1997. In addition, the Company
markets and issues commercial cards to businesses and other entities.
Commercial cards facilitate business-to-business payment procedures and
reporting, replacing traditional direct payment methods.
The Company is a 57%-owned indirect subsidiary of First USA Financial, Inc.
("First USA"), which is a wholly owned subsidiary of BANC ONE CORPORATION ("Banc
One").
BUSINESS COMBINATIONS, DIVESTITURES AND MERCHANT PORTFOLIO PURCHASES
During the quarter ended September 30, 1997, the Company sold its terminal
leasing portfolio to Northern Leasing Systems Inc. ("Northern Leasing") for cash
and a note receivable. This sale generated a pretax gain of $626,000, or $0.01
per share, which is included in other income. In addition, a deferred gain up
to $626,000 will be recognized when certain performance criteria are met with
respect to lease payments made by the Company's merchants to Northern Leasing.
The Company now leases terminals to merchants through a contract with Northern
Leasing which generates fee income.
In September 1997, the Company sold the assets of its Ask! Technical Group
unit, a non-core business, to TASQ Technology, Inc. ("TASQ") for cash and a note
to be paid December 31, 1997. In addition, TASQ has agreed to purchase certain
terminal inventories and supplies at book value. The sale generated a gain of
$273,000 which is included in other income. TASQ is an outsourcing provider of
information systems, inventory management services and logistics to the credit
card and processing industry. In connection with the sale, the Company also
entered into an ongoing servicing agreement with TASQ to provide deployment,
repair and inventory management services to the Company.
On August 11, 1997, the Company issued 46,634 shares of common stock to the
former sole stockholder of Merchant-Link, Inc. ("Merchant-Link") as a result of
the achievement of certain performance criteria following the Company's
acquisition of Merchant-Link in January 1997. Additional payments of up to $3.7
million in common stock may be paid if certain additional performance objectives
are met during fiscal 1998.
On August 19, 1996, the Company purchased for approximately $170 million all
of the outstanding stock of GENSAR Holdings Inc. ("GENSAR"). The acquisition of
GENSAR enables the Company to offer third-party credit and debit authorization
services to financial institutions, sales agents and its direct merchants.
GENSAR also enables the Company to directly provide its existing customers with
a full array of point-of-sale products and services that were previously
primarily outsourced. This acquisition was accounted for as a purchase and
accordingly, GENSAR's results are included in the Company's results of operation
from the date of the acquisition.
RESULTS OF OPERATIONS
The Company recorded net income for the three months ended September 30, 1997
of $4.2 million, or $0.12 per share, compared with a net loss of $3.3 million,
or $0.10 per share, for the three months ended September 30, 1996. Income for
the three months ended September 30, 1996, excluding a $15.5 million, or $9.7
million and $0.30 per share on an after-tax basis, one-time merger, integration
and impairment charge related to the GENSAR acquisition, was $6.4 million, or
$0.20 per share. The one-time merger, integration and impairment charge
included costs related to the conversion from third-party authorization networks
to GENSAR's authorization network, the closure of certain offices and employee
severance.
9
<PAGE>
Revenues increased 22.4% to $50.3 million for the three months ended September
30, 1997, compared with $41.1 million for the three months ended September 30,
1996. The increase in revenues was the result of the increase in sales volume
processed partially offset by margin compression due to increased competition
within the industry. Bankcard sales volume processed increased 24.5% to $11.2
billion for the three months ended September 30, 1997, compared with $9.0
billion for the three months ended September 30, 1996. Total items processed
for the three months ended September 30, 1997 increased 59.2% to 419.8 million,
compared with 263.6 million for the three months ended September 30, 1996.
Bankcard sales volume processed included bankcard transactions derived from the
Company's merchant portfolio. Total items processed included bankcard and other
credit and debit card transactions, and credit and debit authorization
transactions.
Other income for the three months ended September 30, 1997, included a
$626,000 pretax gain, or $0.01 per share, related to the sale of the Company's
terminal leasing portfolio and a $273,000 pretax gain related to the sale of
assets of the Company's Ask! unit. Other income also includes interest income
from investments.
Total expenses for the three months ended September 30, 1997 decreased 7.1% to
$44.1 million, compared with $47.4 million for the three months ended September
30, 1996. Total expenses, excluding amortization of goodwill, purchased
merchant portfolios and other intangibles, and with respect to the quarter ended
September 30, 1996, a one-time merger, integration and impairment charge related
to the GENSAR acquisition, were $39.9 million for the quarter ended September
30, 1997, compared with $30.1 million for the three months ended September 30,
1996. The 32.6% increase was primarily due to increased sales volume processed,
increased number of employees and increased interest expense. Operating
expenses increased 27.3% to $20.5 million for the three months ended September
30, 1997, compared to $16.1 million for the same period of fiscal 1997,
primarily due to increased sales volume processed. Salaries and employee
benefits increased 32.2% to $15.5 million for the three months ended September
30, 1997, compared with $11.7 million for the same period in 1996, primarily due
to the increase in the number of employees. The number of employees increased
from approximately 1,000 at September 30, 1996 to approximately 1,300 at
September 30, 1997. Such increase included employees hired as a result of the
Company's acquisitions as well as those hired to support the growth in sales
volume processed. Operating expenses and salaries and employee benefits also
increased as a result of the Company providing for itself certain administrative
functions, including but not limited to human resources, legal staff and
facilities administration, which were previously provided by First USA.
Interest expense increased to $1.6 million for the three months ended September
30, 1997, compared with $500,000 for the three months ended September 30, 1996.
The increase was primarily due to the Company's $75 million in borrowings under
its revolving credit facility with a bank syndicate ("Revolving Credit
Facility") as of September 30, 1997, compared with no borrowings under the
Revolving Credit Facility as of September 30, 1996.
Depreciation and amortization increased 79.3% to $6.5 million for the three
months ended September 30, 1997, compared with $3.6 million for the three months
ended September 30, 1996. The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $4.2 million for the quarter ended
September 30, 1997, compared to $1.8 million for the same period fiscal 1997, as
a result of the Company's acquisitions, including GENSAR. Depreciation of
property and equipment increased to $2.3 million for the three months ended
September 30, 1997, compared with $1.8 million for the three months ended
September 30, 1996. This 28.4% increase in depreciation was primarily the
result of the Company's capital expenditures and costs associated with
acquisitions.
During the first quarter of fiscal 1997, the Company recorded a one-time
merger, integration and impairment charge related to the acquisition of GENSAR
of $15.5 million, or $9.7 million and $0.30 per share on an after-tax basis. The
charge included costs related to the conversion from third-party authorization
networks to GENSAR's authorization network ($6.4 million), the closure of
certain offices ($7.6 million) and employee severance ($1.5 million). The
conversion costs consisted primarily of the incremental labor costs to convert
existing merchant customers to the GENSAR authorization network. The charge of
$7.6 million related to office closings included lease termination costs as well
as the write-off of $3.7 million pertaining to certain intangible assets related
to systems that will no longer be used. The employee related costs were
primarily severance for individuals displaced as a result of certain office
closings.
10
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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.
COMMERCIAL CARDS
The Company, through its subsidiary First USA Financial Services, Inc.
("Financial Services"), markets and issues commercial cards to businesses and
other entities. Financial Services offers business-to-business payment
solutions.
In January 1997, the Company and PHH Vehicle Management Services Corporation
("PHH"), formed PHH/Paymentech L.L.C. ("PHH/Paymentech"), a Delaware limited
liability company that offers a MasterCard-branded single card payment system
for fleet, purchasing, travel and entertainment needs. PHH/Paymentech offers
the corporate fleet card solution to companies with mobile employees, marketing
to both existing customers and prospects. As consideration for PHH's
contribution of existing client and supplier contracts to PHH/Paymentech, the
Company paid PHH $12.5 million with an additional $5.0 million payable within
one year. If certain performance objectives are met, an additional $2.5 million
will be paid to PHH over the next three years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $14.0 million for the three months
ended September 30, 1997, compared with net cash provided by operating
activities of $55.9 million for the same period of 1996. The Company spent $4.4
million and $6.1 million for capital expenditures during the three months ended
September 30, 1997 and 1996, respectively.
The Company's $200 million Revolving Credit Facility provides a source of
liquidity to manage cash flow, provide capital to subsidiaries for expansion and
for other corporate uses. At September 30, 1997, the Company had $75 million
in borrowings under the Revolving Credit Facility in the form of a $40 million
note and a $35 million note, each at a rate of LIBOR plus 35 basis points
(currently approximately 6.04%). Certain financial conditions must be met to
utilize the full amount of the Revolving Credit Facility.
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.
PARENT COMPANY MERGER
In June 1997, the Company's former indirect parent company, First USA, Inc.,
merged with and into Banc One resulting in Banc One becoming the indirect owner
of 57% of the Company's outstanding stock. Banc One has stated that it expects
to reduce its ownership of the Company, provided such reduction is accomplished
in such a way as to preserve the pooling accounting treatment of the Banc
One/First USA, Inc. merger. The Company understands that such treatment could
be compromised if the Company were to issue common stock, including in an
acquisition or in a capital-raising offering, in an aggregate amount which would
cause Banc One's ownership to fall below a controlling interest. In addition,
the Company believes that growth in its third-party authorization services and
the number of acquisitions completed has slowed and been hampered by the
reluctance of some banks to engage in business with a subsidiary of a large bank
holding company. Banc One also owns a 50% interest in an alliance with First
Data Corporation, which alliance is a competitor of the Company. Banc One
refers all prospective merchant customers from Banc One's branch network to such
alliance.
Furthermore, as a result of the Banc One/First USA, Inc. merger and Banc One's
strategy to allow the Company to operate independently, the Company now provides
for itself certain administrative functions, including but not limited to human
resources, legal staff and facilities administration, which functions were
previously integrated with the same functions of the Company's former parent,
First USA. Effective as of July 1, 1997, the Company is providing these
administrative services in a manner that is not integrated with Banc One. As a
result, the Company incurs additional overhead expenses.
11
<PAGE>
CAUTIONARY STATEMENTS
Information or statements provided by the Company herein and 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 revenue, account origination and growth, customer
base, anticipated operations costs and employment growth, anticipated marketing
expense or anticipated credit and other losses. 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 factors that
are described under "Business-Cautionary Statements" in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997. These cautionary
statements are 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.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 10, 1997, a putative class action suit entitled Raffaele Branca
v. First USA Paymentech, Inc., Pamela H. Patsley, David W. Truetzel and Raymond
J. McArdle was commenced by a stockholder of the Company in the United States
District Court, Northern District of Texas, against the Company, an officer, and
certain former officers, as disclosed in a Form 8-K filed on October 20, 1997.
On October 17, 1997, a putative class action suit entitled Michael P. Fuchs v.
First USA Paymentech, Inc., Elena Anderson, Susan H. Cerpanya, Michael Duffy,
Raymond J. McArdle, Pamela H. Patsley and David W. Truetzel was commenced by a
stockholder of the Company in the United States District Court, Northern
District of Texas, against the Company, certain of its officers, and certain
former officers. The complaints allege, among other things, that the defendants
violated United States securities laws by publicly issuing false and misleading
statements and omitting to disclose material adverse information regarding the
Company's business. Both of the complaints seek to represent all stockholders
who purchased stock during the period from April 15, 1997, the date on which the
Company issued a press release announcing its financial results for the third
quarter of fiscal year 1997, to September 24, 1997, the date on which the
Company announced that it was restating and revising its previously announced
results for the fourth quarter of fiscal year 1997. The complaints claim that as
a result of such alleged improper actions, the price of the Company's common
stock was artificially inflated at the time stockholders in the classes acquired
their stock. The complaints also allege insider trading by one or more officers
of the Company. The complaints seeks monetary damages for the losses the
stockholders in the classes allegedly incurred. The Company has not yet answered
the complaints, but intends to defend these actions vigorously.
In addition, the Company has been named as a defendant in various 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 2. CHANGES IN SECURITIES
On August 11, 1997, the Company issued 46,634 shares of common stock to the
former sole stockholder of Merchant-Link, Inc. ("Merchant-Link") as a result of
the achievement of certain performance criteria following the Company's
acquisition of Merchant-Link in January 1997. No underwriter was used in
connection with the sale or issuance of the shares, and such issuance was an
exempt transaction under Section 4(2) of the Securities Act of 1933, as amended.
The resale of such shares has been registered on a shelf registration statement
on Form S-3 (File No. 333-32697).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Reports on Form 8-K filed during the first quarter of fiscal 1998:
Report on Form 8-K filed July 2, 1997
Item 1. Changes in Control of Registrant
Item 5. Other Events
Report on Form 8-K/A filed July 2, 1997
Item 1. Changes in Control of Registrant
Item 5. Other Events
b. Reports on Form 8-K filed subsequent to the first quarter of fiscal 1998:
Report on Form 8-K filed October 20, 1997
Item 5. Other Events
Report on Form 8-K filed October 23, 1997
Item 5. Other Events
13
<PAGE>
c. Exhibits
The following exhibits are incorporated by reference or filed herewith:
Exhibit Number Description of Exhibit
- -------------- ----------------------
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) and incorporated by reference herein.
3.2 By-Laws of the Company, filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1997 and incorporated by reference herein.
11* Computation of Net Income Per Share.
27* Financial Data Schedule.
_____________________
* Filed herewith.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997
PAYMENTECH, INC.
By: /s/ Pamela H. Patsley
-------------------------------------------
Pamela H. Patsley
President and Chief Executive Officer
By: /s/ Kathryn J. Kessler
-------------------------------------------
Kathryn J. Kessler
Chief Accounting Officer
15
<PAGE>
INDEX OF EXHIBITS
-----------------
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
16
<PAGE>
EXHIBIT 11
PAYMENTECH, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Primary
- -------
Net income (loss).............................................. $ 4,172 $ (3,284)
----------- -----------
Weighted average common equivalent shares outstanding
Average common shares outstanding........................ 35,258,197 31,703,181
Common stock equivalents -- stock options................ 194,184 420,578
----------- -----------
Weighted average common and common stock
equivalent shares..................................... 35,452,381 32,123,759
=========== ===========
Net income (loss) per share.................................... $ 0.12 $ (0.10)
=========== ===========
Fully diluted
- -------------
Net income (loss).............................................. $ 4,172 $ (3,284)
----------- -----------
Weighted average common and common equivalent
shares outstanding
Average common shares outstanding........................ 35,258,197 31,703,181
Common stock equivalents -- stock options................ 195,417 455,745
----------- -----------
Weighted average common and common stock
equivalent shares..................................... 35,453,614 32,158,926
=========== ===========
Net income (loss) per share assuming full dilution............. $ 0.12 $ (0.10)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 108,948
<SECURITIES> 9,203
<RECEIVABLES> 30,347
<ALLOWANCES> 0
<INVENTORY> 3,949
<CURRENT-ASSETS> 179,519
<PP&E> 47,442
<DEPRECIATION> 0
<TOTAL-ASSETS> 608,512
<CURRENT-LIABILITIES> 166,579
<BONDS> 75,104
0
0
<COMMON> 353
<OTHER-SE> 366,476
<TOTAL-LIABILITY-AND-EQUITY> 608,512
<SALES> 0
<TOTAL-REVENUES> 51,541
<CGS> 0
<TOTAL-COSTS> 42,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,649
<INCOME-PRETAX> 7,473
<INCOME-TAX> 3,301
<INCOME-CONTINUING> 4,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,172
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
