<PAGE>
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 March 31, 1997
---------------
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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First USA Paymentech, Inc.
- - --------------------------------------------------------------------------------
(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
- - --------------------------------------------------------------------------------
(address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code 214-849-2000
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N/A
- - --------------------------------------------------------------------------------
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
------- ------
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 April 30, 1997
- - -------------------------------- --------------------------------
Common Stock, $.01 par value 34,962,639 shares
<PAGE>
FIRST USA PAYMENTECH, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
-----------------
PART I. F I N A N C I A L I N F O R M A T I O N Page
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets -
March 31, 1997 (Unaudited) and June 30, 1996................. 3
Condensed Consolidated Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 1997 and 1996.......... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended March 31, 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. O T H E R I N F O R M A T I O N
ITEM 1. LEGAL PROCEEDINGS............................................ 12
ITEM 2. CHANGES IN SECURITIES........................................ 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Index of Exhibits............................................ 13
Reports on Form 8-K.......................................... 13
SIGNATURES............................................................ 14
<PAGE>
FIRST USA PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 99,809 $105,804
Receivables............................................. 38,396 25,952
Credit card loans, net.................................. 16,402 7,012
Terminal inventories.................................... 6,462 3,747
Prepaid expenses and other current assets............... 11,020 7,618
-------- --------
Total current assets................................ 172,089 150,133
Investments, at cost (market value of $10,800 and $12,315
at March 31, 1997 and June 30, 1996, respectively)...... 10,771 12,379
Property and equipment, net............................... 39,551 30,344
Purchased merchant portfolios, net........................ 101,548 26,519
Goodwill, net............................................. 247,989 62,375
Note receivable........................................... 6,375 --
Other assets.............................................. 7,530 8,471
-------- --------
$585,853 $290,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 82,369 $ 16,051
Other accrued expenses................................. 36,377 11,455
Merchant deposits...................................... 19,640 18,353
Interest-bearing deposits.............................. 14,956 5,335
Accrued assessments.................................... 7,537 7,273
-------- -------
Total current liabilities........................... 160,879 58,467
Bank notes, interest-bearing deposits and other
borrowings............................................. 75,171 690
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000 shares
authorized, 34,947,965 and 31,701,081 issued and
outstanding at March 31, 1997 and June 30, 1996,
respectively......................................... 349 317
Additional paid-in capital............................. 316,668 210,433
Retained earnings...................................... 32,786 20,314
-------- --------
349,803 231,064
-------- --------
$585,853 $290,221
======== ========
</TABLE>
See Accompanying Notes.
3
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FIRST USA PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------------------
1997 1996 1997 1996
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net revenue.............................. $50,630 $31,607 $140,670 $87,368
Operating expenses:
Salaries and employee benefits....... 13,433 10,089 37,138 27,852
Data processing and communications... 10,309 6,882 29,206 20,029
Depreciation and amortization........ 5,672 2,085 14,356 5,294
Occupancy and equipment.............. 2,093 1,557 6,072 4,495
Other................................ 6,384 4,820 17,576 15,678
Merger, integration and impairment... -- -- 15,544 --
-------- -------- --------- --------
Total operating expenses.......... 37,891 25,433 119,892 73,348
-------- -------- --------- --------
Income from operations.......... 12,739 6,174 20,778 14,020
Net interest income...................... 551 188 1,743 728
-------- -------- --------- --------
Income before income taxes...... 13,290 6,362 22,521 14,748
Income tax provision..................... 5,930 2,474 10,049 5,926
-------- -------- --------- --------
Net income...................... $ 7,360 $ 3,888 $ 12,472 $ 8,822
======== ======== ========= ========
Net income per share..................... $ 0.21 $ 0.16 $ 0.37 $ 0.36
======== ======== ========= ========
Weighted average common shares
outstanding............................. 35,197 24,816 33,254 24,546
======== ========= ========= ========
</TABLE>
See Accompanying Notes.
4
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FIRST USA PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Operating Activities
Net income.......................................... $ 12,472 $ 8,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash portion of merger, integration and
impairment charge.............................. 7,497 --
Provision for depreciation and amortization..... 14,356 5,294
Changes in operating assets and liabilities:
Receivables.................................... (11,184) (5,076)
Accounts payable and accrued expenses.......... 69,943 25,917
Purchase of terminal inventories............... (2,655) (267)
Note receivable................................ (6,375) --
Other operating activities..................... (2,432) (3,942)
--------- ---------
Net cash provided by operating activities.... 81,622 30,748
Investing Activities
Purchases of merchant portfolios, processing
services and other acquisitions.................. (231,949) (39,806)
Purchases of property and equipment............... (15,096) (14,854)
Maturities (purchases) of investments............. 1,608 (15,449)
--------- ---------
Net cash used by investing activities....... (245,437) (70,109)
Financing Activities
Issuance of common stock, net..................... 100,641 134,298
Note payable to First USA......................... 25,000 59,473
Repayments to First USA........................... (25,000) (63,473)
Notes payable..................................... (23,444) --
Capital contribution from First USA............... -- 16,140
Issuance of interest bearing deposits............. 6,810 4,525
Increase in bank notes and other borrowings....... 73,813 --
--------- ---------
Net cash provided by financing activities.... 157,820 150,963
--------- ---------
Increase (decrease) in cash
and cash equivalents........................ (5,995) 111,602
Cash and cash equivalents at beginning of period....... 105,804 4,623
--------- ---------
Cash and cash equivalents at end of period.... $ 99,809 $116,225
========== =========
Noncash investing and financing activities:
Common stock issued for acquisitions.................. $ 4,499 $ --
========== =========
Capital contribution from First USA................... $ -- $ 12,002
========== =========
</TABLE>
See Accompanying Notes.
5
<PAGE>
FIRST USA PAYMENTECH, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
First USA Paymentech, Inc. (the "Company"), a 57%-owned indirect subsidiary of
First USA, Inc. ("First USA"), 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. 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.
The Company also provides third-party credit and debit authorization services to
financial institutions, sales agents and the Company's direct merchants. During
the nine months ended March 31, 1997, the Company processed approximately $30.3
billion in sales volume in approximately 941 million total transactions.
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 and nine months ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1997. 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, 1996.
NOTE B - BUSINESS COMBINATIONS AND MERCHANT PORTFOLIO PURCHASES
In January 1997, a subsidiary of the Company and PHH Vehicle Management
Services, Inc., a subsidiary of PHH Corporation ("PHH"), formed PHH/Paymentech
L.L.C. ("PHH/Paymentech"), a Delaware limited liability company that is one of
the first to offer 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.
Upon formation of PHH/Paymentech, PHH contributed to PHH/Paymentech existing
client and supplier contracts relating to its private label fleet card programs.
As consideration for a portion of PHH's ownership in PHH/Paymentech, the Company
paid PHH $12.5 million with an additional $5.0 million payable within one year.
As a result, each of the Company and PHH has a 50% interest in PHH/Paymentech.
Also in January 1997, the Company purchased Merchant-Link, Inc. which provides
specialized "help-desk" services in connection with the operation of the bank
card modules of certain integrated hotel, restaurant, and retail financial
management systems. The bank card modules support the processing of credit and
debit card transactions. The acquisition was accounted for as a purchase, and
accordingly, Merchant-Link's results have been included in the Company's results
of operations since acquisition.
In February 1997, the Company purchased the merchant processing portfolio of
TransGlobal Systems, Inc. The portfolio consists primarily of merchants in the
hospitality and travel industries. In March 1997, the credit card processing
portfolio of CheckFree Corporation was acquired. Typical merchants in this
portfolio include Internet service providers, on-line interactive retailers,
cellular communications companies and utility and insurance companies.
On August 19, 1996, the Company purchased for approximately $170 million all
of the outstanding stock of GENSAR Holdings Inc. ("GENSAR") which owned 100% of
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.
6
<PAGE>
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 consist primarily of the incremental labor costs to convert
existing merchant customers to the GENSAR authorization network. The charge
related to office closings includes 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 are primarily severance for individuals
displaced as a result of the office closings.
After all market value adjustments, the purchase resulted in identifiable
intangible assets of approximately $35 million, which have lives of 8-10 years
and goodwill of approximately $170 million.
The following consolidated pro forma results give effect to the purchase of
GENSAR as if it had occurred on July 1, 1995 (in thousands, except per share
information):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------
1997 1996
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<S> <C> <C>
Net revenue................. $143,082 $104,809
Income from operations...... 20,281 9,357
Income before income taxes.. 21,430 4,574
Net income.................. 11,784 2,109
Net income per share........ $ 0.35 $ 0.08
</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.
NOTE C - OFFERING
In December 1996, the Company completed a public underwritten offering of 3.0
million shares of its common stock, $0.01 par value, at $34.00 per share, which
generated $97.1 million in net proceeds, which included the exercise by the
underwriters in the transaction of certain over-allotment options. Concurrently,
First USA sold 4.3 million shares of the Company's stock.
In January 1997, the underwriters of the public offering exercised additional
over-allotment options, and purchased 97,000 shares of the Company's common
stock which generated net proceeds of $3.2 million. Concurrently, First USA sold
an additional 138,000 shares of the Company's stock.
As a result of the above transactions, First USA's ownership percentage was
reduced from 77% to 57%.
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 44.6% and
40.2% for the nine months ended March 31, 1997 and 1996, respectively.
7
<PAGE>
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", 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 how
fully diluted earnings per share is computed. 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. This adoption is not expected to have a material
impact on earnings per share as currently presented by the Company.
NOTE F - SUBSEQUENT EVENTS
In April 1997, the Company filed a shelf registration for 4 million shares of
its common stock, $0.01 par value, to allow the Company to take advantage of
opportunities in the marketplace by using the shares as consideration in future
acquisitions.
On January 20, 1997, First USA and BANC ONE Corporation ("BANC ONE") jointly
announced that an agreement had been reached for First USA to merge with BANC
ONE. Upon completion of the merger, which is expected to occur in June 1997, the
Company will be a 57%-owned indirect subsidiary of BANC ONE and will continue to
pursue greater operating independence and the strategy for growth established
under First USA. In April 1997, BANC ONE expressed its intent to reduce its
ownership in the Company following the merger with First USA. Any such ownership
reduction will be effected in such a way as to preserve the pooling accounting
treatment of the BANC ONE/First USA transaction.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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. According to published industry sources, the Company is the third
largest payment processor of bankcard transactions in the United States. 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
results of operations and financial condition of the Company include the results
of the Company's commercial card operations since its inception in the first
quarter of fiscal 1996. The Company also provides third-party credit and debit
authorization services to financial institutions, sales agents and the Company's
direct merchants. During the nine months ended March 31, 1997, the Company
processed approximately $30.3 billion in sales volume in approximately 941
million total transactions.
The Company is a 57%-owned indirect subsidiary of First USA, Inc. ("First
USA").
BUSINESS COMBINATIONS AND MERCHANT PORTFOLIO PURCHASES
In January 1997, a subsidiary of the Company and PHH Vehicle Management
Services, Inc., a subsidiary of PHH Corporation, formed PHH/Paymentech L.L.C.
("PHH/Paymentech"), a Delaware limited liability company that is one of the
first to offer 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.
Also in January 1997, the Company purchased Merchant-Link, Inc., which
provides specialized "help-desk" services in connection with the operation of
the bank card modules of certain integrated hotel, restaurant, and retail
financial management systems. The bank card modules support the processing of
credit and debit card transactions.
During the quarter ended March 31, 1997, the Company purchased several
merchant processing portfolios, including the portfolios of CheckFree
Corporation ("CheckFree") and TransGlobal Systems, Inc. ("TransGlobal"). Typical
merchants in the CheckFree portfolio include Internet service providers, on-line
interactive retailers, cellular communications companies and utility and
insurance companies while the TransGlobal portfolio consists primarily of
merchants in the hospitality and travel industries.
On August 19, 1996, the Company purchased for approximately $170 million all
of the outstanding stock of GENSAR Holdings Inc. ("GENSAR"). GENSAR is one of
the nation's largest providers of third-party credit and debit authorization
services to financial institutions, sales agents and direct merchants,
processing approximately 300 million transactions during the twelve months ended
June 30, 1996. Prior to its acquisition, GENSAR engaged in the payment
processing business and maintained a payment processing portfolio with
approximately $1 billion in annual sales volume. 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. As a result of the GENSAR acquisition, the Company expects to (1)
realize cost savings through vertical integration of formerly outsourced
services, (2) enhance existing products and services and (3) generate new
revenue by establishing itself as a third-party processor. 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.
9
<PAGE>
RESULTS OF OPERATIONS
The Company recorded net income for the three months ended March 31, 1997 of
$7.4 million, or $0.21 per share, compared with net income of $3.9 million, or
$0.16 per share, for the three months ended March 31, 1996. The Company
attributed the 89.3% increase in net income primarily to its strong growth in
sales volume and transaction volume, as a result of acquisitions and the
Company's direct marketing efforts.
Net income for the nine months ended March 31, 1997 increased 41.4% to $12.5
million, or $0.37 per share, compared with $8.8 million, or $0.36 per share, for
the nine months ended March 31, 1996. The nine-month results for fiscal 1997
were reduced by a one-time merger, integration and impairment charge related to
the GENSAR acquisition of $15.5 million, or $9.7 million and $0.30 per share on
an after-tax basis. 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. Net income for the nine
months ended March 31, 1997, excluding the one-time merger, integration and
impairment charge was $22.1 million, or $0.67 per share.
Net revenue increased 60.2% to $50.6 million for the three months ended March
31, 1997, compared with $31.6 million for the three months ended March 31,
1996. The increase in net revenue was the result of the increase in sales volume
processed which resulted from the Company's acquisitions of GENSAR, several
merchant portfolios and other acquisitions, as well as the Company's direct
sales efforts. Bankcard sales volume processed increased 28.7% to $10.2 billion
for the three months ended March 31, 1997, compared with $7.9 billion for the
three months ended March 31, 1996. Total items processed for the three months
ended March 31, 1997 were 335 million. Bankcard sales volume processed includes
bankcard transactions derived from the Company's merchant portfolio. Total items
processed include bankcard and other credit and debit card transactions, and
credit and debit authorization transactions. Comparable information for periods
prior to the fiscal quarter ended September 30, 1996 is not available.
For the nine months ended March 31, 1997, net revenue increased 61.0% to
$140.7 million, compared with $87.4 million for the nine months ended March 31,
1996. Bankcard sales volume processed for the nine months ended March 31, 1997
increased 35.0% to $30.3 billion, compared with $22.4 billion for the same
period of 1996. Total items processed for the nine months ended March 31, 1997
were 941 million. The Company attributed the increase in net revenue to the
increase in sales volume processed as a result of the Company's acquisitions of
GENSAR and several merchant portfolios, as well as the Company's direct sales
efforts.
Operating expenses, excluding the amortization of goodwill and other
identifiable intangibles, were $34.3 million for the three months ended March
31, 1997, compared with $24.7 million for the three months ended March 31, 1996.
The 38.8% increase was attributable to acquisitions, primarily GENSAR, and the
increase in sales volume processed. Salaries and employee benefits increased
33.2% to $13.4 million for the three months ended March 31, 1997, compared with
$10.1 million for the same period in 1996, primarily due to the increase in the
number of employees. The number of employees increased from approximately 790 at
March 31, 1996 to approximately 1,130 at March 31, 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. Data processing and
communications, which includes the cost of obtaining authorizations and
processing transactions, increased 49.8% to $10.3 million for the three months
ended March 31, 1997, compared with $6.9 million for the three months ended
March 31, 1996. This increase was attributable to the increase in sales volume
processed. The Company continues to emphasize converting existing merchants to,
and installing new merchants on, the Company's internal data processing systems,
which have lower operating costs than the costs of obtaining data processing
services from third-party vendors.
Operating expenses, excluding the one-time merger, integration and impairment
charge and the amortization of goodwill and other identifiable intangibles,
increased 33.8% to $95.9 million for the nine months ended March 31, 1997,
compared with $71.7 million for the same period in the prior year. The increase
was primarily the result of the GENSAR acquisition and the increase in sales
volume processed. Salaries and employee benefits increased 33.3% to $37.1
million for the nine months ended March 31, 1997, compared with $27.9 million
for the nine months ended March 31, 1996, primarily due to the increase in the
number of employees as a result of the Company's acquisitions and the growth in
sales volume processed. Data processing and communications increased 45.8% to
$29.2 million for the nine months ended March 31, 1997, compared with $20.0
million for the nine months ended March 31, 1996, due to the increase in sales
volume processed.
10
<PAGE>
Depreciation and amortization was $5.7 million for the three months ended
March 31, 1997, compared with $2.1 million for the three months ended March 31,
1996. For the nine months ended March 31, 1997, depreciation and amortization
was $14.4 million, compared with $5.3 million for the same period in 1996.
These results reflect the increase in amortization of intangibles and
depreciation of property and equipment related to 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 includes 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 consist 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 includes 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 are primarily
severance for individuals displaced as a result of certain office closings.
The Company's operating margin increased to 25.2% for the three months ended
March 31, 1997, compared with 19.5% for the same period of 1996. The operating
margin before the one-time merger, integration and impairment charge was 25.8%
for the nine months ended March 31, 1997, compared with 16.1% for the nine
months ended March 31, 1996. This increase was the result of the increased net
revenue and the achievement of operating efficiencies.
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $81.6 million for the nine
months ended March 31, 1997, compared with $30.7 million for the same period of
1996. During the nine months ended March 31, 1997, the Company paid $231.9
million to acquire GENSAR, TransGlobal, CheckFree and other merchant portfolios
and processing services and to form PHH/Paymentech, compared with $39.8 million
for the same period of 1996 to purchase merchant portfolios, processing services
and other acquisitions. The Company spent $15.1 million and $14.9 million for
capital expenditures during the nine months ended March 31, 1997 and 1996,
respectively.
In December 1996, the Company completed an equity offering that provided $97.1
million in net proceeds. This cash was used to pay down debt owed by the Company
under its Revolving Credit Facility with a bank syndicate ("Revolving Credit
Facility") as a result of the GENSAR acquisition.
In October 1996, the Company increased its Revolving Credit Facility from $100
million to $200 million. The Revolving Credit Facility provides a source of
liquidity to manage cash flow, provide capital to subsidiaries for expansion and
for other corporate uses. At March 31, 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 5.79% and 5.91%, respectively). The Revolving Credit Facility
allows the Company to borrow up to $75 million from First USA, however, no such
borrowings were outstanding at March 31, 1997. In January 1997, the Company
repaid a $25 million loan from First USA.
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.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two subsidiaries of the Company ("Company Subsidiaries") and First USA
previously 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 February, the Company Subsidiaries and First USA reached a
settlement agreement with LitleNet pursuant to which the parties dismissed with
prejudice, the judicial proceedings filed in Texas and New Hampshire, and agreed
that there would be no further action on the matter.
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, the
outcome of any such lawsuits will not have a material impact on the Company.
ITEM 2. CHANGES IN SECURITIES
The Company completed the sale of securities described below.
On January 7, 1997, the Company acquired Merchant-Link, Inc. ("Merchant-Link")
through a transaction in which a wholly owned subsidiary of the Company merged
with and into Merchant-Link. As part of the consideration in the transaction,
the Company issued 125,764 shares of its Common Stock, $0.01 par value, of the
Company (the "Shares") to the sole stockholder of Merchant-Link. No underwriter
was used in connection with the sale or issuance of the Shares. The issuance of
the Shares by the Company in connection with the acquisition was an exempt
transaction under Section 4(2) of the Securities Act of 1933, as amended, as the
sale of the Shares to Merchant-Link's sole stockholder was a private placement
which did not constitute a public offering.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are incorporated by reference or filed here with:
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
Registration Statement on Form S-1 (No. 333-262) and
incorporated by reference herein.
11* Computation of Net Income Per Share.
27* Financial Data Schedule.
- - --------------------
* Filed herewith.
b. Reports on Form 8-K filed during or subsequent to the quarter ended March
31, 1997:
Report on Form 8-K filed January 28, 1997
Item 5. Other Events
Item 7. Financial Statements and Exhibits
13
<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: May 9, 1997
FIRST USA PAYMENTECH, INC.
By: /s/ Pamela H. Patsley
------------------------------------------
Pamela H. Patsley
President and Chief Executive Officer
By: /s/ David W. Truetzel
------------------------------------------
David W. Truetzel
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
INDEX OF EXHIBITS
-----------------
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- - -------------- ---------------------- -------------
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
15
<PAGE>
EXHIBIT 11
FIRST USA PAYMENTECH, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
THREE AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary
- - -------
Net income............................ $ 7,360 $ 3,888 $ 12,472 $ 8,822
----------- ----------- ----------- -----------
Weighted average common equivalent
shares outstanding
Average common shares outstanding.... 34,928,763 24,788,005 32,909,868 24,537,445
Common stock equivalents -- stock
options............................. 268,681 28,105 343,777 8,646
----------- ----------- ----------- -----------
Weighted average common and common
stock equivalent shares............. 35,197,444 24,816,110 33,253,645 24,546,091
=========== =========== =========== ===========
Net income per share.................. $ 0.21 $ 0.16 $ 0.37 $ 0.36
=========== =========== =========== ===========
Fully diluted
- - -------------
Net income............................ $ 7,360 $ 3,888 $ 12,472 $ 8,822
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding
Average common shares outstanding.. 34,928,763 24,788,005 32,909,868 24,537,445
Common stock equivalents -- stock
options........................... 268,606 28,105 341,962 8,646
----------- ----------- ----------- -----------
Weighted average common and common
stock equivalent shares........... 35,197,369 24,816,110 33,251,830 24,546,091
=========== =========== =========== ===========
Net income per share assuming full
dilution............................. $ 0.21 $ 0.16 $ 0.37 $ 0.36
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JAN-01-1997 JUL-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 0 99,809
<SECURITIES> 0 10,771
<RECEIVABLES> 0 38,396
<ALLOWANCES> 0 0
<INVENTORY> 0 6,462
<CURRENT-ASSETS> 0 172,089
<PP&E> 0 39,551
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 585,853
<CURRENT-LIABILITIES> 0 160,879
<BONDS> 0 0
0 0
0 0
<COMMON> 0 349
<OTHER-SE> 0 349,454
<TOTAL-LIABILITY-AND-EQUITY> 0 349,803
<SALES> 0 0
<TOTAL-REVENUES> 50,630 140,670
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 37,891 119,892
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (551) (1,743)
<INCOME-PRETAX> 13,290 22,521
<INCOME-TAX> 5,930 10,049
<INCOME-CONTINUING> 7,360 12,472
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,360 12,472
<EPS-PRIMARY> 0.21 0.37
<EPS-DILUTED> 0.21 0.37
</TABLE>
