<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 December 31, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14224
------------
Paymentech, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2634185
- --------------------------------------------------------------------------------
(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 214-849-4770
------------
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 January 31, 1998
- ----------------------------------- -------------------------------
Common Stock, $.01 par value 35,814,490 shares
<PAGE>
PAYMENTECH, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I. F I N A N C I A L I N F O R M A T I O N Page
----
<S> <C> <C>
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets -
December 31, 1997 (Unaudited) and June 30, 1997.......................................... 3
Condensed Consolidated Statements of Income (Unaudited) -
Three and Six Months Ended December 31, 1997 and 1996.................................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended December 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............................................ 10
PART II. O T H E R I N F O R M A T I O N
ITEM 1. Legal Proceedings........................................................................ 16
ITEM 2. Changes in Securities.................................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 16
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K...................................................................... 17
Index of Exhibits........................................................................ 17
SIGNATURES............................................................................................ 18
</TABLE>
<PAGE>
PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
-------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 142,044 $ 119,466
Receivables, net................................................................... 41,329 45,563
Credit card loans, net............................................................. 25,877 19,902
Terminal inventories............................................................... 2,485 6,646
Prepaid expenses and other current assets.......................................... 13,352 14,953
-------------- -------------
Total current assets.......................................................... 225,087 206,530
Investments, at cost (market value of $8,519 and $10,143 at December 31, 1997
and June 30, 1997, respectively)................................................... 8,454 10,083
Notes receivable........................................................................ 10,196 9,169
Property and equipment, net............................................................. 50,286 44,103
Goodwill, net........................................................................... 237,038 253,255
Purchased merchant portfolios and other intangibles, net................................ 95,381 99,248
Other assets............................................................................ 7,881 8,612
-------------- -------------
$ 634,323 $ 631,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 88,700 $ 112,752
Interest-bearing deposits.......................................................... 28,927 20,721
Merchant deposits.................................................................. 17,899 18,852
Accrued assessments................................................................ 10,897 8,672
Other accrued expenses............................................................. 34,515 35,448
-------------- -------------
Total current liabilities.......................................................... 180,938 196,445
Notes payable to banks and other borrowings............................................. 75,073 75,140
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000 shares authorized, 35,348,249
and 35,090,395 issued and outstanding at December 31, 1997 and June 30,
1997, respectively............................................................. 353 351
Additional paid-in capital......................................................... 343,493 335,435
Retained earnings.................................................................. 34,466 23,629
-------------- -------------
Total stockholders' equity.................................................... 378,312 359,415
-------------- -------------
$ 634,323 $ 631,000
============== =============
</TABLE>
See Accompanying Notes.
3
<PAGE>
PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1997 1996 1997 1996
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Revenue................................... $ 55,459 $ 48,301 $ 105,799 $ 89,431
Other income.............................. 6,225 3,721 7,426 3,974
---------- ----------- ----------- ----------
Total revenues........................ 61,684 52,022 113,225 93,405
---------- ----------- ----------- ----------
Expenses:
Operating................................. 25,643 17,985 46,114 34,068
Salaries and employee benefits............ 15,821 12,015 31,272 23,705
Depreciation and amortization............. 6,805 5,060 13,302 8,684
Interest.................................. 1,775 1,673 3,424 2,173
Merger, integration and impairment........ -- -- -- 15,544
---------- ----------- ----------- ----------
Total expenses........................ 50,044 36,733 94,112 84,174
---------- ----------- ----------- ----------
Income before income taxes.......... 11,640 15,289 19,113 9,231
Income tax provision............................... 4,975 6,893 8,276 4,119
---------- ----------- ----------- ----------
Net income.......................... $ 6,665 $ 8,396 $ 10,837 $ 5,112
========== =========== =========== ==========
Basic and diluted earnings per share............... $ 0.19 $ 0.26 $ 0.31 $ 0.16
========== =========== =========== ==========
</TABLE>
See Accompanying Notes.
4
<PAGE>
PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Operating Activities
Net income....................................................................... $ 10,837 $ 5,112
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Provision for depreciation and amortization ............................. 13,302 8,684
Noncash portion of asset writeoff, and merger, integration and
impairment charge....................................................... 3,533 7,497
Gain on sale of assets................................................... (6,850) (3,500)
Changes in operating assets and liabilities:
Receivables.............................................................. (642) (6,094)
Accounts payable......................................................... (24,158) 36,208
Other accrued expenses................................................... (7,149) 14,083
Notes receivable......................................................... 226 --
Prepaid expenses and other current assets................................ 1,504 (2,173)
Terminal inventories..................................................... 361 (2,898)
Accrued assessments...................................................... 2,225 1,909
Merchant deposits ....................................................... (1,242) (1,582)
Other operating activities............................................... 1,705 (205)
------------- -------------
Net cash provided by (used for) operating activities............ (6,348) 57,041
Investing Activities
Proceeds from sale of assets..................................................... 27,066 3,500
Proceeds from maturities of investments.......................................... 1,629 919
Purchases of merchant portfolios, processing services and other acquisitions..... (1,180) (199,428)
Purchases of property and equipment, net......................................... (9,858) (11,911)
Purchases of investments......................................................... -- (101)
------------- -------------
Net cash provided by (used for) investing activities............ 17,657 (207,021)
Financing Activities
Issuance of interest-bearing deposits............................................ 8,139 6,205
Issuance of common stock, net.................................................... 3,130 97,418
Decrease in notes payable to banks and other borrowings.......................... -- (14,517)
Note payable to First USA........................................................ -- 25,000
------------- -------------
Net cash provided by financing activities....................... 11,269 114,106
------------- -------------
Increase (decrease) in cash and cash equivalents................ 22,578 (35,874)
Cash and cash equivalents at beginning of period..................................... 119,466 105,804
------------- -------------
Cash and cash equivalents at end of period...................... $ 142,044 $ 69,930
============= =============
</TABLE>
See Accompanying Notes.
5
<PAGE>
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 six months ended December 31, 1997, bankcard sales volume
processed increased approximately 23.3% to $24.8 billion compared with $20.1
billion for the six months ended December 31, 1996. The Company processed 896.1
million total transactions for the six months ended December 31, 1997, an
increase of approximately 48.0%, compared with 605.4 million total transactions
for the same period in fiscal 1997. 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.
The Company is a 57%-owned 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 six months ended December 31, 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
In December 1997, the Company sold its share of PHH/Paymentech L.L.C.
("PHH/Paymentech"), a Delaware limited liability company, to PHH Vehicle
Management Services Corporation's ("PHH") new parent company, Cendant
Corporation ("Cendant") for $30.0 million. This sale generated a $6.0 million
pretax gain after deducting the Company's basis in its investment in
PHH/Paymentech and consideration for a preferred alliance agreement with
Cendant. This gain is included in other income. The Company and PHH had formed
the joint venture PHH/Paymentech to offer a MasterCard-branded single card
payment system for fleet, purchasing, travel and entertainment needs. The
Company will continue its relationship as the exclusive issuer of corporate
fleet cards for PHH.
The Company issued 181,119 shares of common stock in February 1998 and 46,634
shares in August 1997 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 $1.2 million in common stock may be paid if certain
additional performance objectives are met during fiscal 1998. The 125,765
shares of common stock originally issued in connection with the acquisition in
January 1997 are also subject to a price guarantee by the Company. Such
guarantee is payable in shares of the Company's common stock in the event that
on the second anniversary of the acquisition date the Company's average stock
price is below the average stock price immediately prior to the acquisition, and
in the event that the Company has not elected to repurchase such shares prior to
that date.
6
<PAGE>
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
paid in December 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 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 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>
<CAPTION>
Six Months Ended
December 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Total revenues........................... $113,225 $95,830
Income before income taxes............... 19,113 8,140
Net income............................... 10,837 4,424
Net income per share..................... 0.31 0.14
</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 are no longer
used. The employee related costs were primarily severance for individuals
displaced as a result of the office closings.
7
<PAGE>
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 $2.9 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.
NOTE D - OFFERING
In December 1996, the Company completed a public underwritten offering of 3.1
million shares of its common stock, $0.01 par value, at $34.00 per share, which
generated $100.3 million in net proceeds, including the exercise by the
underwriters in the transaction of certain over-allotment options.
NOTE E - INCOME TAXES
The Company's consolidated provision for income taxes includes state and
federal income tax components. The Company's effective tax rate was 43.3% and
44.6% for the six months ended December 31, 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 F - RELATED PARTIES
In December 1996, the Company entered into a related party transaction with
First USA, Inc., its former parent. The transaction resulted in a $3.5 million
gain related to the termination of a call option on warrants held by First USA,
Inc. for stock in First Virtual Holdings, Inc. This transaction was at terms
which the Company believes to be representative of an arms' length transaction.
The gain was included in other income.
8
<PAGE>
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED Six Months Ended
DECEMBER 31, December 31,
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic
- -----
Net income......................... $ 6,665 $ 8,396 $ 10,837 $ 5,112
Weighted average shares
outstanding...................... 35,344,597 32,141,604 35,301,397 31,922,366
-------------- -------------- -------------- --------------
Basic earnings per share........... $ 0.19 $ 0.26 $ 0.31 $ 0.16
============== ============== ============== ==============
Diluted
- -------
Net income......................... $ 6,665 $ 8,396 $ 10,837 $ 5,112
-------------- -------------- -------------- --------------
Weighted average shares
outstanding...................... 35,344,597 32,141,604 35,301,397 31,922,366
Dilutive effect of employee
stock options.................... 19 379,786 59,403 398,863
Adjusted weighted average
shares outstanding............... 35,344,616 32,521,390 35,360,800 32,321,229
============== ============== ============== ==============
Diluted earnings per share.......... $ 0.19 $ 0.26 $ 0.31 $ 0.16
============== ============== ============== ==============
</TABLE>
NOTE H - LITIGATION
In October 1997, two putative class action suits were filed against the
Company and certain officers and former officers of the Company alleging, 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. The complaints
also allege insider trading by one or more officers or former officers of the
Company. The two complaints have since been consolidated into one action. The
Company has not yet been required to answer the complaints, but intends to
defend these actions vigorously.
NOTE I - SUBSEQUENT EVENT
In January 1998, the Company purchased the merchant portfolio and certain
other assets of Mokarow Financial, Inc. for cash and 438,115 shares of common
stock.
9
<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. 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.
During the six months ended December 31, 1997, bankcard sales volume
processed increased approximately 23.3% to $24.8 billion compared with $20.1
billion for the six months ended December 31, 1996. The Company processed 896.1
million total transactions for the six months ended December 1997, an increase
of approximately 48.0%, compared with 605.4 million total transactions for the
same period in fiscal 1997.
The Company is a 57%-owned 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
In December 1997, the Company sold its share of PHH/Paymentech L.L.C.
("PHH/Paymentech"), a Delaware limited liability company, to PHH Vehicle
Management Services Corporation's ("PHH") new parent company, Cendant
Corporation ("Cendant") for $30.0 million. This sale generated a $6.0 million
pretax gain after deducting the Company's basis in its investment in
PHH/Paymentech and consideration for a preferred alliance agreement with
Cendant. This gain is included in other income. The Company and PHH had formed
the joint venture PHH/Paymentech to offer a MasterCard-branded single card
payment system for fleet, purchasing, travel and entertainment needs. The
Company will continue its relationship as the exclusive issuer of corporate
fleet cards for PHH.
The Company issued 181,119 shares of common stock in February 1998 and 46,634
shares in August 1997 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 $1.2 million in common stock may be paid if certain additional
performance objectives are met during fiscal 1998. The 125,765 shares of common
stock originally issued in connection with the acquisition in January 1997 are
also subject to a price guarantee by the Company. Such guarantee is payable in
shares of the Company's common stock in the event that on the second anniversary
of the acquisition date the Company's average stock price is below the average
stock price immediately prior to the acquisition, and in the event that the
Company has not elected to repurchase such shares prior to that date.
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
paid in December 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 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.
10
<PAGE>
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 enabled the Company to offer third-party credit and debit authorization
services to financial institutions, sales agents and its direct merchants.
GENSAR also enabled 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
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE THREE MONTHS
---------------------------------------------------------------------------
ENDED DECEMBER 31, 1996
- -----------------------
The Company recorded net income for the three months ended December 31, 1997
of $6.7 million, or $0.19 per share, compared with net income of $8.4 million,
or $0.26 per share, for the same period in the prior year. Earnings for the
three months ended December 31, 1997, excluding a $6.0 million pretax gain
related to the sale of the Company's share of PHH/Paymentech and a significant
unusual pretax charge of $3.5 million, were $5.3 million or $0.15 per share. The
significant charge related primarily to a reserve for loss on terminal inventory
and a reserve for loss on receivables. For the three months ended December 31,
1996, earnings excluding a $3.5 million pretax gain related to the termination
of a call option on warrants for stock in First Virtual Holdings, Inc. ("First
Virtual"), were $6.4 million or $0.20 per share.
Revenues increased 14.8% to $55.5 million for the three months ended December
31, 1997, compared with $48.3 million for the three months ended December 31,
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 22.3% to $13.6
billion for the three months ended December 31, 1997, compared with $11.1
billion for the same period in the prior year. Total items processed for the
three months ended December 31, 1997 increased 39.4% to 476.4 million, compared
with 341.8 million for the three months ended December 31, 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 December 31, 1997, included a $6.0
million pretax gain related to the sale of the Company's share of
PHH/Paymentech. For the three months ended December 31, 1996, other income
included a related party transaction with First USA, Inc. resulting in a $3.5
million gain related to the termination of a call option on warrants for stock
in First Virtual. Other income also included interest income from investments.
Total expenses for the three months ended December 31, 1997 increased 36.2%
to $50.0 million, compared with $36.7 million for the three months ended
December 31, 1996. Total expenses, excluding amortization of goodwill, purchased
merchant portfolios and other intangibles, were $45.9 million for the quarter
ended December 31, 1997, compared with $33.6 million for the same period in the
prior year. This was a 36.3% increase primarily due to increased sales volume
processed, increased number of employees and a $3.5 million significant unusual
charge related primarily to a reserve for loss on terminal inventory and a
reserve for loss on receivables.
Operating expenses increased 42.6% to $25.6 million for the three months
ended December 31, 1997, compared to $18.0 million for the same period of fiscal
1997, primarily due to increased sales volume processed and $3.5 million in
charges related primarily to a reserve for loss on terminal inventory and a
reserve for loss on receivables. Salaries and employee benefits increased 31.7%
to $15.8 million for the three months ended December 31, 1997, compared with
$12.0 million for the same period in 1996, primarily due to the increase in the
number of employees hired to support the growth in sales volume processed. The
number of employees increased from approximately 1,030 at December 31, 1996 to
approximately 1,200 at December 31, 1997. 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 was $1.8 million for the three months ended December
31, 1997, remaining flat when compared with the same period in the prior year.
11
<PAGE>
Depreciation and amortization increased 34.5% to $6.8 million for the three
months ended December 31, 1997, compared with $5.1 million for the three months
ended December 31, 1996. The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $4.2 million for the quarter ended
December 31, 1997, compared to $3.1 million for the same period in fiscal 1997.
Depreciation of property and equipment increased to $2.6 million for the three
months ended December 31, 1997, compared with $2.0 million for the three months
ended December 31, 1996. This increase in depreciation was primarily the result
of the Company's capital expenditures.
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE SIX MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 1996
- -----------------
Net income for the six months ended December 31, 1996 increased to $10.8
million, or $0.31 per share, compared with $5.1 million, or $0.16 per share, for
the six months ended December 31, 1996. Without the effects of the $6.0 million
pretax gain on the sale of the Company's share of PHH/Paymentech, the $626,000
pretax gain on the sale of the Company's terminal leasing portfolio, and the
$3.5 million significant unusual pretax charge related to reserves, earnings for
the six months ended December 31, 1997 were $9.1 million, or $0.26 per share.
Earnings for the six months ended December 31, 1996, excluding a $15.5 million
pretax, one-time merger, integration and impairment charge related to the GENSAR
acquisition and a $3.5 million pretax gain related to the First Virtual
transaction, was $12.8 million, or $0.40 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.
Revenues for the six months ended December 31, 1997 increased 18.3% to $105.8
million compared with $89.4 million for the same period in the prior year. 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 23.3% to $24.8 billion for
the six months ended December 31, 1997, compared with $20.1 billion for the six
months ended December 31, 1996. Total items processed for the six months ended
December 31, 1997 increased 48.0% to 896.1 million, compared with 605.4 million
for the same period in fiscal 1997.
Other income for the second quarter fiscal 1998 included a $6.0 million
pretax gain related to the sale of the Company's share of PHH/Paymentech. For
the first quarter of fiscal 1998, other income 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. For the six months ended December 31, 1996, other income
included a related party transaction with First USA, Inc. resulting in a $3.5
million gain related to the termination of a call option on warrants for stock
in First Virtual. Other income also included interest income from investments.
Total expenses for the six months ended December 31, 1997 increased 11.8% to
$94.1 million, compared with $84.2 million for the six months ended December 31,
1996. Total expenses, excluding amortization of goodwill, purchased merchant
portfolios and other intangibles, and with respect to the six months ended
December 31, 1996, excluding a one-time merger, integration and impairment
charge related to the GENSAR acquisition, were $85.8 million for the six months
ended December 31, 1997, compared with $63.7 million for the six months ended
December 31, 1996. The 34.6% increase was primarily due to increased sales
volume processed, increased number of employees and a $3.5 million significant
unusual charge related primarily to a reserve for loss on terminal inventory and
a reserve for loss on receivables.
12
<PAGE>
Operating expenses increased 35.4% to $46.1 million for the six months ended
December 31, 1997, compared to $34.1 million for the same period of fiscal 1997,
primarily due to increased sales volume processed and $3.5 million in charges
related primarily to a reserve for loss on terminal inventory and a reserve for
loss on receivables. Salaries and employee benefits increased 31.9% to $31.3
million for the six months ended December 31, 1997, compared with $23.7 million
for the same period in 1996, primarily due to the increase in the number of
employees. 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. The number of employees increased from approximately 1,030 at
December 31, 1996 to approximately 1,200 at December 31, 1997. 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 $3.4
million for the six months ended December 31, 1997, compared with $2.2 million
for the six months ended December 31, 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 December 31, 1997, compared
with no borrowings under the Revolving Credit Facility as of December 31, 1996.
Depreciation and amortization for the six months ended December 31, 1997
increased 53.2% to $13.3 million compared with $8.7 million for the same period
of fiscal 1997. The amortization of goodwill, purchased merchant portfolios and
other intangibles increased 70.6% to $8.3 million for the six months ended
December 31, 1997, compared to $4.9 million for the six months ended December
31, 1996, as a result of the Company's acquisitions, primarily GENSAR.
Depreciation of property and equipment increased 30.7% to $5.0 million for the
six months ended December 31, 1997 compared with $3.8 million for the same
period of fiscal 1997. This 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 are no longer used. The employee related costs
were primarily severance for individuals displaced as a result of certain office
closings.
SEASONALITY
The Company's revenue generally reflects the seasonal fluctuations that are
typically associated with traditional peaks in consumer spending. Such peaks
fall in different quarters for different divisions of the Company due to the
varying nature of the Company's market niches and the varying nature of consumer
trends in such markets.
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 December 1997, the Company sold its share of PHH/Paymentech to Cendant. In
conjunction with the sale, the Company entered into a preferred alliance
agreement with Cendant. In January 1997, the Company and PHH formed
PHH/Paymentech, to offer a MasterCard-branded single card payment system for
fleet, purchasing, travel and entertainment needs. The Company will continue its
relationship as the exclusive issuer of corporate fleet cards for PHH.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $6.3 million for the six months
ended December 31, 1997, compared with net cash provided by operating activities
of $57.0 million for the same period of 1996. The Company used $9.9 million for
capital expenditures, approximately half of which was for technology, during the
six months ended December 31, 1997, compared with $11.9 million for capital
expenditures during the six months ended December 31, 1996.
13
<PAGE>
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 December 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 6.35%). In January 1998, the Company paid down $20 million on the
$35 million note, resulting in total outstanding borrowings of $55 million under
the Revolving Credit Facility. The new $15 million note is also at a rate of
LIBOR plus 35 basis points (currently approximately 5.98%). Certain financial
conditions must be met to utilize the full amount of the Revolving Credit
Facility. As of December 31, 1997, the Company could utilize up to
approximately $140 million 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. Such treatment might 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.
YEAR 2000
As a result of computer programs written using two digits rather than four to
define the applicable year, certain systems may require modifications in order
to properly function beginning with the year 2000. Based on an assessment of its
systems, the Company has developed a plan to ensure that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The majority of the Company's computer systems are already year 2000 compliant,
primarily through the use of internal resources and new year 2000 compliant
software and equipment.
For the Company's remaining noncompliant computer systems, the Company
believes that existing internal resources can be used to modify existing
software and that the associated costs will not be significant. However, if
such modifications are not made, or are not completed timely, year 2000
noncompliance could have a material impact on the operations of the Company.
The Company has begun the process of communicating with all of its
significant suppliers and large customers to assess the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own year 2000 issues. There is no guarantee that the systems of
other companies on which the Company's systems rely will be timely corrected and
will not have a material adverse effect on the Company's systems.
14
<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, year 2000 compliance costs and
implementation, 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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Report on Form 10-Q for the quarter
ended September 30, 1997, 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. These actions have since been
consolidated into one action entitled Raffaele Branca v. First USA Paymentech,
----------------------------------------
Inc., Pamela H. Patsley, David W. Truetzel, Raymond J. McArdle, Elena Anderson,
- -------------------------------------------------------------------------------
Susan H. Cerpanya and Michael Duffy. 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 seek
monetary damages for the losses the stockholders in the classes allegedly
incurred. The Company has not yet been required to answer 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 February 5, 1998, the Company issued 181,119 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The 1997 Annual Meeting of Stockholders was held on December 3, 1997.
b. The following Directors were elected at such meeting:
Votes Cast to
Votes For Withhold Authority
------------- -----------------------
Gene H. Bishop 32,040,348 1,086,613
Ronald G. Steinhart 31,554,855 1,572,106
The following Directors will also continue in their offices after such
meeting:
William P. Boardman
John B. McCoy
Pamela H. Patsley
Rupinder S. Sidhu
John C. Tolleson
16
<PAGE>
c. The following other matters were approved at such meeting:
<TABLE>
<CAPTION>
Votes Broker
Item Votes For Against Abstain Non-votes
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adoption of an amendment to the
Paymentech, Inc. 1996 Amended and
Restated Stock Option Plan to
increase the number of shares of
common stock that may be granted
under such plan 25,694,895 4,173,525 33,838 3,224,703
</TABLE>
No other matter was voted upon at such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Reports on Form 8-K filed during the second 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
b. Reports on Form 8-K filed subsequent to the second quarter of fiscal
1998:
Report on Form 8-K filed January 21, 1998
Item 5. Other Events
Exhibit 99. Press Release
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.
10.1* First Amendment to the Amended and Restated Paymentech, Inc.
1996 Stock Option Plan.
27* Financial Data Schedule.
- -------------------
* Filed herewith.
17
<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: February 12, 1998
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
18
<PAGE>
INDEX OF EXHIBITS
-----------------
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
10.1 First Amendment to the Amended
and Restated Paymentech, Inc.
1996 Stock Option Plan.
27 Financial Data Schedule.
19
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO THE
AMENDED AND RESTATED
PAYMENTECH, INC. 1996 STOCK OPTION PLAN
---------------------------------------
WHEREAS, Paymentech, Inc. a Delaware corporation (the "Company"), has
heretofore maintained the Amended and Restated Paymentech, Inc. 1996 Stock
Option Plan (the "Plan") for the benefit of certain of its employees; and
WHEREAS, the Company considers it advisable to amend the Plan to increase
the number of shares of Common Stock of the Company, par value $.01 per share,
subject to the Plan; and
WHEREAS, based upon the approval of the stockholders of the Company at
the Annual Stockholders Meeting on December 3, 1997, the Board of Directors of
the Company, pursuant to Section 8 of the Plan, has the authority to amend the
Plan;
NOW, THEREFORE, effective as of the December 3, 1997 (the "Effective
Date"), the Company hereby amends the Plan by deleting Section 3 of the Plan in
its entirety and inserting therefore the following:
3. Stock Reserved for the Plan. The shares subject to the Plan shall
---------------------------
consist of 6,500,000 shares of Common Stock, subject to adjustment pursuant to
Section 4(h) hereof, which may be either authorized but unissued shares or
previously issued shares reacquired and held by the Company. If any outstanding
Option under the Plan for any reason expires or is cancelled or otherwise
terminated without having been exercised in full, the shares of Common Stock
allocable to the unexercised portion of such Option shall (unless the Plan shall
have been terminated) become available for subsequent grants of Options under
the Plan.
IN WITNESS WHEREOF, the Company has adopted this amendment as of the
Effective Date.
PAYMENTECH, INC.
/s/ Philip Taken
--------------------------------
Philip Taken
Chief Administrative Officer
General Counsel and Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> OCT-01-1997 JUL-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 0 142,044
<SECURITIES> 0 8,454
<RECEIVABLES> 0 41,329
<ALLOWANCES> 0 0
<INVENTORY> 0 2,485
<CURRENT-ASSETS> 0 225,087
<PP&E> 0 50,286
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 634,323
<CURRENT-LIABILITIES> 0 180,938
<BONDS> 0 0
0 0
0 0
<COMMON> 0 353
<OTHER-SE> 0 377,959
<TOTAL-LIABILITY-AND-EQUITY> 0 378,312
<SALES> 0 0
<TOTAL-REVENUES> 61,684 113,225
<CGS> 0 0
<TOTAL-COSTS> 50,044 94,112
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 11,640 19,113
<INCOME-TAX> 4,975 8,276
<INCOME-CONTINUING> 6,665 10,837
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,665 10,837
<EPS-PRIMARY> 0.19 0.31
<EPS-DILUTED> 0.19 0.31
</TABLE>
