<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, 1998
--------------
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 April 30, 1998
- --------------------------------- --------------------------------------
Common Stock, $.01 par value 36,022,114 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>
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and June 30, 1997................................ 3
Condensed Consolidated Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 1998 and 1997......................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended March 31, 1998 and 1997................................... 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 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K.................................................... 16
Index of Exhibits...................................................... 16
SIGNATURES........................................................................... 17
</TABLE>
<PAGE>
PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ -------------
(Unaudited)
<S> ASSETS <C> <C>
Current assets:
Cash and cash equivalents .......................................................... $ 151,458 $ 119,466
Receivables, net.................................................................. 37,065 45,563
Credit card loans, net............................................................ 33,482 19,902
Terminal inventories.............................................................. 1,750 6,646
Prepaid expenses and other current assets......................................... 11,610 14,953
------------ -------------
Total current assets......................................................... 235,365 206,530
Investments, at cost (market value of $7,200 and $10,143 at March 31, 1998
and June 30, 1997, respectively).................................................. 7,250 10,083
Notes receivable....................................................................... 10,298 9,169
Property and equipment, net............................................................ 54,958 44,103
Goodwill, net.......................................................................... 236,330 253,255
Purchased merchant portfolios and other intangibles, net............................... 101,183 99,248
Other assets........................................................................... 6,323 8,612
------------ -------------
$ 651,707 $ 631,000
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 104,153 $ 112,752
Interest-bearing deposits......................................................... 35,981 20,721
Merchant deposits................................................................. 20,915 18,852
Accrued assessments............................................................... 9,718 8,672
Other accrued expenses............................................................ 34,035 35,448
------------ -------------
Total current liabilities.................................................... 204,802 196,445
Notes payable to banks and other borrowings............................................ 55,058 75,140
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000 shares authorized, 35,991,837 and
35,090,395 issued and outstanding at March 31, 1998 and June 30, 1997,
respectively................................................................. 360 351
Additional paid-in capital........................................................ 354,253 335,435
Net unrealized holding loss on securities available for sale, net of tax.......... (1,566) --
Retained earnings................................................................. 38,800 23,629
------------ -------------
Total stockholders' equity................................................... 391,847 359,415
------------ -------------
$ 651,707 $ 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 Nine Months Ended
March 31, March 31,
------------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Revenue................................... $ 52,379 $ 46,957 $ 158,178 $ 136,388
Other income.............................. 303 5,274 7,729 9,248
-------------- --------------- --------------- ---------------
Total revenues........................... 52,682 52,231 165,907 145,636
-------------- --------------- --------------- ----------------
Expenses:
Operating................................. 19,575 18,786 65,689 52,854
Salaries and employee benefits............ 17,051 13,433 48,323 37,138
Depreciation and amortization............. 6,766 5,672 20,068 14,356
Interest.................................. 1,542 1,050 4,966 3,223
Merger, integration and impairment........ -- -- -- 15,544
-------------- -------------- -------------- --------------
Total expenses........................... 44,934 38,941 139,046 123,115
-------------- -------------- -------------- --------------
Income before income taxes............ 7,748 13,290 26,861 22,521
Income tax provision............................... 3,414 5,930 11,690 10,049
-------------- ------------- ------------- --------------
Net income............................ $ 4,334 $ 7,360 $ 15,171 $ 12,472
============== ============== ============== ===============
Basic and diluted earnings per share.............. $ 0.12 $ 0.21 $ 0.43 $ 0.38
============== ============== ============== ===============
</TABLE>
See Accompanying Notes.
4
<PAGE>
PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Operating Activities
Net income.................................................................. $ 15,171 $ 12,472
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Provision for depreciation and amortization........................... 20,068 14,356
Noncash portion of asset writeoff, and merger,
integration and impairment charge................................... 3,533 7,497
Gain on sale of assets................................................ (6,850) (8,500)
Changes in operating assets and liabilities:
Receivables......................................................... (3,318) (11,184)
Accounts payable.................................................... (7,803) 46,737
Other accrued expenses.............................................. (7,697) 23,206
Notes receivable.................................................... 124 (6,375)
Prepaid expenses and other current assets........................... 3,246 (3,148)
Terminal inventories................................................ 1,096 (2,655)
Accrued assessments................................................. 1,046 264
Merchant deposits................................................... 1,774 577
Other operating activities.......................................... 2,756 (125)
------------- -------------
Net cash provided by operating activities....................... 23,146 73,122
Investing Activities
Proceeds from sale of assets................................................ 27,066 8,500
Proceeds from maturities of investments..................................... 2,833 1,709
Purchases of merchant portfolios, processing services and other acquisitions (2,551) (231,949)
Purchases of property and equipment, net.................................... (17,163) (15,096)
Purchases of investments.................................................... - (101)
------------- -------------
Net cash provided by (used for) investing activities............ 10,185 (236,937)
Financing Activities
Issuance of interest-bearing deposits....................................... 15,178 6,810
Issuance of common stock, net............................................... 3,483 100,641
Increase (decrease) in notes payable to banks and other borrowings.......... (20,000) 73,813
Note payable to First USA................................................... - 25,000
Repayments to First USA..................................................... - (25,000)
Decrease in other notes payable............................................. - (23,444)
------------- -------------
Net cash provided by (used for) financing activities............ (1,339) 157,820
------------- -------------
Increase (decrease) in cash and cash equivalents................ 31,992 (5,995)
Cash and cash equivalents at beginning of period..................................... 119,466 105,804
------------- -------------
Cash and cash equivalents at end of period...................... $ 151,458 $ 99,809
============= =============
Noncash investing and financing activities:
Common stock issued for acquisitions.................................... $ 6,346 $ 4,499
============= =============
</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 nine months ended March 31, 1998, bankcard sales volume processed
increased approximately 20.8% to $36.6 billion compared with $30.3 billion for
the nine months ended March 31, 1997. The Company processed 1.4 billion total
transactions for the nine months ended March 31, 1998, an increase of
approximately 44.5%, compared with 940.6 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 56%-owned subsidiary of First USA Financial, Inc.("First
USA"), which is a wholly owned subsidiary of BANC ONE CORPORATION ("Banc One").
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 nine months ended March 31, 1998 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 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.
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. Pursuant
to the preferred alliance agreement, the Company will continue its relationship
as the exclusive issuer of corporate fleet cards for PHH.
6
<PAGE>
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 diluted 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 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. (f/k/a 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>
Nine Months Ended
March 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Total revenues.............................................. $165,907 $148,061
Income before income taxes.................................. 26,861 21,430
Net income.................................................. 15,171 11,784
Net income per diluted share................................ $ 0.43 $ 0.35
</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.
7
<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 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.
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 $2.6 million note receivable which was the result of the
sale of non-core business agent bank contracts in fiscal 1997. The note matures
in the fourth quarter of fiscal 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 the third quarter of fiscal 2003.
NOTE D - UNREALIZED HOLDING LOSS
The market value of the Company's investment in First Virtual Holdings, Inc.
("First Virtual") was $1.5 million as of March 31, 1998, resulting in a pretax
unrealized holding loss of $2.5 million, or $1.6 million on an after tax basis.
NOTE E - 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 F - INCOME TAXES
The Company's consolidated provision for income taxes includes state and
federal income tax components. The Company's effective tax rate was 43.5% and
44.6% for the nine months ended March 31, 1998 and 1997, 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 G - RELATED PARTIES
During the fiscal year 1997, the Company entered into related party
transactions with First USA, its former parent. The transactions resulted in a
$3.5 million gain in December 1996 related to the termination of a call option
on warrants held by First USA for stock in First Virtual and a $5.0 million gain
in March 1997 related to the termination of an agreement that First USA would
not compete with the Company for business card customers. Both of these
transactions were at terms which the Company believes to be representative of an
arms' length transaction. The gains were included in other income.
8
<PAGE>
NOTE H - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------ ------------------------------------------
1998 1997 1998 1997
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Basic
-----
Net income.......................... $ 4,334 $ 7,360 $ 15,171 $ 12,472
------------------ ------------------- ------------------- -------------------
Weighted average shares
outstanding........................ 35,787,814 34,925,430 35,427,798 32,907,766
------------------ ------------------- ------------------- -------------------
Basic earnings per share............ $ 0.12 $ 0.21 $ 0.43 $ 0.38
================== =================== =================== ===================
Diluted
-------
Net income.......................... $ 4,334 $ 7,360 $ 15,171 $ 12,472
------------------ ------------------- ------------------- -------------------
Weighted average shares
outstanding........................ 35,844,639 34,928,763 35,547,626 32,909,868
Dilutive effect of employee stock
options............................ 214,558 268,606 129,939 341,962
Dilutive effect of contingently
issuable shares.................... 63,163 28,148 20,747 9,246
------------------ ------------------- ------------------- -------------------
Adjusted weighted average shares
outstanding........................ 36,122,360 35,225,517 35,698,312 33,261,076
================== =================== =================== ===================
Diluted earnings per share.......... $ 0.12 $ 0.21 $ 0.43 $ 0.38
================== =================== =================== ===================
</TABLE>
NOTE I - LITIGATION
The Company is a defendant in a putative class action suit commenced in
October 1997 against the Company, certain officers and former officers of the
Company and Banc One 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 complaint also alleges insider trading by one or more
officers or former officers of the Company and requests control-person liability
against Banc One. The Company has not yet been required to answer the
complaint.
NOTE J - RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). Effective for financial statements for fiscal years
beginning after December 15, 1998, SOP 98-1 requires companies to capitalize
qualifying computer software costs incurred during development. Costs incurred
in the designing of software configuration, the coding of programs and the
installation of hardware are examples of qualifying capitalizable costs. The
Company is currently assessing the impact of adoption of SOP 98-1.
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 nine months ended March 31, 1998, bankcard sales volume processed
increased approximately 20.8% to $36.6 billion compared with $30.3 billion for
the nine months ended March 31, 1997. The Company processed 1.4 billion total
transactions for the nine months ended March 1998, an increase of approximately
44.5%, compared with 940.6 million total transactions for the same period in
fiscal 1997.
The Company is a 56%-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 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.
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. Pursuant
to the preferred alliance agreement, 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 diluted 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.
10
<PAGE>
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"). 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 MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31, 1997
- --------------
The Company recorded net income for the three months ended March 31, 1998 of
$4.3 million, or $0.12 per diluted share, compared with net income of $7.4
million, or $0.21 per diluted share, for the same period in the prior year. For
the three months ended March 31, 1997, earnings, excluding a $5.0 million pretax
gain related to the termination of an agreement that First USA would not compete
with the Company for business card customers, were $4.6 million or $0.13 per
diluted share.
Revenues increased 11.5% to $52.4 million for the three months ended March 31,
1998, compared with $47.0 million for the three months ended March 31, 1997.
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 15.8% to $11.8
billion for the three months ended March 31, 1998, compared with $10.2 billion
for the same period in the prior year. Total items processed for the three
months ended March 31, 1998 increased 38.0% to 462.7 million, compared with
335.2 million for the three months ended March 31, 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.
Other income for the three months ended March 31, 1997 included a $5.0 million
pretax gain related to the termination of an agreement that First USA would not
compete with the Company for business card customers. Other income for the
three months ended March 31, 1998 and March 31, 1997 also included interest
income from investments.
Total expenses for the three months ended March 31, 1998 increased 15.4% to
$44.9 million, compared with $38.9 million for the three months ended March 31,
1997. Total expenses, excluding amortization of goodwill, purchased merchant
portfolios and other intangibles, were $40.8 million for the quarter ended March
31, 1998, compared with $35.4 million for the same period in the prior year.
This increase was primarily due to increased sales volume processed and
increased number of employees.
Operating expenses increased 4.2% to $19.6 million for the three months ended
March 31, 1998, compared with $18.8 million for the same period of fiscal 1997,
primarily due to increased sales volume processed. Salaries and employee
benefits increased 26.9% to $17.1 million for the three months ended March 31,
1998, compared with $13.4 million for the same period in 1997, 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 1,130 at
March 31, 1997 to approximately 1,240 at March 31, 1998. 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, tax and legal staff and facilities administration, which
were previously provided by First USA. Interest expense was $1.5 million for
the three months ended March 31, 1998, an increase of 46.9% due to growth in
interest bearing deposits and a higher quarterly average balance on the
Company's borrowings under its revolving credit facility with a bank syndicate
("Revolving Credit Facility") as of March 31, 1998.
11
<PAGE>
Depreciation and amortization increased 19.3% to $6.8 million for the three
months ended March 31, 1998, compared with $5.7 million for the three months
ended March 31, 1997. The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $4.1 million for the quarter ended
March 31, 1998, compared with $3.6 million for the same period in fiscal 1997.
Depreciation of property and equipment increased to $2.6 million for the three
months ended March 31, 1998, compared with $2.1 million for the three months
ended March 31, 1997. This increase in depreciation was primarily the result of
the Company's capital expenditures for technology.
FOR THE NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE NINE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31, 1997
- --------------
Net income for the nine months ended March 31, 1998 increased to $15.2
million, or $0.43 per diluted share, compared with $12.5 million, or $0.38 per
diluted share, for the nine months ended March 31, 1997. 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 a $3.5 million significant unusual pretax charge related
to reserves, earnings for the nine months ended March 31, 1998 were $13.5
million, or $0.38 per diluted share. Earnings for the nine months ended March
31, 1997, excluding a $15.5 million pretax, one-time merger, integration and
impairment charge related to the GENSAR acquisition, 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") and a $5.0 million pretax gain related
to the termination of an agreement that First USA would not compete with the
Company for business card customers, were $17.4 million, or $0.52 per diluted
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 nine months ended March 31, 1998 increased 16.0% to $158.2
million compared with $136.4 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 20.8% to $36.6 billion for
the nine months ended March 31, 1998, compared with $30.3 billion for the nine
months ended March 31, 1997. Total items processed for the nine months ended
March 31, 1998 increased 44.5% to 1.4 billion, compared with 940.6 million for
the same period in fiscal 1997.
Other income for the second quarter of 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 diluted 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 nine months ended March 31, 1997, other income
included related party transactions with First USA resulting in a $3.5 million
gain related to the termination of a call option on warrants for stock in First
Virtual and a $5.0 million pretax gain related to the termination of an
agreement that First USA would not compete with the Company for business card
customers. Other income for the nine months ended March 31, 1998 and March 31,
1997 also included interest income from investments.
Total expenses for the nine months ended March 31, 1998 increased 12.9% to
$139.0 million, compared with $123.1 million for the nine months ended March 31,
1997. Total expenses, excluding amortization of goodwill, purchased merchant
portfolios and other intangibles, and with respect to the nine months ended
March 31, 1997, excluding a one-time merger, integration and impairment charge
related to the GENSAR acquisition, were $126.6 million for the nine months ended
March 31, 1998, compared with $99.1 million for the nine months ended March 31,
1997. The 27.7% 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 24.3% to $65.7 million for the nine months ended
March 31, 1998, compared with $52.9 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 30.1% to $48.3
million for the nine months ended March 31, 1998, compared with $37.1 million
for the same period in 1997, primarily due to the increase in the number of
employees. Such increase included employees hired as a result of the Company's
acquisitions during fiscal 1997 as well as those hired to support the growth in
sales volume processed. The number of employees increased from approximately
1,130 at March 31, 1997 to approximately 1,240 at March 31, 1998. 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, tax and legal staff and facilities administration,
which were previously provided by First USA. Interest expense increased to $5.0
million for the nine months ended March 31, 1998, compared with $3.2 million for
the nine months ended March 31, 1997. The increase was primarily due to growth
in interest bearing deposits and a higher average balance on the Company's
borrowings under its Revolving Credit Facility as of March 31, 1998.
Depreciation and amortization for the nine months ended March 31, 1998
increased 39.8% to $20.1 million compared with $14.4 million for the same period
of fiscal 1997. The amortization of goodwill, purchased merchant portfolios and
other intangibles increased 47.3% to $12.5 million for the nine months ended
March 31, 1998, compared with $8.5 million for the nine months ended March 31,
1997, as a result of the Company's acquisitions during fiscal 1997, primarily
GENSAR. Depreciation of property and equipment increased 29.0% to $7.6 million
for the nine months ended March 31, 1998 compared with $5.9 million for the same
period of fiscal 1997. This increase in depreciation was primarily the result
of the Company's capital expenditures for technology.
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 diluted 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. Pursuant to the preferred
alliance agreement, the Company will continue its relationship as the exclusive
issuer of corporate fleet cards for PHH.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $23.1 million for the nine
months ended March 31, 1998, compared with $73.1 million for the same period of
fiscal 1997. The Company used $17.2 million for capital expenditures, primarily
for technology, during the nine months ended March 31, 1998, compared with $15.1
million for capital expenditures during the nine months ended March 31, 1997.
13
<PAGE>
The Company's 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, 1998, the Company had $55 million in borrowings
under the $200 million Revolving Credit Facility in the form of a $40 million
note and a $15 million note, each at a rate of LIBOR plus 35 basis points
(currently approximately 6.04%). In April 1998, the Company reduced the maximum
borrowings available under the Revolving Credit Facility to $150 million.
Certain financial conditions must be met to utilize the full amount of the
Revolving Credit Facility.
The Company has no current plans to pay dividends on the common stock. The
Company presently intends to retain earnings to support the growth of the
Company's business.
PARENT COMPANY MERGER
In June 1997, the Company's former indirect parent company, First USA, Inc.,
merged with and into Banc One resulting in Banc One becoming the indirect owner
of 56% 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, tax and 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. Many of the Company's computer systems already comply with year
2000 requirements, primarily because of the Company's application 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 is communicating with all of its significant third party vendors
and large customers to assess the extent to which the Company's interface
systems are vulnerable to those third parties' failures 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 Quarterly Reports on Form 10-Q for
the quarters ended December 31, 1997 and September 30, 1997 and in a Current
Report on Form 8-K filed October 20, 1997, the Company is a defendant in a
putative class action suit commenced on October 10, 1997, by a stockholder of
the Company in the United States District Court, Northern District of Texas,
against the Company, certain officers, and certain former officers. On April 6,
1998, plaintiffs filed an amended complaint entitled Raffaele Branca, Carl C.
------------------------
Conrad, and Michael P. Fuchs v. Paymentech, Inc., Banc One Corporation, Michael
- -------------------------------------------------------------------------------
Duffy, Raymond J. McArdle, Pamela H. Patsley and David W. Truetzel. The amended
- ------------------------------------------------------------------
complaint alleges, among other things, that the defendants violated United
States securities laws by publicly issuing false and misleading statements and
omitting material adverse information regarding the Company's business. The
amended complaint seeks to represent all stockholders who purchased stock during
the period from January 22, 1997, the date on which the Company issued a press
release announcing its financial results for the second 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 amended complaint claims 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 class acquired their
stock. The amended complaint also alleges insider trading by one or more
officers of the Company, and requests control-person liability against Banc One.
The amended complaint seeks monetary damages for the losses the stockholders in
the class allegedly incurred. The Company has not yet been required to answer
the amended complaint.
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 as a result of the achievement of
certain performance criteria following the Company's acquisition of Merchant-
Link in January 1997. No underwriter was used in connection with the sale or
issuance of the shares, and such issuance was an exempt transaction under
Section 4(2) of the Securities Act of 1933, as amended. The resale of such
shares has been registered on a shelf registration statement on Form S-3 (File
No. 333-32697).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Reports on Form 8-K filed during the third quarter of fiscal 1998:
Report on Form 8-K filed January 21, 1998
Item 5. Other Events
Exhibit 99. Press Release
b. 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 Restricted Stock Plan.
10.2* First Amendment to the Employee Stock Purchase Plan of
Paymentech, Inc.
10.3* First Amendment to the Paymentech Supplemental Executive
Retirement Plan.
27* Financial Data Schedule.
__________________________
* Filed herewith.
16
<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 11, 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
17
<PAGE>
INDEX OF EXHIBITS
-----------------
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
10.1 First Amendment to the Amended and
Restated Paymentech, Inc. 1996 Restricted
Stock Plan.
10.2 First Amendment to the
Employee Stock Purchase Plan of Paymentech, Inc.
10.3 First Amendment to the Paymentech
Supplemental Executive Retirement Plan.
27 Financial Data Schedule.
18
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO THE
AMENDED AND RESTATED
PAYMENTECH, INC. 1996 RESTRICTED STOCK PLAN
-------------------------------------------
WHEREAS, Paymentech, Inc., a Delaware corporation (the "Company"), has
heretofore maintained the Amended and Restated Paymentech, Inc. 1996 Restricted
Stock Plan (the "Plan") for the benefit of certain of its employees; and
WHEREAS, the Compensation Committee of the Board of Directors approved this
amendment to the Plan on the date set forth below;
NOW, THEREFORE, the Company hereby amends the Plan as follows:
1. Paragraphs (k), (l) and (m) of Section 2 are hereby deleted in their
entirety.
2. The last sentence of Section 6(a) is hereby deleted.
3. Section 6(c) is hereby deleted and replaced with the following:
(c) Forfeiture. Subject to such exceptions as may be determined by
----------
the Committee, if the Grantee's continuous employment with the Company or
its direct and indirect subsidiaries shall terminate for any reason (other
than by reason of death or disability) prior to vesting of the Restricted
Stock, any shares remaining subject to restrictions shall thereupon be
forfeited by the Grantee and transferred to, and reacquired by, the Company
at no cost to the Company; provided, however, that, with respect to
-------- -------
Grantees who are not Executive Officers, (i) the Committee may provide, by
rule or regulation or in any Restricted Stock Agreement, or may determine
in any individual case, that restrictions or forfeiture conditions relating
to Restricted Stock will be waived in whole or in part in the event of
terminations resulting from specified causes, and (ii) the Committee may in
other cases waive in whole or in part the forfeiture of Restricted Stock.
Nothing in the Plan or in any Restricted Stock Agreement shall confer upon
an individual any right to continue in the employ of the Company or
interfere in any way with the right of the Company to terminate such
employment.
4. Section 6(i) is hereby deleted.
IN WITNESS WHEREOF, the Company has adopted this amendment as of this 23rd
day of March, 1998.
PAYMENTECH, INC.
By: /s/ Philip Taken
-----------------------------
Philip E. Taken
Chief Administrative Officer,
General Counsel and Secretary
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO THE
EMPLOYEE STOCK PURCHASE PLAN
OF PAYMENTECH, INC.
WHEREAS, Paymentech, Inc. a Delaware corporation (the "Company"), has
heretofore maintained the Employee Stock Purchase Plan of Paymentech, Inc.
(formerly known as the Employee Stock Purchase Plan of First USA Paymentech,
Inc.; the "Plan") for the benefit of its employees; and
WHEREAS, the Company considers it advisable to amend the Plan to increase
by 250,000 shares the number of shares of Common Stock of the Company, $.01 par,
available for issuance under the Plan, making a total of 400,000 shares
available for issuance under the Plan; and
WHEREAS, the Board of Directors of the Company, pursuant to Section 17 of
the Plan, authorized this amendment on April 22, 1998;
NOW THEREFORE, effective as of April 22, 1998, (the "Effective Date"), the
Company hereby amends the Plan as follows:
The first sentence of Section 10(a) is hereby deleted and replaced
with the following:
The maximum number of shares of Common Stock which shall be reserved
for sale under the Plan shall be 400,000, subject to adjustment upon
changes in capitalization of the Company as provided in paragraph 16.
Except as amended, all other provisions of the Plan shall remain in full
force and effect.
IN WITNESS HEREOF, the Company has adopted this amendment as of the
Effective Date.
PAYMENTECH, INC.
By: /s/ Philip Taken
-----------------------------------
Title: Chief Administrative Officer,
--------------------------------
General Counsel and Secretary
<PAGE>
EXHIBIT 10.3
FIRST AMENDMENT
TO THE
PAYMENTECH
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective as of March 22, 1996)
Pursuant to Section 10.1 of the Paymentech Supplemental Executive Retirement
Plan (Effective as of March 22, 1996) (hereinafter the "Plan") the Plan, as
amended to date, is hereby further amended, effective as of July 1, 1997, as
follows:
1. Article 4 of the Plan is amended by addition of Section 4.6 to read as
follows:
"4.6 RULES OF CALCULATION
In calculating amounts under Section 4.1(a), Section 4.2(a), Section
4.3(a), Section 4.4(a) (including amounts calculated under such
Sections for purposes of Section 7.1) and under Section 6.2(a), the
Participant's Compensation for a Plan Year shall include any amount
deferred by such Participant for such Plan Year under the terms of the
First USA Deferred Compensation Program."
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed,
effective as of the date set forth above, by its duly authorized officer.
PAYMENTECH, INC.
Date: April 22, 1998 By: /s/ Philip Taken
-------------- ------------------
Title: Chief Administrative Officer,
-----------------------------
General Counsel & Secretary
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