<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14224
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Paymentech, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2634185
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1601 Elm Street, 9th Floor, Dallas, Texas 75201
- --------------------------------------------------------------------------------
(address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code 214-849-2149
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N/A
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Former Name, Former Address and former Fiscal Year, If Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
- ------------------------------------ -----------------------------------
Common Stock, $.01 par value 36,157,009 shares
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PAYMENTECH, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
PART I. F I N A N C I A L I N F O R M A T I O N Page
----
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets -
September 30, 1998 (Unaudited) and June 30, 1998............. 3
Condensed Consolidated Statements of Income (Unaudited) -
Three Months Ended September 30, 1998 and 1997............... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 30, 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
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks.. 13
PART II. O T H E R I N F O R M A T I O N
ITEM 1. Legal Proceedings............................................ 14
ITEM 2. Changes in Securities........................................ 14
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K.......................................... 14
Index of Exhibits............................................ 14
SIGNATURES............................................................ 15
<PAGE>
PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $284,535 $158,307
Receivables, net..................................................................... 5,238 23,770
Credit card loans, net............................................................... 50,875 42,079
Terminal inventories................................................................. 805 895
Prepaid expenses and other current assets............................................ 8,350 9,159
------------ ------------
Total current assets.............................................................. 349,803 234,210
Investments, at cost (market value of $6,396 and $6,205 at September 30, 1998
and June 30, 1998, respectively)..................................................... 6,456 6,212
Notes receivable....................................................................... 9,925 9,997
Property and equipment, net............................................................ 57,830 57,873
Goodwill, net.......................................................................... 239,483 234,711
Purchased merchant portfolios and other intangibles, net............................... 101,882 98,817
Other assets........................................................................... 7,003 7,563
------------ ------------
$772,382 $649,383
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $232,458 $103,180
Notes payable to banks............................................................... 40,029 55,049
Interest-bearing deposits............................................................ 33,035 34,790
Merchant deposits.................................................................... 23,919 22,844
Accrued assessments.................................................................. 9,383 8,881
Other accrued expenses............................................................... 25,840 25,567
------------ ------------
Total current liabilities......................................................... 364,664 250,311
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000 shares authorized, 36,121,989 and
36,025,944 issued and outstanding at September 30, 1998 and June 30, 1998,
respectively..................................................................... 361 360
Additional paid-in capital........................................................... 358,535 354,274
Accumulated other comprehensive income............................................... 51 621
Retained earnings.................................................................... 48,771 43,817
------------ ------------
Total stockholders' equity........................................................ 407,718 399,072
------------ ------------
$772,382 $649,383
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
-------- --------
Revenues
Revenue...................................... $56,465 $50,340
Other income................................. 229 1,201
-------- --------
Total revenues............................ 56,694 51,541
-------- --------
Expenses
Operating.................................... 20,845 20,471
Salaries and employee benefits............... 18,267 15,451
Depreciation and amortization................ 7,247 6,497
Interest..................................... 1,481 1,649
-------- --------
Total expenses............................ 47,840 44,068
-------- --------
Income before income taxes............. 8,854 7,473
Income tax provision........................... 3,900 3,301
-------- --------
Net income............................. $ 4,954 $ 4,172
======== ========
Basic and diluted earnings per share........... $ 0.14 $ 0.12
======== ========
See notes to consolidated financial statements.
4
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PAYMENTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
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<S> <C> <C>
Operating Activities
Net income.................................................................... $ 4,954 $ 4,172
Provision for depreciation and amortization................................. 7,247 6,497
Gain on sale of assets...................................................... -- (899)
Other cash provided by (used for) operating activites....................... 138,540 (23,789)
-------- --------
Net cash provided by (used for) operating activities...................... 150,741 (14,019)
Investing Activities
Purchases of merchant portfolios, processing services and other acquisitions.. (5,800) (687)
Purchases of property and equipment, net...................................... (2,112) (4,398)
Proceeds from sale of assets.................................................. -- 2,216
Other investing activities.................................................... (244) 880
-------- --------
Net cash used for investing activities.................................... (8,156) (1,989)
Financing Activities
Decrease in notes payable to banks and other borrowings....................... (15,020) --
Net increase (decrease) in interest-bearing deposits.......................... (1,755) 2,866
Issuance of common stock, net................................................. 418 2,624
-------- --------
Net cash provided by (used for) financing activities...................... (16,357) 5,490
-------- --------
Increase (decrease) in cash and cash equivalents.......................... 126,228 (10,518)
Cash and cash equivalents at beginning of period................................ 158,307 119,466
-------- --------
Cash and cash equivalents at end of period................................ $284,535 $108,948
======== ========
</TABLE>
See notes to consolidated financial statements.
5
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PAYMENTECH, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
Paymentech, Inc. ("Paymentech" or 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.
The Company has changed the presentation of its settlement inflows and
outflows effective for the quarter ended September 30, 1998. For a portion of
the Company's business, receivables from credit card associations and the
related payables to merchants were previously presented as cash and cash
equivalents. These payables to merchants are now presented as liabilities in
accounts payable. The change was made to provide reporting consistency across
the Company's businesses.
Effective for the quarter ended September 30, 1998, Paymentech adopted the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). 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. In the three months ended September 30, 1998,
$723,000 of such software costs were capitalized. These costs will be amortized
on a straight-line basis over the period of benefit and will be periodically
reviewed for possible impairment.
During the three months ended September 30, 1998, bankcard sales volume
processed increased approximately 16.5% to $13.1 billion compared with $11.2
billion for the three months ended September 30, 1997. The Company processed
549.6 million total transactions for the three months ended September 30, 1998,
an increase of approximately 30.9%, compared with 419.8 million total
transactions for the same period in fiscal 1998. 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 55%-owned subsidiary of First USA Financial, Inc. ("First
USA"), which is a wholly owned subsidiary of BANK ONE CORPORATION, f/k/a BANC
ONE CORPORATION ("Bank 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 three months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999. 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, 1998.
6
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NOTE B - BUSINESS COMBINATIONS, DIVESTITURES AND MERCHANT PORTFOLIO PURCHASES
During the quarter ended September 30, 1998, Paymentech purchased certain
assets of Prism Processing Services, a company that specializes in developing
merchant business with agent banks. Additional cash payments may be made if
certain performance objectives are met annually for each of the next eight
years. Also during the quarter ended September 30, 1998, Paymentech purchased
two merchant portfolios. Cash paid for this quarter's acquisitions totaled
$5.8 million.
The Company paid in common stock $1.2 million in August 1998, $2.5 million in
February 1998 and $1.5 million 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. 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 February 1999, 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 of up to approximately $450,000 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.
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 $2.3 million note receivable which was the result of the
sale of 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 - COMPONENTS OF COMPREHENSIVE INCOME
As of July 1, 1998, Paymentech adopted Statement No. 130, "Reporting
Comprehensive Income" (SFAS 130). This Statement establishes standards for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires that the unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
7
<PAGE>
The market value of the Company's investment in First Virtual Holdings, Inc.
("First Virtual") was $4.1 million as of September 30, 1998, resulting in a
pretax unrealized holding loss of $920,000, or $570,000 on an after-tax basis.
Components of comprehensive income are as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
------ ------
Net income........................................... $4,954 $4,172
Unrealized holding loss on securities
available for sale................................ (570) --
------ ------
Total comprehensive income........................... $4,384 $4,172
====== ======
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 44.0% and
44.2% for the three months ended September 30, 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 F - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
------- -------
Basic
Net income........................................... $ 4,954 $ 4,172
------- -------
Weighted average shares outstanding.................. 36,139 35,196
------- -------
Basic earnings per share............................. $ 0.14 $ 0.12
======= =======
Diluted
Net income........................................... $ 4,954 $ 4,172
------- -------
Weighted average shares outstanding.................. 36,139 35,196
Dilutive effect of common stock equivalents.......... 25 257
Dilutive effect of contingently issuable shares...... 226 68
------- -------
Adjusted weighted average shares outstanding......... 36,390 35,521
======= =======
Diluted earnings per share........................... $ 0.14 $ 0.12
======= =======
8
<PAGE>
NOTE G - LITIGATION
The Company is a defendant in a putative class action suit commenced in
October 1997 against the Company, and a current and a former officer 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
Company has notified its insurance carriers of this action. It is premature to
determine whether the Company will have any liability in the action or whether,
if so, that liability will be material.
NOTE H - SUBSEQUENT EVENT
On October 29, 1998, Paymentech announced that it had agreed to acquire the
merchant processing business of Mellon Bank Corporation. The acquisition is
expected to be completed before December 31, 1998, and is subject to conditions
typical for such transactions, including necessary regulatory approvals.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Paymentech, Inc. ("Paymentech" or 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. Paymentech 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 for
merchants in the United States. In addition, Paymentech 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 three months ended September 30, 1998, bankcard sales volume
processed increased approximately 16.5% to $13.1 billion compared with $11.2
billion for the three months ended September 30, 1997. Paymentech processed
549.6 million total transactions for the three months ended September 30, 1998,
an increase of approximately 30.9%, compared with 419.8 million total
transactions for the same period in fiscal 1998.
The Company is a 55%-owned subsidiary of First USA Financial, Inc. ("First
USA"), which is a wholly owned subsidiary of BANK ONE CORPORATION, f/k/a BANC
ONE CORPORATION ("Bank One").
BUSINESS COMBINATIONS, DIVESTITURES AND MERCHANT PORTFOLIO PURCHASES
During the quarter ended September 30, 1998, Paymentech purchased certain
assets of Prism Processing Services, a company that specializes in developing
merchant business with agent banks. Additional cash payments may be made if
certain performance objectives are met annually for each of the next eight
years. Also during the quarter ended September 30, 1998, Paymentech purchased
two merchant portfolios. Cash paid for this quarter's acquisitions totaled
$5.8 million.
The Company paid in common stock $1.2 million in August 1998, $2.5 million in
February 1998 and $1.5 million 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. 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 February 1999, 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 approximately $450,000 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>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
Paymentech recorded net income for the three months ended September 30, 1998
of $5.0 million, or $0.14 per diluted share, compared with net income of $4.2
million, or $0.12 per diluted share, for the same period in the prior year. For
the three months ended September 30, 1997, earnings excluding a $626,000 pretax
gain related to the sale of the Company's terminal leasing portfolio, were $3.8
million or $0.11 per diluted share.
Revenue increased 12.2% to $56.5 million for the three months ended September
30, 1998, compared with $50.3 million for the three months ended September 30,
1997. The increase in revenue 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 16.5% to $13.1
billion for the three months ended September 30, 1998, compared with $11.2
billion for the same period in the prior year. Total items processed for the
three months ended September 30, 1998 increased 30.9% to 549.6 million, compared
with 419.8 million for the three months ended September 30, 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 September 30, 1997 included a $626,000
pretax gain related to the sale of the Company's terminal leasing portfolio to
Northern Leasing. Other income for the three months ended September 30, 1998
and September 30, 1997 also included interest income from investments.
Total expenses for the three months ended September 30, 1998 increased to
$47.8 million, compared with $44.1 million for the three months ended September
30, 1997. Total expenses, excluding amortization of goodwill, purchased
merchant portfolios and other intangibles, were $43.5 million for the quarter
ended September 30, 1998, compared with $39.9 million for the same period in the
prior year. This increase was primarily due to increased sales volume
processed.
Operating expenses of $20.8 million for the three months ended September 30,
1998, remained flat compared with $20.5 million for the same period of fiscal
1998. Paymentech's ability to maintain these expenses while achieving a 16.5 %
increase in sales volumes processed is the result of the realization of
operational efficiencies. Salaries and employee benefits increased 18.2% to
$18.3 million for the three months ended September 30, 1998, compared with $15.5
million for the same period in fiscal 1998. This increase is primarily due to
increased incentive compensation as well as the Company providing for itself
certain administrative functions, including but not limited to tax, legal staff
and facilities administration, which were previously provided by First USA. The
increase in salaries and employee benefits is partially offset by the Company's
adoption, during the first quarter of fiscal 1999, of Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which allowed for the capitalization of approximately $723,000 of
certain software development costs. Interest expense was $1.5 million for the
three months ended September 30, 1998, a decrease of 10.2% due to a lower
quarterly average balance on the Company's borrowings under its revolving credit
facility with a bank syndicate ("Revolving Credit Facility") for the quarter
ended September 30, 1998.
Depreciation and amortization increased 11.5% to $7.2 million for the three
months ended September 30, 1998, compared with $6.5 million for the three months
ended September 30, 1997. The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $4.4 million for the quarter ended
September 30, 1998, compared with $4.2 million for the same period in fiscal
1998. Depreciation of property and equipment increased to $2.9 million for the
three months ended September 30, 1998, compared with $2.3 million for the three
months ended September 30, 1997. This increase in depreciation was primarily
the result of the Company's capital expenditures for technology.
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.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $150.7 million for the three
months ended September 30, 1998, compared with $14.0 million used for operating
activities in the same period of fiscal 1998. This increase in cash provided by
operating activities for the quarter ended September 30, 1998, is primarily the
result of the Company's change in its presentation of settlement inflows and
outflows. For a portion of the Company's business, receivables from credit card
associations and the related payables to merchants were previously presented as
cash and cash equivalents. These payables to merchants are now presented as a
liabilities in accounts payable. Effective for the quarter ended September 30,
1998, this change was made to provide reporting consistency across the Company's
businesses.
The Company used $5.8 million for acquisitions and $2.1 million for capital
expenditures, primarily for technology, during the three months ended September
30, 1998, compared with $4.4 million for capital expenditures during the three
months ended September 30, 1997.
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 September 30, 1998, the Company had $40 million in
borrowings under the $150 million Revolving Credit Facility in the form of a
note at a rate of LIBOR plus 35 basis points (currently approximately 5.91%).
In September 1998, Paymentech paid a $15 million note it had outstanding under
the Revolving Credit Facility. 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, Paymentech's former indirect parent company, First USA, Inc.,
merged with and into Bank One resulting in Bank One becoming the indirect owner
of 55% of the Company's outstanding stock. Bank One has informed Paymentech
that it completed an assessment of the strategic value of its ownership interest
in Paymentech and a review of the business prospects of Paymentech and has
concluded that its present intention is to not reduce its ownership interest in
Paymentech. Bank One also owns a 50% interest in an alliance with First Data
Corporation, which alliance is a competitor of the Company. Bank One currently
refers all prospective merchant customers from Bank One's branch network to such
alliance.
Furthermore, as a result of the Bank One/First USA, Inc. merger, the Company
now provides for itself certain administrative functions, including but not
limited to human resources, tax and legal staff and facilities administration.
These functions were integrated with the same functions of the Company's former
parent, First USA, prior to July 1, 1997. As a result, the Company now 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
Based on progress made to date, management anticipates that core data
processing software and hardware will be compliant and tested by December 1998.
Approximately half of the Company's desktop computer, telecommunication and non-
information technology hardware is currently year 2000 compliant with the
remainder of the hardware targeted to be compliant by March 1999. For the
Company's remaining noncompliant computer systems, the Company believes that
existing internal resources can be used to modify existing software and
hardware, and that the associated costs will not be significant. However, if
such modifications are not made, or are not completed on a timely basis, year
2000 noncompliance could have a material impact on the operations of the
Company.
12
<PAGE>
Paymentech is actively monitoring the progress of its significant third-party
vendors and customers in their efforts to become year 2000 compliant, and is
planning actions deemed necessary in order to mitigate its exposure to year 2000
noncompliance. There is no guarantee that the systems of other companies on
which the Company's systems rely will be corrected on a timely basis and will
not have a material adverse effect on the Company's systems.
Paymentech is identifying the most reasonably likely scenarios involving year
2000 noncompliance and is currently developing contingency plans to support the
Company's core systems.
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 and the impact of third-party year 2000 non-compliance, account
origination and growth, customer base, anticipated growth via acquisitions,
anticipated actions by Bank One with respect to its ownership of shares of the
Company, potential customer reactions to the Bank One ownership, 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, 1998. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the fiscal year 1998 Annual Report on
Form 10-K related to the Company's exposure to market risk from interest rates.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Annual Report on Form 10-K for fiscal
year ended June 30, 1998, Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998, 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. On September
2, 1998, plaintiffs filed an amended complaint entitled Raffaele Branca, Carl C.
Conrad, and Michael P. Fuchs v. Paymentech, Inc., Pamela H. Patsley and David W.
Truetzel. The defendants in the amended complaint are the Company and a current
and a former officer of the Company. 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 defendants intend to file a motion to dismiss this amended complaint. The
Company has notified its insurance carriers of this action. It is premature to
determine whether the Company will have any liability in the action or whether,
if so, that liability will be material.
ITEM 2. CHANGES IN SECURITIES
In August 1998, the Company issued 67,289 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 first quarter of fiscal 1999:
Report on Form 8-K filed August 28, 1998
Item 5. Other Events
b. Reports on Form 8-K filed subsequent to the first quarter of fiscal
1999:
Report on Form 8-K filed October 29, 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.
27* Financial Data Schedule.
- ------------------------
* Filed herewith.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 16, 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 Financial Officer
15
<PAGE>
INDEX OF EXHIBITS
-----------------
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
27 Financial Data Schedule.
16
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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0
0
<COMMON> 361
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