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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14224
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Paymentech, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2634185
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1601 Elm Street, 9th Floor, Dallas, Texas 75201
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 28, 1999
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Common Stock, $.01 par value 36,435,412 shares
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EXPLANATORY NOTE
Paymentech, Inc. ("the Company") is amending its Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 to include an expanded discussion of
the Company's preparedness for year 2000 and the likely impact of year 2000 on
its business. This expanded discussion is in response to the Securities and
Exchange Commission's comments to the Company's preliminary proxy materials
filed with the Commission on April 13, 1999.
This Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of
the Company for the fiscal quarter ended March 31, 1999 contains revised
information under the caption "Year 2000" in management's discussion and
analysis of financial condition and results of operations (Part I Item 2). Item
2 of Part I included herein has been restated in full.
Part I. Item 2.
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 nine months ended March 31, 1999, bankcard sales volume
processed increased approximately 23.6% to $45.2 billion compared with $36.6
billion for the nine months ended March 31, 1998. Paymentech processed 1.8
billion total transactions for the nine months ended March 31, 1999, an increase
of approximately 31.7%, compared with 1.4 billion 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 December 1998, Paymentech acquired the merchant processing business
of Mellon Bank Corporation ("Mellon") which directly services a broad range of
retailers and government agencies, as well as processes for merchants through
independent sales organizations and agent banks. Mellon was acquired for $48.5
million, a portion of which is subject to certain adjustments which are
contingent upon the transfer by Mellon of certain of its merchant agreements to
Paymentech. Mellon and the Company also agreed to an exclusive marketing and
referral agreement under which the parties market Paymentech's processing
services to Mellon's merchant customers through Mellon's network of retail
offices and cash management and corporate banking groups. In addition to Mellon,
during the quarter ended December 31, 1998, the Company purchased two other
merchant portfolios. All of these acquisitions were accounted for as purchases
and accordingly, their results are included in Paymentech's results of
operations from the date of acquisition.
During the quarter ended September 30, 1998, Paymentech purchased certain
assets of Prism Processing Services ("Prism") and acquired two merchant
portfolios for a total of $5.8 million. Prism is a company that specializes in
developing merchant business with agent banks. Additional cash payments will be
made when certain performance objectives are met annually by Prism for each of
the next eight years. These acquisitions were accounted for as purchases and
accordingly, their results are included in the Company's result of operations
from the date of acquisition.
The Company paid $1.2 million in common stock 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 were also subject to a price
guarantee by the Company. In January 1999, Paymentech paid 163,675 shares of
common stock to the former sole stockholder of Merchant-Link as a result of this
price guarantee.
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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 jointly-owned PHH/Paymentech to offer a MasterCard-branded single card
payment system for fleet, purchasing, travel and entertainment needs. The
Company will continue its relationship as the exclusive issuer of corporate
fleet cards for PHH.
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.
Results of Operations
For the Three Months Ended March 31, 1999 Compared With the Three Months
------------------------------------------------------------------------
Ended March 31, 1998
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Paymentech recorded net income for the three months ended March 31, 1999 of
$5.9 million, or $0.16 per diluted share, compared with net income of $4.3
million, or $0.12 per diluted share, for the same period in the prior year.
Revenue increased 30.9% to $68.6 million for the three months ended March 31,
1999, compared with $52.4 million for the three months ended March 31, 1998.
Excluding the impact of Mellon, revenue increased 19.5% over the same period in
the fiscal 1998. This increase was primarily the result of increased sales
volume processed partially offset by margin compression due to increased
competition within the industry.
Bankcard sales volume processed increased 34.8% to $15.9 billion for the
three months ended March 31, 1999, compared with $11.8 billion for the same
period in the prior year. Total items processed for the three months ended March
31, 1999 increased 33.3% to 616.8 million, compared with 462.7 million for the
three months ended March 31, 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.
Total expenses for the three months ended March 31, 1999 increased 29.6% to
$58.2 million, compared with $44.9 million for the three months ended March 31,
1998. Total expenses, excluding amortization of goodwill, purchased merchant
portfolios and other intangibles, were $52.3 million for the quarter ended March
31, 1999, compared with $40.8 million for the same period in the prior year.
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Operating expenses for the three months ended March 31, 1999, increased
42.8% to $27.9 million, compared with $19.6 million for the same period of
fiscal 1998. This increase is primarily the result of data processing and
communication expenses related to Mellon. Salaries and employee benefits
increased 13.3% to $19.3 million for the three months ended March 31, 1999,
compared with $17.1 million for the same period in fiscal 1998. This increase is
primarily due to increased incentive compensation as well as increased number of
employees. 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" ("SOP 98-1"), which allowed for the capitalization
certain software development costs. Interest expense was $1.9 million for the
three months ended March 31, 1999, an increase of 25.0% due primarily to a
higher quarterly average balance on the Company's borrowings under its revolving
credit facility with Bank One ("Revolving Credit Facility") for the quarter
ended March 31, 1999.
Depreciation and amortization increased 33.5% to $9.0 million for the three
months ended March 31, 1999, compared with $6.8 million for the three months
ended March 31, 1998. The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $5.9 million for the quarter ended
March 31, 1999, compared with $4.1 million for the same period in fiscal 1998,
primarily due to the Mellon acquisition. Depreciation of property and equipment
increased to $3.1 million for the three months ended March 31, 1999, compared
with $2.6 million for the three months ended March 31, 1998. This increase in
depreciation was primarily the result of the Company's capital expenditures for
technology.
For the Nine Months Ended March 31, 1999 Compared With the Nine Months Ended
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March 31, 1998
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Paymentech recorded net income for the nine months ended March 31, 1999 of
$18.5 million, or $0.51 per diluted share, compared with net income of $15.2
million, or $0.43 per diluted share, for the same period in the prior year. For
the nine months ended March 31, 1998, earnings excluding a $6.0 million pretax
gain related to the sale of the Company's interest in PHH/Paymentech, the
$626,000 pretax gain on the sale of the Company's terminal leasing portfolio,
and a significant unusual pretax charge of $3.5 million related to reserves,
were $13.5 million or $0.38 per diluted share.
Revenue increased 20.0% to $189.8 million for the nine months ended March
31, 1999, compared with $158.2 million for the nine months ended March 31, 1998.
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. Contributing to the increase in sales volume processed and revenue was
the Mellon acquisition. Bankcard sales volume processed increased 23.6% to $45.2
billion for the nine months ended March 31, 1999, compared with $36.6 billion
for the same period in the prior year. Total items processed for the nine months
ended March 31, 1999 increased 31.7% to 1.8 billion, compared with 1.4 billion
for the nine months ended March 31, 1998.
Other income for the nine months ended March 31, 1998 included a $6.0
million pretax gain related to the sale of the Company's interest in
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. Other income also included interest
income from investments.
Total expenses for the nine months ended March 31, 1999 increased 13.2% to
$157.4 million, compared with $139.0 million for the nine months ended March 31,
1998. Total expenses, excluding amortization of goodwill, purchased merchant
portfolios and other intangibles, were $142.3 million for the quarter ended
March 31, 1999, compared with $126.6 million for the same period in the prior
year.
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Operating expenses for the nine months ended March 31, 1999, were $72.3
million, compared with $65.7 million for the same period of fiscal 1998. Data
processing and communication expenses related to Mellon are the primary reason
for this increase. Excluding $3.5 million in charges related primarily to a
reserve for loss on terminal inventory and a reserve for loss on receivables
recorded during the quarter ended December 31, 1997, operating expenses
increased 16.4% for the nine months ended March 31, 1999, primarily due to
increased sales volume processed. Salaries and employee benefits increased
15.3% to $55.7 million for the nine months ended March 31, 1999, compared with
$48.3 million for the same period in fiscal 1998. This increase is primarily
due to increased incentive compensation as well as increased number of
employees. The increase in salaries and employee benefits is partially offset
by the Paymentech's adoption of SOP 98-1. Interest expense was $5.0 million for
the nine months ended March 31, 1999, a slight increase over the prior fiscal
year.
Depreciation and amortization increased 21.4% to $24.4 million for the nine
months ended March 31, 1999, compared with $20.1 million for the nine months
ended March 31, 1998. The amortization of goodwill, purchased merchant
portfolios and other intangibles increased to $15.1 million for the nine months
ended March 31, 1999, compared with $12.5 million for the same period in fiscal
1998, primarily due to the Mellon acquisition. Depreciation of property and
equipment increased to $9.2 million for the nine months ended March 31, 1999,
compared with $7.6 million for the nine months ended March 31, 1998. 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.
Liquidity and Capital Resources
Net cash provided by operating activities was $179.1 million for the nine
months ended March 31, 1999, compared with $23.1 million used for operating
activities in the same period of fiscal 1998. This increase in cash provided by
operating activities for the nine months ended March 31, 1999, 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
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 $53.0 million for acquisitions and $7.9 million for
capital expenditures, primarily for technology, during the nine months ended
March 31, 1999, compared with $2.6 million for acquisitions and $17.2 million
for capital expenditures during the nine months ended March 31, 1998.
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. In February 1999, Paymentech entered into the Revolving Credit
Facility after its revolving credit facility with a bank syndicate expired.
Proceeds from the Revolving Credit Facility were used to pay off $84 million in
borrowings outstanding under the previous revolving credit facility. The terms
of the Revolving Credit Facility are similar to the prior facility's terms and
conditions. At March 31, 1999, the Company had $84 million in borrowings under
the $150 million Revolving Credit Facility in the form of a note at the London
Interbank Offering Rate ("LIBOR") plus 35 basis points (currently approximately
5.31%). Certain financial conditions must be met to utilize the full amount of
the Revolving Credit Facility.
In December 1998, under the Company's prior revolving credit facility, $44
million in proceeds were used to fund the acquisition of the Mellon portfolio,
while in September 1998, Paymentech paid off a $15 million note it had
outstanding under the prior 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.
5
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Merger With First Data Corporation
On March 22, 1999, the Company and First Data Merchant Services Corporation
("FDMS"), a wholly owned subsidiary of First Data Corporation ("FDC"), announced
the execution of a definitive Processing Agreement pursuant to which the Company
will outsource to FDMS certain processing functions for the Company's general
merchant acquiring business.
In addition, on March 22, 1999, the Company announced that it had entered
into a Merger Agreement with FDC providing for the acquisition by a wholly-owned
subsidiary of FDC of all of the outstanding shares of the Company's common stock
(the "Shares"), other than Shares owned by Bank One and its subsidiaries, at a
price of $25.50 per Share in cash. Pursuant to the Merger Agreement, among other
things, a newly-formed subsidiary of FDC will be merged with and into the
Company (the "Merger"), with the Company continuing as the surviving
corporation. As a result of the Merger, all of the issued and outstanding Shares
(other than Shares owned by the Company, FDC, Bank One or any of their
respective subsidiaries) will be converted into the right to receive $25.50 in
cash per Share. Consummation of the Merger is conditioned upon, among other
things, approval of the Merger by holders of a majority of the outstanding
Shares, including at least 66 2/3% of the outstanding Shares not owned by Bank
One or its affiliates, and certain other conditions. Concurrently with the
execution of the Merger Agreement, FDC, Bank One and certain of their
subsidiaries entered into a Stockholder Agreement, pursuant to which, among
other things, Bank One has agreed to vote its Shares in favor of the Merger.
Following completion of the Merger, pursuant to a Contribution Agreement entered
into between FDC and Bank One, the Company will contribute substantially all of
its assets, liabilities and businesses to Banc One Payment Services LLC, the
existing merchant bank alliance between Bank One and FDC.
The foregoing descriptions of the Merger Agreement, the Stockholder
Agreement, the Contribution Agreement and the Processing Agreement are qualified
in their entirety by reference to the Company's Forms 8-K, filed with the
Commission on February 17, 1999 and March 23, 1999, and incorporated herein by
reference.
On March 12, 1999 and March 15, 1999, FDC and Bank One filed the necessary
documents with the Department of Justice (the "DOJ") and the Federal Trade
Commission in connection with the merger. On May 13, 1999, the Company and FDC
announced that, in connection with the merger, the parties received clearance
from DOJ under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. The merger remains subject to shareholder approval and other
conditions. Management expects the merger to close in the third calendar quarter
of 1999.
Year 2000
As a result of computer programs written using two digits rather than four
to define the applicable year, certain of the Company's computer systems may
require modifications in order to properly function beginning with the year 2000
("Y2K"). Based on an assessment of its systems, the Company has developed and
implemented a plan to ensure that its computer systems will function properly
with respect to dates in the year 2000 and thereafter.
In October of 1997 the Company created a company-wide project team with
representatives from each Paymentech location (the "Task Force") to coordinate,
monitor and assist the Company in its Y2K efforts. The Task Force has developed
a common process with specific phases and timeline goals and monitors progress
toward those goals.
Non-IT Systems. The Company's Y2K preparedness efforts are differentiated
between information technology ("IT") systems and non-IT systems. Non-IT
systems are embedded systems that support facilities infrastructures, such as
microcontrollers in lighting, heating/ventilation/air conditioning, security,
elevator, fire, uninterrupted power supply, and other infrastructure systems.
As a result of efforts to inventory and upgrade non-Y2K compliant non-IT
hardware, approximately 95% of the Company's non-IT hardware is currently
believed to be Y2K compliant, and the Company expects that all critical path
non-IT hardware will be Y2K compliant by the end of July, 1999.
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IT Systems. IT systems include primarily computer hardware and software and
related systems. Many of the Company's computer systems already comply with Y2K
requirements, primarily because of the Company's application of internal
resources and new Y2K compliant software and equipment. Paymentech's core data
processing hardware has been tested and is believed to be Y2K compliant.
Additionally, the Company has completed the required software renovations for
the core data processing systems. All of this software has been successfully
tested for Y2K compliance. Approximately 90% of the Company's desktop computer
and telecommunication hardware is currently believed to be Y2K compliant. In
addition, the Task Force has determined that approximately 50% of desktop
operating systems need to be upgraded to be Y2K compliant. This upgrade is
currently in progress and is scheduled to be completed on or before July 30,
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, or
that the non-compliant hardware will be retired or replaced. All such
modifications, retirements or replacements are expected to be completed by July
1999.
With respect to all IT system software, the Company employs the three-tiered
windowing approach to renovate existing code. Windowing is an industry-approved
method of installing century logic into programming code using a pivot date to
differentiate between centuries. The three tiers are:
Tier 1- System Identification. All core systems are identified and code is
inventoried, then turned over to the Year 2000 Project Team.
Tier 2- Software Renovation. All designated program code is scanned to
determine where date logic is located and which files contain date files.
The identified code is then renovated for Year 2000 compliance. The
renovated code is then turned over to the Validation Team for testing.
Tier 3- Testing. The Validation Team and end users perform Year 2000
testing on the modified code. Results are then confirmed by the Quality
Assurance area as an additional audit point.
The Company has completed this process with respect to all existing critical
path IT systems and expects that all such critical path systems will be Y2K
compliant by July 1999.
Material Relationships. The Company's material third-party relationships
include: (i) providers of hardware/software products, (ii)
service/network/gateway providers, and (iii) clients/customers, including
merchants, banks and other payment card processors. The Company's remediation
plan addresses third party readiness by requiring an inventory of material
third-party and vendor issues and identifying required changes. Coordination
with third parties regarding Y2K issues will continue to the Year 2000 and
beyond and the Company is working with material third parties to minimize
service interruptions that could occur in connection with the Year 2000.
Notwithstanding these efforts, unexpected third-party failures could occur and,
despite testing procedures, erroneous or corrupted data received from third
parties could impact internal systems and cause material service disruptions.
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Third-party relationships currently believed to be most material to the
Company are described below. (i) Clients- The Company does not control clients'
remediation efforts or timely testing on the Company's systems. However, many of
the Company's largest clients are themselves subject regulation by the
Securities and Exchange Commission, the FDIC, or government agencies. These
regulated entities are subject to Y2K compliance requirements and supervisory
examinations focusing on Y2K readiness. (ii) Telecommunications- The Company
has contracts for telecommunication services with a number of service providers
in the U.S. and is reliant on regional bell operating companies and other local
service providers. One of the Company's business units is similarly reliant
upon telecommunication providers in foreign countries. Telecommunication
services are critical to the Company's business. (iii) Electronic Money
Transfer Networks- Most of the Company's businesses require settlement of
financial transactions through various electronic networks, primarily the
Federal Reserve Board's Fedwire (R) Funds Transfer System ("FedWire"), the
Automated Clearing House ("ACH"), and various automated clearing services for
international funds and other similar settlement networks. The Federal Reserve
has provided assurances regarding their readiness. (iv) Association Networks and
Similar Proprietary Third-Party Networks- The Company provides services related
to credit and debit card transactions which occur over the VISA (R), MasterCard
(R), Discover (R), American Express (R) and EuroPay networks, regional Automated
Teller Machine networks, and various other proprietary third-party networks in
the United States and abroad. All of the above-mentioned card networks have
established testing schedules and the Company is participating in testing with
them. (v) Utilities- The Company is reliant upon utilities for electricity,
gas, water, and sewers. The Company's readiness plan requires the Company to
work with utility providers to confirm Y2K readiness and to coordinate
contingency plans in case of unanticipated events. The Company's major data
centers have power generation systems to provide electrical backup for
reasonable periods of time based on accepted business practices for the relevant
business unit. (vi) EDS- Electronic Data Systems provides data processing and
financial settlement services for the Dallas merchant services business unit.
In addition, EDS provides debit gateway services to Paymentech Network Services,
Inc.
There can be no assurances (a) that any third party vendors of Paymentech will
be Y2K compliant, (b) that the representations provided by third party vendors
or other third-parties with respect to Y2K compliance will be accurate, or (c)
that the Company will have any recourse against such vendors if the
representations prove to be inaccurate. Furthermore, there can be no assurances
that Y2K-related failure caused by third parties, such as utility providers,
transportation companies or others, will not have a material adverse effect on
the Company.
Year 2000 Risks. Management believes that the most likely Y2K risks relate to
third parties with which it has material relationships. A failure or disruption
of (i) the Company's mission-critical computer systems caused by third-party
hardware/software, (ii) third-party service/network/gateway providers, or (iii)
significant clients for an extended period, could adversely affect the financial
condition and results of operations of the Company. Moreover, while management
believes that its internal state of readiness" indicates that the Company's
mission-critical systems will be Y2K ready in a timely manner, failure to
achieve timely remediation of business units' computer systems that process
client information and transactions would have a material adverse effect on the
Company's business, operations and financial results. However, based on
currently available information, while management anticipates there could be
isolated and intermittent disruptions of various services and interfaces at its
businesses, there is no expectation of extensive or protracted systemic failures
that would have a material adverse effect on the financial condition or results
of operations of the Company.
Contingency Plans. Each business unit is developing its own contingency plans
pursuant to Task Force guidelines. There are two types of plans. All of the
Company's major business units have hardware/software contingency plans in case
a supplier of hardware/software products or internally developed systems used in
a business does not have a Y2K ready version in time for implementation and
testing. A second type of contingency plan focuses on business contingency plans
to support the date change event. Although each business unit has its own unique
business plan, the plans generally call for obtaining goods and services from
alternative sources, utilizing alternative methods to perform functions, and
acquiring additional reserves of goods, such as fuel for power generation at the
Company's major data centers. In addition, the Company's units have developed
preliminary staffing support plans to ensure that appropriate on-site staff are
in place to implement any contingency plan and address any issues that may
arise. It is expected that these plans will be revised throughout 1999, as the
Company completes testing with clients and gains a better understanding of
external third party risks.
8
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Costs to Address the Company's Year 2000 Issues. Through March 31, 1999, the
Company has spent an estimated $1,000,000 in connection with preparing for the
year 2000, including (i) approximately $700,000 on IT-related costs, including
IT personnel, replacing systems and equipment, and software remediation and
testing, and (ii) no more than $300,000 in non-IT Y2K expenditures, including
costs incurred in communications, planning, facilities, copies, and other non-IT
costs. The Company anticipates that total Y2K expenditures (both IT and non-IT)
will not exceed approximately $1.5 million. To date, the Company has financed
its Y2K expenses from cash flow and expects to continue to do so.
Some of the Company's IT personnel have been dedicated to the Y2K project who
otherwise could have worked on other system enhancements, client conversions and
new products. However, throughout the Company, every effort has been made to
prioritize IT projects and to focus available IT resources on the most critical
projects. The Company has reviewed new business opportunities, product launches
and conversions and either accelerated or deferred these developments, as
appropriate, in response to Y2K efforts.
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 consummation of the merger of the Company into a wholly-owned
subsidiary of First Data Corporation (subject to shareholder approval and
certain other conditions), potential customer reactions to the Company's
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 and Form 10-K/A 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.
9
<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: June 11, 1999
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
10
<PAGE>
INDEX OF EXHIBITS
-----------------
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
27* Financial Data Schedule.
- -------------------------
* Exhibit originally filed with the Registrant's Form 10-Q on May 14, 1999 and
is not affected by this Form 10-Q/A.
11
