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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11030
FIRST USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 75-2291060
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR JURISDICTION) IDENTIFICATION NO.)
1601 ELM STREET, 47TH FLOOR 75201
DALLAS, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 849-3700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
ON WHICH THE COMMON STOCK
AND THE PREFERRED STOCK
TITLE OF EACH CLASS ARE REGISTERED
- ----------------------------------------- -------------------------
Common Stock, $.01 par value New York Stock Exchange
Mandatory Convertible Chicago Stock Exchange
Preferred Stock, $.01 par value Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 13, 1996, the aggregate market value of the voting stock held
by non-affiliates of the Registrant computed by reference to the closing price
of First USA, Inc. Common Stock and Mandatory Convertible Preferred Stock as
reported on the New York Stock Exchange on such date was approximately $3.5
billion. For purposes of such calculation, shares owned by directors and
executive officers of the Company have been treated as owned by affiliates of
the Company, although such treatment is not an admission of the affiliate status
of any of such parties. As of September 13, 1996, there were outstanding
121,755,640 shares of First USA, Inc. Common Stock, $.01 par value (as adjusted
to reflect the 100% Common Stock dividend paid by the Company on November 12,
1996), and 5,750,000 shares of First USA, Inc. Mandatory Convertible Preferred
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the First USA, Inc. Annual
Meeting of Stockholders held November 6, 1996 are incorporated by reference into
Part III.
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EXPLANATORY NOTE
As discussed in Note A to the Company's consolidated financial statements,
the Company restated its financial statements to properly reflect the two items
described below. The restatement did not affect the Company's net cash flows,
liquidity or regulatory capital compliance, nor did the restatement have an
effect on the Company's fiscal year 1996 and 1995 net income. The restatement
did however have an effect on previously reported quarterly results of the 1996
and 1995 fiscal years and increased fiscal year 1994 earnings.
The Company has previously not recorded gains on securitization
transactions consistent with the Company's belief and common industry assumption
that such gains would not be significant due to the relatively short life of the
outstanding balances and the narrow spread between the account yield and the sum
of the cost of servicing these accounts and investor yield on the
securitizations. As a result of a more detailed analysis of gains on all
securitizations of credit card receivable balances in connection with the
preparation for the adoption of Statement of Financial Accounting Standards No.
125, which is effective January 1, 1997, the Company has restated its financial
statements to recognize gains in those periods where the gains were significant.
In addition, the Company has been deferring the costs to solicit new
accounts. These costs were deferred and matched with the future revenues from
these new accounts over a twelve-month period. The average life of these new
accounts, including all annual renewals, is expected to be seven years. During
the course of a review of the Company's accounting policies in connection with
the Company's pending merger with Banc One Corporation ("Banc One"), the Company
learned that, while its deferred costs were paid to independent third parties,
these costs were not eligible for deferral and that its accounting policy
regarding such solicitation costs did not conform with the accounting policy of
Banc One. As a result, the Company restated its financial statements to expense
these costs in the period such costs were incurred.
As previously noted, the changes had no effect on fiscal 1996 or 1995 net
income. The Company has restated its fiscal year 1994 consolidated statement of
income resulting in an increase in net income and retained earnings of $47.4
million and an increase in net income per share of $0.40.
This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K of
the Company for the fiscal year ended June 30, 1996 (this "Form 10-K/A")
contains restated financial statements and quarterly data of the Company (Item
8), restated selected financial data (Item 6) and restated management's
discussion and analysis of financial condition and results of operations (Item
7) to reflect the above accounting changes. This Form 10-K/A also contains a
restated description of the Company's business (Item 1), to reflect the impact
of such accounting changes on the Company's regulatory capital ratios. In
addition, this Form 10-K/A contains restated market price data of the Company's
common equity and related matters (Item 5) and restated earnings per share,
dividends per share and outstanding share data in Items 6, 7 and 8, to reflect
the November 1996 two-for-one split of the Company's common stock, paid in the
form of a 100% common stock dividend on November 12, 1996. Each of the
items included herein has been restated in full.
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FIRST USA, INC.
1996 10-K/A ANNUAL REPORT
AMENDMENT NO.1
TABLE OF CONTENTS
PART I
PAGE
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ITEM 1. Business.................................................... 3
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ...................................... 19
ITEM 6. Selected Financial Data.................................... 20
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 22
ITEM 8. Financial Statements and Supplementary Data................ 44
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 66
SIGNATURES
Signature........................................................... 74
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PART I
ITEM 1. BUSINESS
First USA, Inc. (the "Company"), incorporated in 1989, is a Delaware
corporation, which, through its wholly owned subsidiary, First USA Bank, is the
fourth largest issuer of Visa and MasterCard credit cards in the United States.
The Company's majority owned subsidiary, First USA Paymentech, Inc. ("First USA
Paymentech"), engages in the credit card industry primarily as a payment
processor of merchant bankcard transactions. The Company conducts its business
through its wholly owned subsidiary, First USA Financial, Inc. ("First USA
Financial"), which is the parent company of First USA Bank and the majority
stockholder of First USA Paymentech.
In March 1996, First USA Paymentech completed an initial public offering of
its common stock. First USA Paymentech, through its wholly owned subsidiary,
First USA Merchant Services, Inc. ("Merchant Services"), is the third largest
payment processor of merchant bankcard transactions in the United States. At
June 30, 1996, First USA Financial owned approximately 77% of the outstanding
shares of common stock of First USA Paymentech.
First USA Federal Savings Bank ("First USA FSB"), a wholly owned subsidiary
of the Company and its newest operating unit, is focused on expanding the
Company's relationship with its Cardmembers. It expects to offer financial
products related to significant life events of the typical household by using
the Company's existing distribution system as a conduit for delivering multiple
financial products. At June 30, 1996, First USA FSB's portfolio of financial
products included mortgages, insurance and installment loans and was
expected to include retail certificates of deposit, auto loans and other
financial products. The Company expects that these new products will create
incremental revenue and strengthen relationships with existing customers.
The Company's other business units, conducted through other subsidiaries of
First USA Financial and First USA Paymentech, provide services that complement
First USA Bank's, First USA Paymentech's and First USA FSB's business
operations. The address of the principal executive office of the Company is
1601 Elm Street, Dallas, Texas 75201 and its telephone number is (214) 849-3700.
FIRST USA BANK
First USA Bank, located in Wilmington, Delaware, is the fourth largest issuer
of Visa and MasterCard credit cards in the United States, with more than 14.3
million credit cards issued and $18.7 billion in managed credit card loans
outstanding as of June 30, 1996. First USA Bank's revenues derive primarily from
interest income on its credit card loans and investments, securitization
income, including gains on sales of credit card receivables, interchange income
and credit card fee income. Its primary cash expenses include the cost of
funding credit card loans, credit losses, salaries and employee benefits,
marketing expenses, processing expenses and income taxes.
Products
First USA Bank offers a broad array of bankcard products to targeted segments
of creditworthy consumers. First USA Bank's primary target market is
experienced users of general purpose credit products. The strategy of First USA
Bank is to offer uniquely tailored individualized products to profitable
consumer segments.
First USA Bank markets over 1,000 credit card products to customers
throughout the United States. These products cover a range which includes
standard card products, those that are identified and developed through
datamining efforts, as well as products that are developed and marketed through
partnership relationships. Products include designs that are tailored to an
individual's lifestyle, profession or interest; those that are built around
affiliations, such as universities or fraternal organizations, co-brand
relationships and programs with financial institutions; an upscale platinum card
product; and the most individualized product offering, a First USA Images
Photocard.
First USA Bank's products feature low interest rates, specific features and
benefits, unique card design and individualized credit lines. First USA Bank's
strategy is to target customers through a carefully matched combination of
pricing, credit analysis and packaging. Rates, fees, other features and credit
lines offered
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vary depending on the profile of targeted prospect groups. First USA Bank
generally markets its products with low introductory and regular rates and
no annual fee.
In line with its product diversity, First USA Bank has built and maintains a
broad set of distribution channels. First USA Bank is one of the leading direct
mailers and telemarketers in the industry and manages a large active sales force
to distribute its product via fairs, tradeshows and other events. First USA
Bank also markets its products through an array of Internet web sites and
utilizes other direct response media channels for distribution.
As of June 30, 1996, First USA Bank had 10.9 million accounts of which
approximately 74% were First USA brand accounts and approximately 26% were
partner accounts.
Product Pricing
First USA Bank's pricing philosophy reflects a risk-based pricing approach
where customers with better credit qualifications generally merit more favorable
pricing. Pricing parameters include a combination of the annual percentage
rate, late, overlimit, returned check, cash advance and other fees,
corresponding credit limits and ancillary features and services.
Introductory rates on accounts are generally fixed annual percentage rates.
First USA Bank issues accounts with floating monthly periodic finance charge
rates that adjust periodically according to an index such as the "Prime" rate,
and accounts with fixed monthly periodic finance charge rates. These rates can
be repriced by First USA Bank by giving 30 days' advance notice to the
Cardmember. Existing card products generally have no annual fee. Cardmembers
also generally receive a grace period on purchases and credit line checks if all
balances shown in the billing statement are paid by the payment due date, which
is approximately 23-25 days from the previous cycle billing date.
Growth Strategy and Account Origination
To achieve steady and diversified growth, First USA Bank originates credit
card accounts through several different programs: (i) First USA brand products,
(ii) partnership products such as affinity group, financial institutions, sports
marketing and co-branding programs, and (iii) the acquisition of credit card
portfolios from other financial institutions. These programs (excluding
portfolio acquisitions) use direct mail, telemarketing, take-one application
displays, events, media and the Internet as channels to market First USA Bank's
products. Management believes that such multi-faceted account origination
programs help to ensure balanced and reliable growth for First USA Bank. The
following table shows the number of accounts originated by source.
<TABLE>
<CAPTION>
Source: 1992 1993 1994 1995 1996
- ------ ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
First USA brand products 431,000 934,900 1,553,900 2,696,400 2,713,398
Partnership products 139,100 229,300 409,100 678,400 988,838
------- --------- --------- --------- ---------
Sub-total 570,100 1,164,200 1,963,000 3,374,800 3,702,236
Portfolio acquisitions 8,100 18,800 4,600 8,400 94,983
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Total 578,200 1,183,000 1,967,600 3,383,200 3,797,219
</TABLE>
The First USA brand direct solicitation program represents the greatest share
of new account origination. First USA Bank has historically emphasized direct
solicitation as a source of new accounts as its expertise has increased through
experience and the benefit of numerous marketing, credit and risk management
tests. Currently, First USA Bank conducts national direct mail and
telemarketing solicitation to geographic areas that have been selected from a
process that includes a rigorous analysis of the economic indicators of each
region of the nation and targets the most favorable regions. First USA Bank
carefully targets consumers through various datamining methods and targeting
models. First USA Bank aligns the product offering with the target customer
segment along with the number and sequence of offers in order to maximize
penetration, response rates and usage.
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The affinity group, financial institutions and sports marketing programs are
partnership programs which involve the active participation of endorsing
organizations. The affinity group marketing program involves the solicitation
of prospective individual Cardmembers from identifiable groups with a common
interest or affiliation. In this program, First USA Bank has entered into
exclusive marketing arrangements with a number of affinity groups. First USA
Bank typically pays referral compensation to the affinity groups for each new
account generated. First USA Bank has a similar relationship with certain
professional sports organizations.
In its financial institutions program, the Company maintains exclusive
marketing partnership relationships with banks, as well as mortgage companies,
insurance companies, brokerage firms and other financial institutions. Through
this program, participating financial institutions offer Visa and MasterCard
products to their customers without becoming primary issuers. In addition to
placing the name of the participating financial institution on the front of the
plastic card, First USA Bank typically pays a referral fee for each account.
First USA Bank believes that the endorsement of the participating financial
institution reduces overall origination costs and encourages Cardmember usage.
First USA Bank also participates in co-branding, which involves a partnership
between First USA Bank and a consumer products or services company to solicit
the customers of such company. Companies such as airlines, oil and gas
companies, catalog companies and general retailers participate with financial
institutions in co-branding programs. First USA Bank typically pays a portion
of on-going revenue to the co-branding partner, with the benefit of such payment
generally accruing to the customer in the form of "points" which can then be
redeemed with the co-branding partner.
First USA Bank currently has relationships with over 1,000 partners in these
various programs. Management believes this network is one of the largest of its
kind in the nation.
First USA Bank has made portfolio acquisitions in the past, but does not plan
to rely on such transactions in order to achieve growth and earnings targets.
While acquisitions are possible in the future, management believes that such
transactions should be pursued only if favorable terms can be negotiated.
Risk Management
Account Risk Management. First USA Bank has installed an integrated risk
management process that manages credit planning and policy, credit extension,
portfolio management, security and collections to bring a coordinated approach
to managing portfolio risk.
First USA Bank's delinquency and net credit loss rates at any time reflect,
among other factors, the quality of the credit card loans, the average seasoning
of First USA Bank's accounts, the success of First USA Bank's collection efforts
and general economic conditions.
As a result of a slower rate of growth, intense competition and the overall
softening in consumer credit, delinquency and net credit loss rates for First
USA Bank trended higher during fiscal 1996. Over the past fiscal year, new
unseasoned loans became a smaller percentage of managed credit card loans, which
contributed to the increase in managed delinquency and managed credit card loss
rates. In light of these conditions, First USA Bank continued to tighten and
refine credit underwriting throughout the year. The managed delinquency rate at
June 30, 1996 was 4.33%, and the managed net credit loss rate for fiscal 1996
was 3.38%.
First USA Bank's focus continues to be to optimize the profitability of each
account within the context of acceptable risk characteristics. First USA Bank
has developed a credit process through the experience of numerous marketing,
credit and risk management tests which provides First USA Bank with a reliable
basis for predicting the asset quality of new accounts. First USA Bank also
believes that its frequent and early contact with delinquent customers, as well
as active portfolio management, has a significant impact on predicting
delinquency trends and managing net credit losses.
Product Planning. First USA Bank believes that successful credit card
origination programs require the matching of the proper product to the
appropriate segment of creditworthy potential customers. There is a strong
emphasis on testing changes in credit policies and accelerating performance
measurements before creating significant programs. First USA Bank has utilized
a policy of offering new criteria or services to small test groups in order to
monitor performance against target results. When programs have been determined
to be
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feasible, First USA Bank will expand or modify account generation activities.
Program performance is continually monitored using characteristic and tenure
analysis. Performance significantly different from planned levels activates
adjustments to bring the next tenure group or program into acceptable ranges of
performance. Account origination programs are designed to achieve a multi-year
profitability target at acceptable risk levels. All programs and significant
acquisitions have individual profit and loss statements. Management monitors
profit and loss statements of individual programs to confirm that First USA
Bank's profitability goals are being achieved.
Credit Extension. First USA Bank's credit extension process is designed to
bring consistency in credit practices and operating efficiencies. First USA
Bank has employed a high degree of automation in its use of scoring technology
and verification procedures with judgmental review by highly qualified,
experienced credit analysts when necessary. The credit evaluation process is
based on proprietary scores developed in cooperation with nationally recognized
scoring firms and tailored to individual programs. These scores are
continuously validated, monitored and maintained by First USA Bank and feedback
of results is utilized to insure optimal score performance. The scoring process
is selectively supplemented with judgmental review and verification. One of the
principal values of these scores is to provide a highly consistent, measurable
way to make decisions regarding applications and to evaluate risk and modify
credit extension policies in the future.
First USA Bank proactively conducts periodic portfolio credit line increase
programs to ensure that its Cardmembers in good standing have adequate credit to
meet their needs. Line increases are considered to be strategically important
both as a service to customers and as a tool for increasing usage and enhancing
the ability to retain accounts.
Portfolio Management. Active portfolio management is essential to moderate
risk levels as well as ensure Cardmember loyalty and enhance profitability. The
risk management activities are effected through the authorization process,
security controls and transaction risk assessment. The risk control process is
driven by an internal score which assesses the likelihood that an account will
become seriously delinquent. All accounts are scored each month and the
resulting score is used to manage the authorization process, line
increase/decrease evaluation and collections strategies.
The authorization process combines networks maintained by Visa and MasterCard
with an on-line, real-time authorization system. The network has been set to
bring as many authorization requests as possible to the authorization system to
allow the most up-to-date evaluation of an account's status. First USA Bank
uses an authorization system which allows flexibility in designing authorization
strategies based on risk control and service enhancement. First USA Bank also
utilizes numerous state of the art systems and techniques to limit its fraud
risk from lost or stolen cards, mail intercept, fraudulent accounts and
counterfeiting.
In addition to credit line management programs, First USA Bank has developed
and tested a wide variety of initiatives designed to increase Cardmember
utilization of First USA Bank cards and assist in customer retention in this
highly competitive environment. Current programs include upgrading qualified
Cardmembers to gold or platinum cards, providing an array of specially designed
cards from which the Cardmember can select a favorite at renewal, and offering
an individualized First USA Images Photocard where a favorite photo can be
selected for the front of the card.
Collections. First USA Bank's collection activities are characterized by
extensive automation, differing collection practices according to the reasons
for delinquency and varying levels of intensity based on balance, stage of
delinquency and risk score. First USA Bank believes that frequent and early
contact with delinquent Cardmembers maximizes Cardmember return to active paying
status. First USA Bank's policies attempt to encourage Cardmembers to pay
delinquent amounts. Once an account has established a payment pattern with three
consecutive minimum payments, First USA Bank's policies provide that it can be
re-classified to current status. An account can be reaged only once in a 12-
month period.
Accounts are charged off immediately prior to the end of the seventh billing
cycle after having become contractually past due unless a payment has been
received in an amount sufficient to bring the account into a different
delinquency category or to bring the account current. Charged off balances are
subject to extensive collection efforts to recover the balance due.
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Technology/Systems and Customer Service
The Company believes that, in order to remain efficient and responsive to
changing business conditions and objectives, it is essential to apply
technology, systems and management information capabilities consistent with
changing trends in the credit card industry. Consistent with this belief, the
Company's strategy through the years has been to invest in technology in order
to reduce costs and improve quality. Applying its advanced technology, First
USA Bank is able to test hundreds of potential new products each year and target
new products to those customers who have indicated an interest in such products.
The Company believes that customer satisfaction and the Company's
responsiveness and availability are keys that enhance and extend First USA
Bank's relationships with its customers, and that its ability to achieve
customer satisfaction is significantly enhanced by a high level of automation.
First USA Bank offers 24-hour service, 365 days a year, along with an audio
response service that provides basic information to Cardmembers on an automated
basis through a touch-tone phone. First USA Bank has a "point-of-contact"
service program to enable action to be taken and completed on an account through
a variety of automated processes during the customer call rather than requiring
a call-back, written correspondence or additional paperwork. First USA Bank has
imaging and processing technology in the Cardmember service areas that link all
Cardmember account information, statements and correspondence and make it
available on a real-time basis to Cardmember service representatives. With the
recent installation of massively parallel processing architectures which allow
it to more efficiently process larger quantities of relevant data, the Company
believes that it has become one of the largest and most sophisticated users of
data warehousing technology in the nation. When combined with intelligent
workstations, expert systems and advanced imaging technology, the Company
believes that its processing technology is at an advanced level relative to the
Company's competitors and supports the Company's commitment to Cardmember
satisfaction.
Bank Funding and Liquidity
First USA Bank's primary methods of funding include credit card
securitizations, issuing certificates of deposit in amounts of $100,000 or
greater, bank notes and other borrowings and federal funds purchased from
financial institutions. In addition, First USA Bank maintains facilities
totaling $2.5 billion which provide for the securitization of receivables on a
revolving basis through the issuance of commercial paper ($1.0 billion), and a
committed bank facility for introductory rate credit cards ($1.5 billion).
Securitizations, certificates of deposit, bank notes and other borrowings
provide long-term funding. The federal funds purchased from financial
institutions provide significant diversification as amounts are generally
limited to $10 million per financial institution. This program, which is
designed for financial institutions that utilize other services of the Company,
has proven to be a very stable and cost effective source of funding.
Excess liquidity of First USA Bank is invested primarily in variable rate
U.S. government agency mortgage-backed securities, which enhance yield and
provide a source of secondary liquidity through repurchase agreements, overnight
federal funds and short-term U.S. Treasury securities. The Asset and Liability
Committee, consisting of executive management, reviews and manages all funding
and liquidity decisions.
Competition
First USA Bank competes with national, regional and local issuers of Visa and
MasterCard credit cards. In addition, American Express, Discover Card and
Diners Club represent additional competition in the general purpose credit card
market in the United States. First USA Bank does not believe that single
purpose or "private label" credit cards such as oil company, department store or
telephone credit cards represent a significant competitive threat. First USA
Bank believes that, based on its experience, the principal factors determining
market success are product quality, competitive pricing, targeted marketing,
superior customer service and low operating costs.
As a marketer of credit products, the Company faces intense competition
from numerous providers of financial services. Many of these companies are
substantially larger and have more capital and other resources than the Company.
Although the Company believes it is generally competitive, there can be no
assurance that its ability to market its services successfully or to obtain
adequate yields on its loans will not be impacted by the nature of the
competition that now exists or may develop.
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In seeking funding from the public, First USA Bank faces competition from
banks, savings institutions, money market funds, credit unions and a wide
variety of other entities that take deposits and/or sell debt securities, some
of which are publicly traded. Many of the competitors are larger and have more
capital and other resources than First USA Bank. There can be no assurance that
competition from these other borrowers will not increase First USA Bank's cost
of funds.
FIRST USA PAYMENTECH
First USA Paymentech, through Merchant Services, engages in the credit card
industry primarily as a payment processor of bankcard transactions. According
to published industry sources, Merchant Services is the third largest payment
processor of bankcard transactions in the United States, with sales volume
processed of approximately $30.9 billion in approximately 574 million
transactions in fiscal 1996. In addition, through its wholly owned subsidiary,
First USA Financial Services, Inc. ("Financial Services"), First USA Paymentech
began in September 1995 to actively market and issue commercial cards to
businesses and other entities. Commercial cards facilitate centralized
business-to-business payment procedures and reporting, replacing traditional
direct payment methods.
Payment Processing
General. First USA Paymentech markets its services directly to merchants and
indirectly through financial institutions and sales agents, which in turn market
the processing services to merchants.
The principal operations of First USA Paymentech are located in Dallas,
Texas, with a number of additional sales and other support offices throughout
the United States.
First USA Paymentech uses a number of proprietary and third party national
networks for its authorization, capture and merchant accounting services,
including its internal proprietary network and settlement system. First USA
Paymentech has entered into agreements with several third party vendors who
provide merchant accounting, network and other processing services to First USA
Paymentech. Other services are provided by First USA Paymentech's internal data
processing systems. First USA Paymentech has emphasized converting existing
merchants to, and installing new merchants on, First USA Paymentech's internal
data processing systems, which have operating costs that are lower than the
costs of obtaining data processing services from third party vendors. First USA
Paymentech's internal network provides authorization, capture, settlement and
reporting capabilities to its merchants.
In furtherance of First USA Paymentech's strategy of converting volume to
internal systems, in August 1996, First USA Paymentech acquired GENSAR Holdings,
Inc. ("GENSAR"), the largest independent third party processor and one of the
premier providers of electronic draft capture and authorization services for
financial institutions and sales agents, processing approximately 300 million
transactions annually. This acquisition provided First USA Paymentech with new
and advanced capabilities and product offerings which it previously outsourced.
By converting more volume to its internal systems, First USA Paymentech believes
it can develop and deliver unique products to the merchant community.
Products. First USA Paymentech offers a wide range of quality products and
services related to payment processing, which are known as Paymentech Solutions.
First USA Paymentech's proprietary and third party licensed software
applications and equipment permit authorization and capture of Visa, MasterCard,
Diners Club, Carte Blanche, JCB, American Express and Discover transactions, as
well as offering settlement for Visa, MasterCard, Diners Club, Carte Blanche and
JCB transactions. First USA Paymentech also provides value-added services in
connection with its processing systems, including on-line data access,
electronic mail communication capabilities and customized reporting features.
First USA Paymentech has the equipment and applications which permit it to
process credit, charge, debit and private label card transactions.
Paymentech Solutions include products and PC-support software targeted to
specific industries. In addition to the general retail electronic draft capture
programs, Paymentech Solutions provide products that meet the unique needs of
the lodging, dining and direct response industries.
Net Revenue. First USA Paymentech's net revenue is generated primarily from
fee income earned under processing agreements with merchants, financial
institutions and sales agents, which is partially offset by Visa and MasterCard
interchange and assessments. First USA Paymentech also receives income for
several value-
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added services it provides, such as enhanced reporting options and terminal
products it sells and leases to merchants.
The processing fees charged to a particular merchant vary with the total
dollar amount processed, average purchase amount and number of transactions
processed for the merchant. There are two primary billing methods, each using a
per-transaction basis for calculating fees. The first billing method, the
discount rate method, is the traditional billing method and is most common for
smaller merchants. Under this billing method, a discount rate is charged for
each transaction. The other billing method is the per item or transaction fee
pricing method. Under this billing method, the merchant is billed a flat fee
per transaction, plus Visa and MasterCard interchange and assessments and
certain per item fees. Larger merchants often prefer this pass-through billing
method to the discount rate method. Financial institutions and sales agents are
also generally charged using the per item or transaction fee billing method.
First USA Paymentech's principal transaction expenses are Visa and MasterCard
interchange and assessments. Interchange fees are stated fees charged by Visa
and MasterCard to reimburse card issuing banks for the risk of transaction
fraud, processing expenses and funding during the period from purchase to
payment. The fee schedules are set by Visa and MasterCard, and are based upon
the type of merchant, transaction type (electronic or paper-based) and
settlement time. Interchange fees generally range from 1.25% to 2.1% of the
transaction amount. Although interchange rates vary by merchant industry, they
are uniform among payment processors. Assessments are stated fees charged by
Visa and MasterCard to fund their internal operations. Assessments are also
uniform among payment processors.
Operating Strategy. In order to remain competitive in the payment processing
industry, First USA Paymentech continues to dedicate significant resources to
acquiring and developing unique products and services that will lower costs,
generate new sales and reduce customer attrition. The resulting proprietary
products, along with continuing systems enhancements and operating efficiencies,
provide improved services for its merchants, and First USA Paymentech believes
its dedication to developing these products will allow it to remain highly
competitive in the industry.
Growth Strategy. First USA Paymentech focuses its sales and marketing
efforts on four distinct areas for obtaining new merchant customers: direct
merchant sales, financial institutions, sales agents and acquisitions.
Additionally, First USA Paymentech benefits from the continuing expansion of the
markets which now accept bankcards but have traditionally been cash payment
markets.
Direct Merchant Sales. One aspect of First USA Paymentech's growth
strategy relies on sales volume growth from merchants that are solicited
directly through First USA Paymentech's internal sales force. Direct merchants
are the most profitable segment of First USA Paymentech's portfolio. First USA
Paymentech intends to continue to aggressively seek new direct merchant
customers of all sizes, especially within those industries in which First USA
Paymentech's products and services exhibit a significant advantage, including
the dining, lodging, hospitality and direct response industries.
Financial Institutions. First USA Paymentech markets to local,
regional and national financial institutions. First USA Paymentech offers the
financial institutions dedicated account representatives who work directly with
each financial institution's staff to develop merchant business for the
financial institution. In this program, First USA Paymentech generally assumes
the marketing and support functions.
Sales Agents. Sales agents solicit new customers on behalf of First
USA Paymentech. The sales agents provide varying degrees of customer service to
the merchants which First USA Paymentech approves for processing. The fees
charged to sales agents by First USA Paymentech vary based upon level of service
provided, allocation of risk of loss and transaction volume.
Acquisitions. First USA Paymentech has completed a number of
acquisitions and continues to consider acquisition opportunities as a component
of its growth.
The Company acquired all of the outstanding stock of Litle & Company, Inc.
("Litle") and subsequently merged Litle's operations with First USA Paymentech.
In addition, First USA Paymentech acquired certain assets of DMGT Corporation
("DMGT"). Each of these acquisitions occurred during the first quarter of
fiscal 1996, prior to which both Litle and DMGT were significant providers of
processing services for the direct
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response industry. Direct response processing is a highly specialized area with
unique processing requirements, particularly in the areas of risk management and
chargeback resolution. In connection with these acquisitions, First USA
Paymentech acquired approximately $10.2 billion in annual sales volume
processed, of which $4.3 billion represented additional sales volume processed
for First USA Paymentech. The remaining sales volume was formerly processed by
First USA Paymentech for Litle as a sales agent of First USA Paymentech. As a
result of the Litle acquisition, pricing of merchants associated with Litle
converted from a wholesale basis to a direct basis and thus improved
profitability for First USA Paymentech.
In August 1996, First USA Paymentech acquired GENSAR, the largest independent
third party processor and one of the premier providers of electronic draft
capture and authorization services for financial institutions and sales agents.
GENSAR processes approximately 300 million transactions annually. This
acquisition provided First USA Paymentech with new and advanced capabilities and
product offerings which it previously outsourced. The Company expects to
recognize cost savings from efficiencies generated due to the consolidation of
its internal systems with GENSAR's existing network.
Merchant Portfolio. First USA Paymentech serves a diverse portfolio of
merchant clients that are concentrated in a number of industries. The largest
industry categories as of June 30, 1996 were retail (34%), direct response
(33%), travel and entertainment (14%) and service stations (12%). First USA
Paymentech provides transaction processing for large national accounts, as well
as for many smaller, regional merchants. No one merchant represents in excess
of 5% of First USA Paymentech's annual sales volume processed.
New Product Initiatives. Given the large market potential for Internet
transactions, First USA Paymentech is exploring processing methods that are
secure and effective on the Internet. First USA Paymentech is testing several
alternative approaches to the conduct of on-line commerce using bankcard
accounts. There are several solutions designed to secure information by
providing an encryption program on-line to cardholders and merchants for
transacting business and transmitting bankcard information over the Internet.
Other solutions use off-line means to establish a user account and verify and
approve transactions using electronic mail. Each method provides a potential
solution to the immediate need for Internet transaction processing.
Credit. Visa and MasterCard require that an in-depth examination of the
merchant be performed prior to processing for the merchant. First USA
Paymentech has established a credit review policy that exceeds the minimum Visa
and MasterCard standards and examines other significant areas identified through
its experience in the payment processing business.
After merchants begin processing, First USA Paymentech reviews unusual
activity on a daily basis. Visa and MasterCard have established minimum
standards for weekly review. First USA Paymentech believes that its daily
procedures generally exceed these standards. If fraudulent activity is
discovered, the merchant is terminated and placed in the Combined Terminated
Merchant File, a database of merchants who have violated Visa and MasterCard
rules in the past, so that future processors will be aware of previous problems.
First USA Paymentech has had minimal losses due to merchant fraud because of the
initial credit review and the extensive monitoring procedures that are in place.
First USA Paymentech also reviews potential merchants based upon the
merchant's industry. According to Visa and MasterCard rules, First USA
Paymentech has contingent liability for chargeback transactions. For most
industry types, a chargeback and potential First USA Paymentech liability is
unlikely and limited because the product or service charged by the cardholder is
delivered upon payment. However, for industries where the card is not present
at the time of the transaction, such as in the direct response industry, which
includes the mail order and telephone order businesses, First USA Paymentech's
potential liability is greater. First USA Paymentech takes these and other
risks into account in making its credit determinations with respect to potential
new merchants. At June 30, 1996, First USA Paymentech had cash reserves from
certain customers aggregating approximately $18.4 million as an offset to
potential contingent liabilities that are the responsibility of such customers.
These cash reserves are primarily related to merchants in the direct response
industry. Credit losses for merchant processing incurred by First USA
Paymentech relating to such contingent liabilities were approximately $640,000,
$310,000 and $390,000 in fiscal 1996, 1995 and 1994, respectively, compared to
total sales volume processed in such periods of $30.9 billion, $20.1 billion and
$18.4 billion, respectively. The Company believes that this loss history is
significantly better than that of the industry. First USA Paymentech is not
exposed to cardholder credit losses.
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Competition. The payment processing market is highly competitive. Uniform
interchange requirements and Visa and MasterCard compliance rules limit
significant pricing variances among processors. Therefore, First USA Paymentech
competes on the basis of customer service, product features, processing speed
and systems reliability, and the Company believes that these are the critical
factors analyzed by merchants when choosing a payment processor.
Commercial Cards
First USA Paymentech's commercial card operations are located in Murray,
Utah. First USA Paymentech markets and issues commercial cards to businesses
and other entities that facilitate centralized business-to-business payment
procedures and reporting, replacing traditional direct payment methods. First
USA Paymentech began to actively market and issue its commercial cards in
September 1995 following receipt of an initial capital contribution of $16.1
million.
First USA Paymentech's current operating and growth strategies are to
aggressively market its commercial card products and develop customer
relationships that will provide strategic business opportunities for growth.
The Company believes that it is in a unique position to benefit in its account
origination and growth and marketing efforts from the existing partnerships and
relationships that First USA Paymentech, First USA Bank and the Company's other
affiliates have established. In addition to developing its own partnerships
with financial institutions, corporations and other entities, First USA
Paymentech expects to realize significant synergies from existing customer
relationships established by its affiliates, and can rely upon its existing
telemarketing and other sales and marketing structures. First USA Paymentech
expects its commercial card operations to become profitable in late fiscal 1997.
The losses associated with this operation did not have material impact on the
consolidated results of First USA Paymentech in fiscal 1996 and First USA
Paymentech believes that its losses associated with this operation will not have
a material impact on the consolidated results of First USA Paymentech in fiscal
1997.
First USA Paymentech offers various types of Visa and MasterCard cards to its
customers. The origination and servicing of Visa and MasterCard accounts is
subject to the terms and conditions of membership in Visa and MasterCard.
First USA Paymentech offers its products to its customers for use by
officers, directors, employees and other individuals designated by a customer in
connection with business expenditures by such individuals. Each account is
subject to an agreement with the customer governing the terms and conditions of
the related Visa and MasterCard account, as well as agreements with each
individual Cardmember.
First USA Paymentech's product offerings include corporate cards, which are
non-revolving charge cards designed for use by medium to large companies for
travel and entertainment expenditures; purchasing cards, which are non-revolving
charge cards designed for use by medium to large companies, and are used by
employees who are responsible for making regular purchases of equipment,
supplies and services on behalf of the customer; and business cards designed for
use by small to medium companies for routine business purchases, including
travel and entertainment expenditures and equipment and supply purchases, and
which offer a revolving line of credit to Cardmembers at a floating interest
rate which adjusts monthly based upon the "Prime" rate determined on a specified
date. First USA Paymentech also offers access to a cardless account through
which purchases can be made by authorized users for specific types of charges or
charges made with specific vendors.
First USA Paymentech competes with national, regional and other issuers of
commercial cards. In seeking funding from the public, First USA Paymentech
faces competition from banks, savings institutions, money market funds, credit
unions and a wide variety of other entities that take deposits and/or sell debt
securities. The primary methods of funding include issuing certificates of
deposit and other borrowings. Excess liquidity is invested in overnight reverse
repurchase agreements and other short-term investments.
OTHER SIGNIFICANT SUBSIDIARIES
First USA FSB, the Company's newest operating unit, received its charter from
the Office of Thrift Supervision in March 1996, and the Federal Deposit
Insurance Corporation (the "FDIC") approved its application for deposit
insurance in April 1996. First USA FSB's focus will be on expanding the
Company's relationship with its Cardmembers. It expects to offer multiple
financial products related to significant life events of the typical household
by using the existing distribution system of the Company as a conduit for
delivering such financial products. At June 30, 1996, First USA FSB's
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portfolio of financial products included mortgages, insurance and installment
loans and was expected to include retail certificates of deposit, auto loans and
other financial products. First USA FSB will directly offer some of these
products and will partner with other entities for the remaining products. These
new products are designed to create incremental revenue and strengthen
relationships with existing customers.
First USA Capital Markets, Inc. ("First USA Capital Markets"), a subsidiary
of First USA Financial, is a registered broker-dealer that primarily seeks and
obtains funding sources for First USA Bank, Financial Services and First USA
FSB. In addition, First USA Capital Markets manages each such entity's
investment portfolio, which is available as a secondary liquidity source, and
buys and sells federal funds on behalf of each such entity. First USA Capital
Markets also provides investment portfolio management services to many of the
Company's financial institutions.
First USA Management, Inc., another subsidiary of First USA Financial,
provides various administrative services to the Company and its subsidiaries
including accounting, legal, human resources, administrative services and office
space.
EMPLOYEES
As of June 30, 1996, the Company and its subsidiaries had over 3,800
employees. A central part of the Company's philosophy is to attract and
maintain a highly capable staff. The Company views current employee relations
to be satisfactory. None of the Company's employees are covered under
collective bargaining agreements.
REGULATION OF FIRST USA BANK, FINANCIAL SERVICES AND FIRST USA FSB
First USA Bank and Financial Services are banking organizations chartered
under state law, the deposits of which are insured by the Bank Insurance Fund
(the "BIF") of the FDIC, up to applicable limits. First USA Bank is a Delaware-
chartered banking corporation subject to comprehensive regulation and periodic
examination by the Delaware State Bank Commissioner. Financial Services is an
industrial loan corporation chartered under Utah law, that is subject to
comprehensive regulation and periodic examination by the Utah Department of
Financial Institutions. Financial Services received FDIC approval and an
initial cash capital contribution of $16.1 million in September 1995.
First USA FSB is a federal savings bank, the deposits of which are insured by
the Savings Association Insurance Fund (the "SAIF") of the FDIC, up to
applicable limits. First USA FSB is subject to comprehensive regulation and
periodic examination by the Office of Thrift Supervision (the "OTS").
Both First USA Bank and Financial Services are subject to regulation and
periodic examination by the FDIC, which also has back-up enforcement authority
under federal law over First USA FSB.
The federal and state banking laws contain numerous provisions affecting
various aspects of the business and operations of First USA Bank, Financial
Services and First USA FSB (together, the "Banks"). The following description
of statutory and regulatory provisions, which is not intended to be a complete
description of these provisions or their effects on the Banks, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
Holding Company Status
Neither the Company nor First USA Financial is a bank holding company under
the Bank Holding Company Act of 1956, as amended (the "BHCA"), as a result of
its ownership of First USA Bank or First USA FSB, because each of such entities
meet certain criteria that cause them to be exempt from the definition of a
"bank" under the BHCA. Similarly, neither the Company, First USA Financial nor
First USA Paymentech is a bank holding company under the BHCA, as a result of
its ownership of Financial Services, because Financial Services is not a "bank"
under the BHCA. If either First USA Bank, First USA FSB or Financial Services
failed to meet the criteria for the exemptions discussed above, the Company and
First USA Financial (in the event that any of the Banks no longer satisfied the
exemptions) and First USA Paymentech (in the event that Financial Services no
longer satisfied the exemptions) would become subject to the BHCA. The Company
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believes that being subject to the BHCA would not restrict, curtail, or
eliminate any of the Company's, First USA Financial's or First USA Paymentech's
operations or activities at current levels.
The Company and First USA Financial are each registered savings and loan
holding companies, as a result of their ownership of First USA FSB. Each
operates as a unitary savings and loan holding company. Generally, there are few
restrictions on the activities of a unitary savings and loan holding company and
its non-savings association subsidiaries. If either company ceased to be a
unitary savings and loan holding company as a result of its acquisition of an
additional savings institution, the types of activities that the Company and its
non-savings association subsidiaries would be able to engage in would be further
restricted.
Dividends and Transfers of Funds
The principal source of funds for the Company to pay dividends on stock, make
payments on debt securities and meet other obligations is dividends from its
direct and indirect subsidiaries. There are various federal and state
limitations on the extent to which the Banks can supply funds to their
respective holding companies and their affiliates through dividends, loans or
otherwise. Under federal law, none of the Banks may declare dividends or make
any capital distributions if, after payment of such dividend or other
distribution, the Bank would fall within any of the three undercapitalized
categories under the prompt corrective action standards of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). In addition, First
USA FSB is required to give the OTS at least 30 days' advance notice of any
proposed dividend or else such dividend will be invalid. Under OTS regulations,
other limitations apply to First USA FSB's ability to pay dividends, the
magnitude of which depends upon the extent to which the bank meets its
regulatory capital requirements.
State laws additionally restrict the ability of each of First USA Bank and
Financial Services to pay dividends. Under both Delaware and Utah law, directors
of a credit card institution and industrial loan company, respectively, may
declare dividends out of net profits, subject to a requirement that the
institution replenish its surplus account until it reaches 100% of its capital
stock. Under the current capital adequacy guidelines adopted by the FDIC, First
USA Bank's stockholders' equity available for dividends to meet the
requirements of an "adequately capitalized" institution was approximately $569
million at June 30, 1996. As of June 30, 1996, each of the Banks met the capital
requirements of a "well capitalized" institution.
In addition to the dividend restrictions described above, each of the Banks
is subject to Sections 23A and 23B of the Federal Reserve Act governing
transactions between an insured depositary institution and its affiliates, as
well as general federal and state regulatory oversight to assure safety and
soundness.
Liability for Commonly-Controlled Institutions
A depository institution insured by the FDIC can be held liable for any loss
incurred, or reasonably anticipated to be incurred, by the FDIC in connection
with the default of any commonly-controlled FDIC-insured institution, or for any
assistance provided by the FDIC to such commonly-controlled institution which is
in danger of default. First USA Bank, Financial Services and First USA FSB are
commonly-controlled insured depository institutions for purposes of this
provision.
Capital Adequacy
First USA Bank and Financial Services are subject to capital adequacy
guidelines adopted by the FDIC. These guidelines include, generally, a minimum
ratio of Tier 1 capital to risk-weighted assets (which are the credit risk
equivalents of balance sheet items and certain off-balance sheet items, such as
stand-by letters of credit) of 4% and a minimum ratio of total capital (Tier 1
capital plus Tier 2 capital) to risk-weighted assets of 8%. In addition, the
guidelines provide for a minimum "leverage ratio" of Tier 1 capital to total
assets of 3% for the most highly-rated institutions, and not less than 4% for
all other institutions. The FDIC's risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banks that meet certain specified
criteria, including having the highest regulatory rating. Banks not meeting
these criteria are expected to operate with capital positions well above the
minimum ratios. Failure to meet applicable capital guidelines could subject
First USA Bank and Financial Services to a variety of enforcement remedies
available to federal regulatory authorities, including, in the most severe
cases, the termination of deposit insurance by the FDIC or placing the
institution into conservatorship or receivership.
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As of June 30, 1996, First USA Bank's risk-based Tier 1 capital ratio was
20.63%, its risk-based total capital ratio was 25.42% and its Tier 1 leverage
ratio was 11.43%. As of June 30, 1996, Financial Services' risk-based Tier 1
capital ratio was 163%, its risk-based total capital ratio was 164% and its Tier
1 leverage ratio was 60%.
First USA FSB is subject to capital regulations of the OTS that are
substantially similar to the FDIC's capital adequacy guidelines. As of June 30,
1996, First USA FSB's tangible capital ratios were each 97.84% and its risk-
based capital ratio and its Tier 1 capital ratios were each 630.90%, which
reflects the start-up nature of its operations.
FDICIA. FDICIA revised sections of the Federal Deposit Insurance Act
affecting bank regulation, deposit insurance and provisions for funding of the
BIF administered by the FDIC. FDICIA also revised bank regulatory structures
embodied in several other federal banking statutes, imposed additional safety
and soundness standards on management and operations of a bank, placed limits on
real estate lending and tightened audit requirements.
In addition, the prompt corrective action provisions of FDICIA significantly
expand the regulatory and enforcement powers of federal banking regulators,
including the FDIC and the OTS. Among other things, these provisions establish
additional capital standards for insured depository institutions and require
specific enforcement actions by the appropriate federal regulatory agencies
against institutions that fail to meet these standards. The extent of these
powers depends upon whether the institutions in question are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Regulations of the FDIC and the OTS under
FDICIA establish specific actions that are permitted or, in certain cases,
required to be taken by regulators with respect to institutions falling within
one of the three undercapitalized categories. Depending on the level of an
institution's capital, the agency's corrective powers can include, in the most
severe cases, appointing a receiver for the institution. A bank that is
undercapitalized is required to submit a capital plan, and such a plan will not
be accepted unless, among other things, the bank's holding company guarantees
the capital plan, up to a certain specified amount. As of June 30, 1996, First
USA Bank, Financial Services and First USA FSB each exceeded the required
capital ratios for classification as "well capitalized."
First USA Bank accepts, and Financial Services and First USA FSB may accept,
brokered deposits as part of their funding. Under FDICIA, only "well
capitalized" and "adequately capitalized" banks may accept brokered deposits.
"Adequately capitalized" banks, however, must first obtain a waiver from the
FDIC before accepting brokered deposits, and such deposits are subject to
certain rate limitations. See "Business--First USA Bank--Bank Funding and
Liquidity."
Deposit Insurance Assessments. The deposits of First USA Bank and Financial
Services are insured by the BIF, up to applicable limits. The deposits of First
USA FSB are insured by the SAIF, up to applicable limits. Under the FDIC's
risk-based insurance system, BIF-insured institutions are currently assessed
premiums of between 0 and 27 cents per $100 of eligible deposits, and SAIF-
insured institutions are assessed premiums of between 23 and 31 cents per $100
of eligible deposits, in each case depending upon the institution's capital
position and other supervisory factors.
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Because the SAIF has not reached its required designated reserve ratio,
savings banks such as First USA FSB pay deposit insurance premiums that are
higher than premiums paid by comparable banks insured by BIF. There are a
number of proposals being considered by Congress to recapitalize the SAIF. If
enacted, these proposals could affect the assessment rates imposed on all FDIC-
insured institutions and the use of the proceeds from such assessments. Other
Congressional proposals would combine the two deposit insurance funds and merge
the charters for federal savings banks and commercial banks. The Company is
unable to predict whether, or in what form, any of this proposed legislation
would be enacted.
Qualified Thrift Lender Test
In general, federal savings banks, such as First USA FSB, are required to
maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties. At June 30, 1996, approximately
72% of First USA FSB's portfolio assets were qualified thrift investments.
Enforcement Powers of Federal and State Regulators
The FDIC and the OTS have broad enforcement powers over the institutions they
regulate, including the power to terminate deposit insurance (in the case of the
FDIC), impose substantial fines and other civil penalties and, in the most
severe cases, to appoint a conservator or receiver. The Delaware State Bank
Commissioner and the Utah Commissioner of Financial Institutions also have broad
enforcement powers under state law with respect to First USA Bank and Financial
Services, respectively.
Consumer Protection Laws
The Banks' lending activities are subject to regulation under various
federal consumer protection laws including, among others, the Truth-in-Lending
Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Electronic Funds Transfer Act and the Soldiers' and Sailors' Civil Relief Act,
as well as various such state laws. Regulators are authorized to impose
penalties for violations of these statutes and, in certain cases, to order First
USA Bank or Financial Services to pay restitution to injured Cardmembers.
Cardmembers may also bring actions for up to treble damages for certain
violations. Federal and state bankruptcy and debtor relief laws also affect
First USA Bank's and Financial Services' ability to collect outstanding balances
owed by Cardmembers who seek relief under these statutes.
Interstate Taxation
Several states have passed legislation which attempts to tax the income from
interstate financial activities, including credit cards, derived from accounts
held by local state residents. Based on the volume of its business in these
states, the Company believes that this development will not materially affect
First USA Bank, Financial Services or First USA FSB.
AMORTIZATION OF CERTAIN INTANGIBLE ASSETS
With respect to customer base intangible assets acquired on or before July
25, 1991 (the retroactive election date of new Section 197 of the Internal
Revenue Code of 1986, as amended (the "Code"), discussed below) for United
States federal income tax purposes, the Company amortizes the amounts allocable
to its customer base intangible assets on a basis consistent with its financial
statements. The Company's customer base intangible assets consist principally
of the excess of allocable amounts paid over the stated amount of the credit
card loans acquired. Such excess in each case represents an asset
(collectively, the "Portfolio Premium") that has a value and useful life which
has been determined by an independent portfolio valuation study. The Company's
existing Portfolio Premium (for assets acquired on or before July 25, 1991) is
presently being amortized over periods ranging from seven to eleven years.
In 1993, the United States Supreme Court held that a taxpayer who is able to
prove that a particular asset can be valued, and that the asset has a limited
useful life which can be ascertained with reasonable accuracy, may amortize the
value over the useful life regardless of how much the asset appears to reflect
the expectancy of continued patronage. In addition, the Revenue Reconciliation
Act of 1993 (P.L. 103-66) added Section 197
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to the Code which specifically permits the amortization of certain intangible
assets such as customer based intangibles over a period of 15 years. Section
197 applies to property acquired after August 10, 1993 unless a taxpayer elects
to have the provisions apply to property acquired after July 25, 1991. The
Company has made this election to apply Section 197 to property acquired after
July 25, 1991; however, this election will not have a material effect on the
Company's consolidated financial position. With respect to property acquired on
or before July 25, 1991, the Internal Revenue Service (the "IRS") designed a
global settlement program under which the IRS presented to many taxpayers a
standard settlement offer with regard to any unresolved claims for amortization.
The Company received such a settlement offer in April, 1994 and has decided not
to accept the offer because the Company viewed the terms of the offer as
unfavorable. The examination division of the IRS completed an examination for
fiscal years 1990, 1991 and 1992 and has proposed to limit the Company's
intangible tax deductions. The Company disagrees with this proposal and is
pursuing a resolution of the matter through the IRS appeal process and may
pursue it further through litigation, if necessary. At the present time, it is
impossible to predict the outcome concerning the Company's amortization of its
Portfolio Premium (for assets acquired on or before July 25, 1991); however, the
Company believes that it has strong arguments in support of its position and
expects that this challenge will not have a material impact on the Company.
CAUTIONARY STATEMENTS
Information or statements provided by the Company from time to time may
contain certain "forward-looking information," including information relating to
growth in earnings per share, returns on equity, growth in net revenue, growth
in managed loans outstanding and credit card accounts, merchant or Cardmember
base, net interest margins, funding costs, operations costs and employment
growth, marketing expense, delinquencies and charge-offs. The cautionary
statements provided below are being 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. Many of the following factors
discussed below as well as other factors have also been discussed in prior
filings made by the Company.
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 following:
Competition
. Intense and increasing competition from numerous providers of credit
cards, payment processing and financial products and services who may employ
various competitive strategies. The Company faces competition from national,
regional and local issuers of bankcards. Additionally, the Company competes
with other general purpose credit card providers. Some of the Company's
primary competitors have begun pricing credit card products at attractive
interest rates, including rates which are at or below those currently charged
by First USA Bank. Some of these companies may be substantially larger and have
more capital and other resources than the Company. Competitive pressures by
other providers have made it difficult for payment processors to pass through
their costs, such as Visa and MasterCard interchange and assessments, to
customers and could require the Company to absorb increases in costs to maintain
its customer base.
Accounts and Loan Balances
. Changes in the Company's aggregate accounts or loan balances and the
growth rate thereof, including changes resulting from factors such as shifting
product mix, amount of actual marketing investment made by the Company,
attrition of accounts and loan balances (to competing card issuers in connection
with repricing of customers or otherwise) and general economic conditions and
other factors beyond the control of the Company. Customers are attracted to
credit card issuers largely on the basis of price, credit limit and other
product features and, once an account is originated, customer loyalty may be
limited.
. The impact of "seasoning" (the average age of a credit card issuer's
portfolio) on the Company's level of delinquencies and losses which may require
higher loan loss provisions (and reserves). The rate of growth of accounts or
account balances and the attrition of such accounts or balances could
significantly impact the seasoning of the overall portfolio.
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Interest Rate Risks
. The effects of interest rate fluctuations on the Company's net
interest margin and the value of its assets and liabilities; the continued legal
or commercial availability of techniques (including interest rate swaps and
similar financial instruments, loan repricing, hedging and other techniques)
used by the Company to manage the risk of such fluctuations and the continuing
operational viability of those techniques.
. The impact of repricing accounts and the overall product mix of
accounts on the Company's net interest margins; the actual amount of accounts
(and related loan balances) repriced and the level and type of account
originations at that time; the ability of the Company on a competitive basis to
use account management techniques to retain repriced accounts and the related
loan balances.
New Products and Services
. The impact of difficulties or delays in the development, production,
testing and marketing of products or services, including the Company's new
financial product operations and new commercial card opertions, and the impact
of the costs and losses associated with such difficulties or delays. These may
include, without limitation, a failure to implement new product or service
programs when anticipated, the failure of customers to accept these products or
services when planned, losses associated with the testing of new products or
services or financial, legal or other difficulties that may arise in the course
of such implementation.
. The amount, and rate of growth in, the Company's expenses (including
employee and marketing expenses) as the Company's business develops or changes
and the Company expands into new market areas.
Financing
. Difficulties or delays in the securitization of the Company's
receivables and the resulting impact on the cost and availability of such
funding. Such difficulties and delays may result from changes in the
availability of credit enhancement in securitizations, the current legal,
regulatory, accounting and tax environment and adverse changes in the
performance of the securitized assets.
. The amount, cost and type of financing available to the Company and
any changes to that financing.
Credit Card Acceptance
. The impact of a lack of growth or a decline in the number and scope of
card-based payment transactions, on a worldwide basis, and a lack of growth or a
decline in the types of industries and merchants that accept card-based
transactions as a method of payment.
Payment Processing Industry Consolidation
. Industry consolidation which has enabled a few of the Company's
competitors to have access to significant capital, management,
marketing and technological resources that are equal to or greater than those of
the Company. The highly competitive nature of the payment processing
industry combined with the market's requirement that payment processors continue
to invest in and provide advanced and efficient technology to their customers
has caused other payment processors to leave the business or merge with other
providers resulting in significant consolidation in the industry.
Acquisitions
. The Company's ability to identify and consummate acquisitions of
merchant portfolios, operating businesses and payment processing assets upon
satisfactory terms and the Company's ability to achieve a smooth and
timely integration of newly acquired assets and operating businesses and to
achieve anticipated synergies. The Company has relied in part on such
acquisitions in order to achieve greater economies of scale and to develop new
types of systems and expertise. However, the Company faces competition
within the industry for future acquisition and similar growth opportunities.
Contingent Liabilities
. Increased credit and other losses; costs associated with an increase
in the number of customers seeking protection under the bankruptcy laws,
resulting in chargeback and other losses; effects of fraud by third parties or
customers; and increased collection costs associated with such occurrences.
Technology
. Systems delays, malfunctions and errors in the proprietary and third
party systems and networks used by the Company for its payment processing
services and other operations, which may lead to delays, additional costs to the
Company and, if not corrected in a timely fashion, customer dissatisfaction,
which could ultimately affect the Company's customer base and the level of
service it is able to provide to its customers.
17
<PAGE>
Regulation
. The effects of, and changes in, monetary and fiscal policies, laws and
regulations (financial, consumer regulatory or otherwise), other activities of
governments, agencies and similar organizations, and social and economic
conditions, such as inflation, and changes in the Company's accounting policies
and practices or the taxation of the Company's earnings. In recent years,
several pieces of legislation have been proposed in Congress which, if adopted,
would have had the effect of limiting the interest rate that could be charged on
credit card accounts by credit card issuers.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common and Preferred Stock Price Ranges and Dividends
The common stock of the Company is listed for trading on the New York Stock
Exchange under the symbol FUS. As of June 30, 1996, the Company had 2,198 common
stockholders of record. This does not include beneficial owners for whom CEDE &
Company or others act as nominees. All stock prices below have been adjusted to
give effect to the Company's 100% stock dividend on its common stock paid
November 12, 1996. On June 30, 1996, the closing market price was $27 1/2.
During the last two fiscal years, the high, low and close sales prices and
dividends declared on each share of common stock have been:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Fiscal Year Ended June 30,
---------------------------------------------------------------------------
Common Stock Prices
------------------------------------------------------
Common
1996 1995 Dividends Declared
---------------------------------------------------------------------------
High Low Close High Low Close 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fourth fiscal quarter $30 1/2 $26 9/16 $27 1/2 $25 3/16 $20 5/16 $22 3/16 $0.03 $0.015
Third fiscal quarter 29 5/8 21 3/16 28 5/16 21 13/16 16 21 0.03 0.015
Second fiscal quarter 27 13/16 21 11/16 22 3/16 18 3/8 13 1/4 16 7/16 0.03 0.015
First fiscal quarter 27 9/16 20 1/8 27 1/8 20 3/8 15 1/2 17 9/16 0.03 0.015
</TABLE>
The mandatory convertible preferred stock of the Company is listed for trading
on the New York Stock Exchange under the symbol FUSPR. As of June 30, 1996, the
Company had nine preferred stockholders of record. This does not include
beneficial owners for whom CEDE & Company or others act as nominees. On June 30,
1996, the closing market price was $47 3/4. During the last two fiscal years,
the high, low and close sales prices and dividends declared on each share of
preferred stock have been:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Fiscal Year Ended June 30,
---------------------------------------------------------------------------
Mandatory Convertible Preferred Stock Prices
------------------------------------------------------
Preferred
1996 1995 Dividends Declared
---------------------------------------------------------------------------
High Low Close High Low Close 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fourth fiscal quarter $52 $45 $47 3/4 $44 1/2 $37 $40 1/2 $0.498 $0.498
Third fiscal quarter 50 38 49 1/2 39 3/8 31 1/4 38 0.498 0.498
Second fiscal quarter 48 1/2 38 3/4 39 1/2 36 1/8 27 1/2 32 5/8 0.498 0.498
First fiscal quarter 47 1/2 38 47 1/4 40 31 3/4 35 1/2 0.498 0.498
</TABLE>
The common stock and preferred stock are also traded on the Chicago Stock
Exchange and the Pacific Stock Exchange.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
First USA, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30, (a)(b)
---------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Interest income $515,093 $427,725 $388,891 $302,636 $268,440
Interest expense, excluding senior and
Acquisition debt expense 391,939 305,548 192,754 126,038 140,890
Interest expense on senior and Acquisition debt -- -- 8,517 20,963 26,917
---------- ---------- --------- -------- --------
Net interest income 123,154 122,177 187,620 155,635 100,633
Provision for possible credit losses 90,153 54,659 53,469 64,007 61,037
Other operating income 1,118,649 764,334 426,869 193,311 168,848
Amortization of intangibles 55,906 54,748 54,958 55,076 56,530
Operating expenses 705,460 495,505 267,912 164,500 126,835
Income before income taxes and extraordinary item 390,284 281,599 238,150 65,363 25,079
Income before extraordinary item 246,736 178,422 150,934 40,484 18,891
Extraordinary item, net of income tax benefit (c) -- -- (10,637) -- --
Net income $246,736 $178,422 $140,297 $ 40,484 $ 18,891
Income before extraordinary item per share (j) $ 1.84 $ 1.36 $ 1.23 $ 0.36 $ 0.16
Extraordinary item per share (c)(j) -- -- (0.09) -- --
Net income per share (j) $ 1.84 $ 1.36 $ 1.14 $ 0.36 $ 0.16
Cash dividends declared per common share (j) $ 0.12 $ 0.06 $ 0.04 $ 0.025 --
Cash dividends declared per preferred share $ 1.99 $ 1.99 $ 0.37 -- --
BALANCE SHEET STATISTICS
Cash, cash equivalents and investments $ 3,295,795 $ 2,442,301 $ 1,449,445 $ 909,097 $ 434,219
Managed credit card loans 18,727,825 13,287,452 7,520,458 3,720,634 2,307,708
Less: securitizations (d) (15,163,391) (10,099,884) (3,835,571) (1,626,766) (604,809)
---------- ---------- ---------- --------- ---------
Credit card loans 3,564,434 3,187,568 3,684,887 2,093,868 1,702,899
---------- ---------- ---------- --------- ---------
Allowance for possible credit losses 74,163 66,000 66,000 55,500 48,000
Customer base intangible, net 70,008 123,289 174,301 228,964 282,354
Purchased merchant portfolios and goodwill, net 88,894 40,024 3,930 2,290 2,910
Total assets 7,708,501 6,379,116 5,573,767 3,380,433 2,493,390
Bank notes, interest-bearing deposits and other borrowings 6,125,287 5,175,337 4,774,986 2,861,832 1,980,502
Acquisition debt (c) -- -- -- 201,000 266,000
Cumulative redeemable preferred stock -- -- -- -- 35,533
Stockholders' equity (e) $ 1,113,880 $ 764,815 $ 574,547 $ 212,898 $ 146,965
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
First USA, Inc. and Subsidiaries
--------------------------------------------------------------------
Fiscal Year Ended June 30, (a)(b)
--------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
RATIOS
Return on stockholders' equity (f) 27.26% 25.85% 42.08% 23.20% 20.24%
Return on assets (f) 3.18 2.93 3.13 1.45 0.80
Operating expenses/average managed loans 4.23 4.74 5.02 5.88 5.96
Risk-based capital - First USA Bank 25.42 21.53 16.17 10.28 7.67
Delinquency rate (g) 3.06 2.59 1.76 2.76 4.02
Net credit loss rate (h) 2.07 1.57 1.45 3.01 3.97
MANAGED CREDIT CARD STATISTICS (d)
Managed credit card loans $18,727,825 $13,287,452 $ 7,520,458 $ 3,720,634 $ 2,307,708
Average credit card loans $16,669,778 $10,446,438 $ 5,339,689 $ 2,795,350 $ 2,128,558
Credit card charge volume $17,753,793 $12,701,996 $ 7,924,309 $ 4,771,191 $ 3,292,244
Credit cards issued 14,318,093 10,558,811 6,848,078 4,541,122 3,142,670
Net interest margin (i) 5.99% 5.31% 6.28% 7.49% 6.21%
Credit card interest yield 12.85 12.21 12.64 15.24 16.31
Cost of funds (i) 6.10 6.11 4.76 6.07 7.99
Delinquency rate (g) 4.33 2.96 2.22 2.81 3.88
Net credit loss rate (h) 3.38 2.21 2.22 3.25 4.03
FIRST USA PAYMENTECH, INC. (e)
Net revenue $ 121,232 $ 86,628 $ 63,749 $ 51,287 $ 44,611
Net income 14,252 7,920 6,351 4,119 4,257
Net income per share 0.54 0.32 0.26 0.17 0.17
Operating margin 17.3% 11.4% 13.4% 11.3% 12.5%
Sales volume processed $30,875,857 $20,059,066 $18,425,550 $13,467,563 $8,291,377
Items processed 574,157,000 358,705,000 321,791,000 237,740,000 163,296,000
</TABLE>
(a) The selected financial data for the fiscal years ended June 30, 1996, 1995
and 1994 has been restated to reflect the recognition of gains on the
securitization of credit card loans and to expense certain costs to
solicit new accounts in the period they were incurred as described in Note
A to the Company's consolidated financial statements.
(b) On September 12, 1995, First USA, Inc. issued 1.9 million shares of its
common stock for all of the outstanding common stock of Litle & Company,
Inc. and subsequently merged Litle's operations with First USA Paymentech,
Inc. ("Paymentech"). This transaction has been accounted for as a pooling
of interests, and accordingly, the consolidated financial statements were
restated for all prior periods.
(c) First USA, Inc. acquired certain of its operating subsidiaries in a
management-led leveraged transaction in 1989 (the "Acquisition"). Debt
incurred for the Acquisition was prepaid in fiscal year 1994 resulting in
a prepayment premium which reduced net income by $10.6 million, or $0.09
per share.
(d) First USA, Inc. and its subsidiaries (the "Company") securitizes credit
card loans to provide funding for credit card growth. The effect of these
transactions is to remove these credit card loans from the balance sheet
and to record a gain based upon net interest income and credit card fees
less estimated credit losses and servicing fees on the securitized loans.
Managed credit card statistics include loans sold in credit card
securitization transactions and the Company's on-balance-sheet loan
portfolio.
(e) On March 27, 1996, Paymentech completed an initial public underwritten
offering of 5.9 million shares of its common stock, issued 635,000 shares
in a direct placement and issued 790,000 shares pursuant to a stock loan
program funded by the Company. At June 30, 1996, Paymentech had 31.7
million shares outstanding of which the Company owned 24.4 million shares,
or approximately 77%. Net proceeds from the offerings were $141.4 million.
As a result of the offerings, the Company's additional paid-in capital
increased approximately $78 million which represents an increase in the
Company's proportionate share in the stockholders' equity of Paymentech.
The offerings established a market valuation for Paymentech in excess of
$1.2 billion as of June 30, 1996. The Company's unrealized gain in
Paymentech's common stock at June 30, 1996, was approximately $520
million, net of taxes.
(f) Before extraordinary item of $10.6 million for the fiscal year ended June
30, 1994.
(g) Delinquencies represent credit card loans which are 35 days or more past
due at period end.
(h) Net credit losses reflect actual principal amounts charged off less
recoveries as a percentage of average credit card loans.
(i) Includes actual cost of funds plus all costs associated with asset
securitizations, including interest paid to bondholders and amortization
of discounts and fees.
(j) On October 16, 1996, the Company's Board of Directors approved a
two-for-one common stock split to be effected in the form of a 100% stock
dividend paid on November 12, 1996. Net income and cash dividends per
common share have been restated to reflect the two-for-one stock split.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL The Company is one of the nation's largest providers of Visa(R) and
MasterCard(R) services through its principal operating subsidiaries, First USA
Bank and First USA Paymentech, Inc. ("Paymentech"). First USA Bank is an issuer
of Visa and MasterCard credit cards with 14.3 million credit cards issued and
$18.7 billion in managed credit card loans outstanding at June 30, 1996. First
USA Bank's profitability is affected by loan growth, interest rate spread,
Cardmember usage, credit quality and marketing expenses. Paymentech conducts its
business through its wholly owned subsidiaries, First USA Merchant Services,
Inc. ("Merchant Services") and First USA Financial Services, Inc. ("Financial
Services"). Merchant Services, a processor of merchant bankcard transactions,
processed approximately $30.9 billion in sales volume and approximately 574.2
million transactions for the fiscal year ended June 30, 1996. Financial Services
during the past fiscal year has begun to market and issue to businesses and
other entities commercial cards that facilitate business-to-business payment
solutions.
The Company's revenues consist of interest income on its credit card
loans and investments, securitization income, including gains on
securitization transactions, interchange income, credit card fee income and
payment processing fee income. The Company's primary expenses are the costs of
funding credit card loans, credit losses, salaries and employee benefits,
marketing expenses, processing expenses and income taxes. In addition, the
results of operations include the non-cash, tax-deductible amortization of
intangibles, including those acquired in the management-led leveraged
acquisition of certain of the Company's operating subsidiaries in 1989 (the
"Acquisition").
In September 1995, the Company issued 1.9 million shares of common stock for all
the outstanding common stock of Litle & Company, Inc. and subsequently merged
Litle's operations with Paymentech. This transaction has been accounted for as a
pooling of interests, and accordingly, the Company's consolidated financial
statements have been restated for all prior periods.
FISCAL YEAR 1996 RESULTS OF OPERATIONS Net income for the fiscal year ended
June 30, 1996, was $ 246.7 million, or $ 1.84 per share, compared with $ 178.4
million, or $ 1.36 per share, for the fiscal year ended June 30, 1995. The
increase in operating results was attributable to the 59.6% growth of average
managed credit card loans from $10.4 billion to $16.7 billion, increased credit
card charge volume, increased managed credit card interest yield from 12.21% to
12.85%, increased payment processing volume and improved operating efficiencies.
These increases were partially offset by an increase in interest expense due to
the increase in average managed interest-bearing liabilities and increased net
credit losses.
On-balance-sheet credit card loans increased from $3.2 billion at June 30,
1995, to $3.6 billion at June 30, 1996, which reflects the Company's direct
credit card solicitations offset by the results of the Company's completion of
securitizations of $5.3 billion during fiscal 1996.
FISCAL YEAR 1995 RESULTS OF OPERATIONS Net income for the fiscal year ended
June 30, 1995, was $ 178.4 million, or $ 1.36 per share, compared with income
before extraordinary item of $ 150.9 million, or $ 1.23 per share, for the
fiscal year ended June 30, 1994. Fiscal 1994 included an extraordinary item
related to prepayment of Acquisition debt which reduced net income by $10.6
million, or $0.09 per share. The increase in operating results
22
<PAGE>
was attributable to the 95.6% growth of average managed credit card loans from
$5.3 billion to $10.4 billion, increased credit card charge volume, an increase
in gains recorded on securitization transactions, improved operating
efficiencies and increased payment processing volume. This was offset by a lower
yield on credit card loans due to the impact of introductory loan pricing
strategies, an increase in cost of funds during the year and an increase in
certain costs incurred to solicit new accounts.
On-balance-sheet credit card loans decreased from $3.7 billion at June 30, 1994,
to $3.2 billion at June 30, 1995, which reflects the results of the completion
of securitizations totaling $6.5 billion during fiscal 1995, offset by the
Company's direct credit card solicitations.
MANAGED PORTFOLIO REPORTING AND ANALYSIS It is management's practice to analyze
its financial performance on a "managed" portfolio basis, in addition to
analyzing information as reported under generally accepted accounting
principles. The effect of securitizing loans is to remove these credit card
loans from the balance sheet and to record a gain based upon the present value
of net interest income and credit card fees less estimated credit losses and
servicing fees on the securitized loans. Managed credit card statistics include
loans sold in credit card securitization transactions and the Company's on-
balance-sheet portfolio. The Company's consolidated statements of income and
balance sheets are adjusted to eliminate the effect of securitizing loans to
analyze the data on a "managed" portfolio basis. The table on page 24 depicts
the Company's key financial data as a result of securitizing loans as of and for
each of the three fiscal years ended June 30, 1996.
23
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
---------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------------------
(Dollars in thousands) As Reported Managed As Reported Managed As Reported Managed
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT STATISTICS
Net interest income $ 123,154 $ 1,164,514 $ 122,177 $ 654,406 $ 187,620 $ 423,127
Other operating income:
Securitization income 950,008 -- 640,607 -- 310,260 --
Interchange income 29,066 193,356 31,988 137,529 47,455 88,564
Credit card fee income 27,586 181,287 18,286 119,265 22,143 58,208
Other 111,989 111,989 73,453 73,453 47,011 47,011
---------- ----------- ---------- ----------- ---------- ----------
Total other operating income 1,118,649 486,632 764,334 330,247 426,869 193,783
Provision for possible credit losses 90,153 571,321 54,659 230,473 53,469 128,890
---------- ----------- ---------- ----------- ---------- ----------
Net revenue after provision for possible
credit losses $1,151,650 $ 1,079,825 $ 831,852 $ 754,180 $ 561,020 $ 488,020
========== =========== ========== =========== ========== ==========
BALANCE SHEET AND OTHER
STATISTICS
Average credit card loans $3,953,662 $16,669,778 $3,479,813 $10,446,438 $2,973,563 $5,339,689
Credit cards loans 3,564,434 18,727,825 3,187,568 13,287,452 3,684,887 7,520,458
Securitization -- 15,163,391 -- 10,099,884 -- 3,835,571
Credit card interest yield 8.27% 12.85% 8.99% 12.21% 10.88% 12.64%
Cost of funds 6.11 6.10 6.00 6.11 4.69 4.76
Delinquency rate 3.06 4.33 2.59 2.96 1.76 2.22
Net credit loss rate 2.07 3.38 1.57 2.21 1.45 2.22
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As Reported information is derived from consolidated financial statements which
have been prepared in conformity with generally accepted accounting principles.
Managed loan data include loans sold in credit card securitization transactions
and the Company's on-balance-sheet loan portfolio.
24
<PAGE>
NET INTEREST INCOME For fiscal 1996, net interest income was $123.2 million
compared with $122.2 million for fiscal 1995. Credit card loan interest income
increased $14.1 million due to an increase in average credit card loans
partially offset by a decrease in yield from 8.99% for fiscal 1995 to 8.27% for
fiscal 1996. This decrease in yield is due to an increase in securitizations
which results in a higher percentage of introductory rate credit card loans
remaining on the balance sheet. The increase was also due to a 68.8% increase in
interest income from investments, excluding interest income from cash
equivalents, due to the increase in average investments from $1.7 billion to
$2.6 billion and an increase in yield from 6.15% to 6.78% for fiscal year 1995
and 1996, respectively. These increases were offset by a 28.3% increase in
interest expense due to an increase in average interest-bearing liabilities from
$5.1 billion to $6.4 billion to supplement loan growth which is primarily funded
by securitizations, as well as an increase in the average cost of funds from
6.00% to 6.11% for fiscal 1995 and 1996, respectively.
Net interest income on a managed basis was $1.2 billion for fiscal 1996,
compared with $654.4 million for fiscal 1995. Net interest margin on a managed
basis was 5.99% for fiscal 1996, compared with 5.31% for fiscal 1995. The
increase is due primarily to managed credit card interest yield increasing from
12.21% for fiscal 1995 to 12.85% for fiscal 1996, resulting from changes in the
overall pricing distribution of the credit card loan portfolio.
The Company believes that its credit card portfolio, with variable rate loans
and fixed rate loans that can be repriced with 30 days notice and variable rate
funding sources combined with the low-cost operating structure and pricing
flexibility, should enable it to maintain its desired level of profitability
despite changes in interest rates.
For fiscal 1995, net interest income was $122.2 million, a decrease of 34.9%, or
$65.4 million, from net interest income of $187.6 million for fiscal 1994. The
decrease was primarily due to the effect of increasing average securitized loans
from $2.4 billion for fiscal 1994 to $7.0 billion for fiscal 1995. Interest
expense increased 51.8% due to the 18.8% increase in average interest-bearing
liabilities from $4.3 billion to $5.1 billion to supplement loan growth which is
primarily funded by securitizations, as well as an increase in the average cost
of funds from 4.69% to 6.00% for fiscal 1994 and 1995, respectively. Credit card
loan interest income reflected the 17.0% increase in average credit card loans
offset by a decrease in credit card interest yield due to the impact of
marketing and introductory loan pricing strategies. Interest income from
investments, excluding interest income from cash equivalents, increased 120.2%
primarily due to the increase in average investments and the increase in yield.
Net interest income on a managed basis was $654.4 million for fiscal 1995,
compared with $423.1 million for fiscal 1994. Net interest margin on a managed
basis was 5.31% for fiscal 1995, compared with 6.28% for fiscal 1994. The
decrease was due primarily to an increase in managed cost of funds from 4.76%
for fiscal 1994 to 6.11% for fiscal 1995. The decrease in the managed credit
card interest yield from 12.64% for fiscal 1994 to 12.21% for fiscal 1995 also
contributed to the decrease in managed net interest margin.
The table on page 26 provides an analysis of net interest income, average
balance sheet data and interest rate spread (the difference between the yield on
earning assets and the cost of interest-bearing liabilities), as of and for each
of the three fiscal years ended June 30, 1996.
25
<PAGE>
<TABLE>
<CAPTION>
Analysis of Average Balances, Interest and Average Rates
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Interest Balance Rate Interest Balance Rate Interest
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Cash equivalents $ 100,123 8.12% $ 8,130 $ 60,516 6.09% $ 3,687 $ 295,637 3.74% $ 11,064
Federal funds sold 117,503 5.70 6,699 152,564 5.56 8,486 228,673 3.34 7,649
Investments 2,558,150 6.78 173,336 1,670,131 6.15 102,709 874,459 5.33 46,634
Credit card loans 3,953,662 8.27 326,928 3,479,813 8.99 312,843 2,973,563 10.88 323,544
---------- ---- --------- ----------- ---- ---------- ---------- ----- --------
Total earning assets 6,729,438 7.65% $ 515,093 5,363,024 7.98% $ 427,725 4,372,332 8.89% $388,891
Cash 137,295 91,870 44,377
Allowance for possible
credit losses (69,364) (66,000) (61,165)
Other assets 963,282 690,391 469,140
---------- ----------- ----------
Total assets $7,760,651 $ 6,079,285 $4,824,684
========== =========== ==========
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Bank notes and other
borrowings $3,280,275 6.16% $ 201,986 $ 1,977,628 6.35% $ 125,651 $ 601,750 5.04% $ 30,349
Interest-bearing deposits 1,792,839 6.33 113,435 2,572,081 5.83 149,869 3,049,068 4.77 145,555
Federal funds purchased 1,345,008 5.69 76,518 544,735 5.51 30,028 485,417 3.47 16,850
Senior and Acquisition debt -- -- -- -- -- -- 152,708 5.58 8,517
---------- ---- ---------- ----------- ---- ---------- ---------- ----- --------
Total interest-bearing
liabilities 6,418,122 6.11% $ 391,939 5,094,444 6.00% $ 305,548 4,288,943 4.69% $201,271
Other liabilities 437,344 294,646 177,055
---------- ----------- ----------
Total liabilities 6,855,466 5,389,090 4,465,998
Stockholders' equity 905,185 690,195 358,686
---------- ----------- ----------
Total liabilities and
stockholders' equity $7,760,651 $ 6,079,285 $4,824,684
========== =========== ==========
Net interest margin and
net interest income (a) 1.83% $ 123,154 2.28% $ 122,177 4.29% $187,620
==== ========== ==== ========== ===== ========
Interest rate spread (b) 1.54% 1.98% 4.20%
==== ==== ====
- ---------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET
TRANSACTIONS
Average securitized credit
card loans $12,716,116 14.28% $1,815,881 $ 6,966,625 13.82% $ 963,101 $2,366,126 14.83% $350,872
Securitized loans cost
of funds 12,716,116 6.09% 774,521 6,966,625 6.18 430,872 2,366,126 4.88 115,365
---- ---------- ---- ---------- ---- -------
Securitized loans net
interest rate spread 8.19% $1,041,360 7.64% $ 532,229 9.95% $235,507
==== ========== ==== ========== ===== ========
- ---------------------------------------------------------------------------------------------------------------------------------
INCLUDING SECURITIZED
CREDIT CARD LOANS
Total earning assets $19,445,554 11.99% $2,330,974 $12,329,649 11.28% $1,390,826 $6,738,458 10.98% $739,763
Interest-bearing liabilities 19,134,238 6.10 1,166,460 12,061,069 6.11 736,420 6,655,069 4.76 316,636
---- --------- ---- ---------- ---- -------
Net interest margin and
net interest income (a) 5.99% $1,164,514 5.31% $ 654,406 6.28% $423,127
==== ========== ==== ========== ===== ========
Interest rate spread (b) 5.89% 5.17% 6.22%
==== ==== =====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net interest margin is computed by dividing net interest income by average
total earning assets.
(b) The interest rate spread is the average earning assets rate minus the
average interest-bearing liabilities rate.
26
<PAGE>
INTEREST VARIANCE ANALYSIS
Net interest income is affected by changes in the average interest rate earned
on earning assets, the average interest rate paid on interest-bearing
liabilities and changes in the volume of earning assets and interest-bearing
liabilities. The following table presents the effects of changes in average
volume and interest rates on individual financial statement line items. Changes
not solely due to volume or rate have been allocated on a pro rata basis between
volume and rate.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Fiscal 1996 Compared Fiscal 1995 Compared
with Fiscal 1995 with Fiscal 1994
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Cash equivalents $ 2,944 $ 1,499 $ 4,443 $(11,883) $ 4,506 $ (7,377)
Federal funds sold (1,996) 209 (1,787) (3,109) 3,946 837
Investments 59,218 11,409 70,627 47,965 8,110 56,075
Credit card loans 40,421 (26,336) 14,085 50,338 (61,039) (10,701)
-------- -------- -------- -------- --------- --------
Total interest income 100,587 (13,219) 87,368 83,311 (44,477) 38,834
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Bank notes and other borrowings 80,206 (3,871) 76,335 83,738 11,564 95,302
Interest-bearing deposits (48,442) 12,008 (36,434) (24,923) 29,237 4,314
Federal funds purchased 45,478 1,012 46,490 2,267 10,911 13,178
Senior and Acquisition debt -- -- -- (4,258) (4,259) (8,517)
-------- -------- -------- -------- --------- --------
Total interest expense 77,242 9,149 86,391 56,824 47,453 104,277
-------- -------- -------- -------- --------- --------
Net interest income $ 23,345 $(22,368) $ 977 $ 26,487 $ (91,930) $(65,443)
======== ======== ======== ======== ========= ========
- -------------------------------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET TRANSACTIONS
Securitized loan interest income $819,720 $ 33,060 $852,780 $637,552 $ (25,323) $612,229
Securitized loan interest expense 350,013 (6,364) 343,649 277,224 38,283 315,507
-------- -------- -------- -------- --------- --------
Net interest income $469,707 $ 39,424 $509,131 $360,328 $ (63,606) $296,722
======== ======== ======== ======== ========= ========
- -------------------------------------------------------------------------------------------------------------------
INCLUDING SECURITIZED CREDIT CARD LOANS
Total interest income $920,307 $ 19,841 $940,148 $720,863 $ (69,800) $651,063
Total interest expense 427,255 2,785 430,040 334,048 85,736 419,784
-------- -------- -------- -------- --------- --------
Net interest income $493,052 $ 17,056 $510,108 $386,815 $(155,536) $231,279
======== ======== ======== ======== ========= ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
OTHER OPERATING INCOME Other operating income was $ 1.1 billion for fiscal 1996,
compared with $ 764.3 million for fiscal 1995. Fiscal 1996 includes a 48.3%
increase in securitization income due to the effect of additional
securitizations from the 59.6% increase in average managed credit card loans,
partially offset by the effects of a slight reduction in the net interest rate
spread used to calculate gains on the securitized loans. Other operating income
increased due to increased payment processing volume.
Other operating income was $ 764.3 million for fiscal 1995, compared with $426.9
million for fiscal 1994. Fiscal 1995 includes a 106.5% increase in
securitization income due to the effect of additional securitizations from the
95.6% increase in average managed credit card loans, partially offset by the
effects of a slight reduction in the net interest rate spread used to calculate
gains on the securitized loans, and a 56.2% increase in other operating income
resulting from increased payment processing volume. Correspondingly, these
increases were offset by a 32.6% decrease in interchange income.
OTHER OPERATING EXPENSES Other operating expenses, excluding amortization of
intangibles, increased 42.4% to $705.5 million for fiscal 1996, compared with
$495.5 million for fiscal 1995. Postage, shipping, stationery and supplies
increased 26.5%, data processing and communications increased 28.5%, and other
expenses increased 57.5% due to increased marketing costs and increased
accounts, transaction volumes and balances. Salaries and employee benefits
increased 51.2% primarily due to the increase in the number of employees.
Occupancy and equipment expenses increased 70.1% primarily due to facility
expansions to support growth.
Other operating expenses, excluding amortization of intangibles, increased 85.0%
to $495.5 million for fiscal 1995, compared with $267.9 million for fiscal 1994.
Postage, shipping, stationery and supplies increased 162.6%, data processing and
communications increased 56.1% and other expenses increased 80.3% due to
increased marketing costs for marketing initiatives implemented in fiscal 1995
and increased accounts, transaction volumes and balances. Salaries and employee
benefits increased 52.5% primarily due to the increase in employees.
Other operating expenses, excluding amortization of intangibles, as a percentage
of average managed credit card loans were 4.23%, 4.74% and 5.02% for fiscal
1996, 1995 and 1994, respectively, primarily as a result of operating
efficiencies partially offset by increased marketing efforts and the timing of
the Company's implementation of marketing initiatives.
INTANGIBLES
The Company's consolidated balance sheets include a customer base intangible
which represents the excess of allocable amounts paid over the stated amount of
the credit card loans acquired, primarily those acquired in the Acquisition. The
customer base intangible is amortized over the estimated periods to be benefited
(generally seven to 11 years) on a straight-line basis based on independent
portfolio valuation studies. The amortization of the customer base intangible is
primarily a tax deductible item for which the Company realizes a reduction in
federal tax payments. The examination division of the Internal Revenue Service
(the "IRS") has completed an examination for fiscal years 1990, 1991 and 1992
and has proposed to limit the Company's intangible tax deductions. The Company
disagrees with the proposal and is pursuing a resolution of the matter through
the IRS appeals process and may pursue it further through litigation, if
necessary. At the present time, it is impossible to
28
<PAGE>
predict the outcome concerning the Company's amortization of its intangible;
however, the Company believes that it has strong arguments in support of its
position and expects that this challenge will not have a material impact on the
Company.
The balance sheets also include purchased merchant portfolios and
goodwill acquired subsequent to July 25, 1991. The amortization of purchased
merchant portfolios and goodwill is primarily a tax deductible item for which
the Company realizes a reduction in federal tax payments. Purchased merchant
portfolios and goodwill increased from $40.0 million at June 30, 1995, to $88.9
million at June 30, 1996, due primarily to the acquisitions by Paymentech.
Purchased merchant portfolios are amortized over the estimated period to be
benefited, primarily 25 years. Goodwill is amortized over 40 years on a
straight-line basis.
Amortization of intangibles was $55.9 million, $54.7 million and $55.0 million
for fiscal 1996, 1995 and 1994, respectively. Amortization expense for the
customer base intangible from the Acquisition was $50.9 million, $51.0 million
and $52.4 million in fiscal 1996, 1995 and 1994, respectively, and will be
approximately $50.8 million in fiscal 1997 at which time the Acquisition
intangible will be substantially amortized. As a result, in fiscal 1998, the
Company's results from operations will no longer be adversely affected by the
amortization expense for the Acquisition intangible.
LOAN PORTFOLIO
From June 30, 1991, to June 30, 1996, the Company's managed credit card loans
grew 832% to $18.7 billion, which is a compound annual growth rate of 56%. The
Company's strategy for growth consists of direct solicitation of First USA brand
products, affinity group and financial institutions marketing, co-branding and
portfolio acquisitions. This strategy allows the Company to continue to grow in
periods when any one of these avenues for growth, individually, might become
less advantageous economically. Of the $18.7 billion in managed loans
outstanding at June 30, 1996, approximately 90% incur a finance charge. Credit
card interest yield on managed loans was 12.85%, 12.21% and 12.64% for fiscal
1996, 1995 and 1994, respectively.
ASSET QUALITY
The Company's delinquency and net credit loss rates at any time reflect, among
other factors, the quality of the credit card loans, the average seasoning of
the Company's accounts, the success of the Company's collection efforts and
general economic conditions.
As a result of a slower rate of growth, intense competition and the overall
softening in consumer credit, delinquency and net credit loss rates for the
Company trended higher. Over the past year, new unseasoned loans have become a
smaller percentage of managed credit card loans, which has contributed to the
increase in managed delinquency and managed credit card loss rates. In light of
these conditions, the Company continued to tighten and refine credit
underwriting throughout the year. The managed delinquency rate at June 30, 1996,
was 4.33%, and the managed net credit loss rate for fiscal year 1996 was 3.38%.
The Company's focus continues to be to optimize the profitability of each
account within the context of acceptable risk characteristics. The Company has
developed a credit process through the experience of numerous marketing, credit
and risk management tests which provides the Company with a reliable basis for
predicting the asset quality of new accounts. The Company also believes that
29
<PAGE>
its frequent and early contact with delinquent customers, as well as active
portfolio management, has a significant impact on predicting delinquency trends
and managing net credit losses.
DELINQUENCIES
The following table represents the delinquency trends of the Company's credit
card loans as reported for financial purposes and for managed loans. An account
is contractually delinquent if the minimum payment is not received by the next
billing date. It is the Company's policy to accrue interest and fee income on
all credit card accounts, except as specified below, until the account is
charged off. In certain situations where an account becomes delinquent and a
legitimate hardship exists, a loan may qualify to be placed on nonaccrual
status, provided that the account is closed and the credit card is returned. All
hardship situations result in either a charge off of the account or a re-
establishment to reliable paying status. The Company has stringent policies
governing the placement of accounts into hardship and the ultimate disposition
of these accounts. These accounts constitute approximately 0.5% of total loans.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
At June 30, 1996 At June 30, 1995 At June 30, 1994
-----------------------------------------------------------------------------
Percent of Percent of Percent of
(Dollars in thousands) Loans Total Loans Loans Total Loans Loans Total Loans
<S> <C> <C> <C> <C> <C> <C>
MANAGED LOANS
Loans outstanding $18,727,825 100.00% $13,287,452 100.00% $7,520,458 100.00%
=========== ====== =========== ====== ========== ======
Loans delinquent
35 to 64 days $ 272,496 1.46% $ 141,181 1.06% $ 60,024 0.80%
65 to 94 days 159,814 0.85 76,416 0.57 32,255 0.43
95 or more days 378,193 2.02 176,250 1.33 74,458 0.99
----------- ------ ----------- ------ ---------- ------
Total $ 810,503 4.33% $ 393,847 2.96% $ 166,737 2.22%
=========== ====== =========== ====== ========== ======
AS REPORTED
Loans outstanding $ 3,564,434 100.00% $ 3,187,568 100.00% $3,684,887 100.00%
=========== ====== =========== ====== ========== ======
Loans delinquent
35 to 64 days $ 37,221 1.04% $ 26,738 0.84% $ 24,181 0.66%
65 to 94 days 21,182 0.60 14,653 0.46 12,653 0.34
95 or more days 50,497 1.42 41,201 1.29 27,963 0.76
----------- ------ ----------- ------ ---------- ------
Total $ 108,900 3.06% $ 82,592 2.59% $ 64,797 1.76%
=========== ====== =========== ====== ========== ======
</TABLE>
30
<PAGE>
NET CREDIT LOSSES
Net credit losses include the principal amount (excluding accrued finance
charges and fees) of losses resulting from Cardmembers unwilling or unable to
pay, as well as bankrupt and deceased accounts, less current period recoveries.
Loans are charged off prior to the end of the seventh billing cycle after having
become contractually past due unless a payment has been received sufficient to
bring the account into a different delinquency category or bring the account
current. The following table presents the Company's net credit losses for the
periods indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
-----------------------------------------
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
MANAGED LOANS
Average loans outstanding $16,669,778 $10,446,438 $5,339,689
Net credit losses 563,158 230,473 118,390
Net credit losses as a percentage of average loans outstanding 3.38% 2.21% 2.22%
- ------------------------------------------------------------------------------------------------------------
AS REPORTED
Average loans outstanding $ 3,953,662 $ 3,479,813 $2,973,563
Net credit losses 81,990 54,659 42,969
Net credit losses as a percentage of average loans outstanding 2.07% 1.57% 1.45%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses includes current period credit losses
and an amount which, in the judgment of management, is necessary to maintain the
allowance for possible credit losses at a level that reflects known and inherent
risks in the loan portfolio. The Company securitizes credit card loans to
provide funding for credit card growth. The effect of these transactions is to
remove these credit card loans from the balance sheet and to recognize gains
based upon the present value of the net interest income and credit card fees
less estimated credit losses and servicing fees over the lives of the
securitized loans. It is the Company's policy to maintain an allowance based on
on-balance-sheet credit card loans as well as projected on-balance-sheet net
credit losses. Other factors considered in evaluating the provision and
allowance for possible credit losses are general economic conditions, overall
asset quality and loan seasoning.
For fiscal 1996, the Company's provision for possible credit losses was $90.2
million, which included charges of $8.2 million to increase the allowance for
possible credit losses. This provision was 2.28% of average credit card loans
outstanding. This compared to provisions of
31
<PAGE>
$54.7 million for fiscal 1995 and $53.5 million for fiscal 1994, which were
1.57% and 1.80% of average on-balance-sheet credit card loans outstanding,
respectively.
Net credit losses to average credit card loans on a managed basis were 3.38%,
2.21% and 2.22% for fiscal 1996, 1995 and 1994, respectively. Net credit losses
to average on-balance-sheet credit card loans were 2.07%, 1.57% and 1.45% for
fiscal 1996, 1995 and 1994, respectively.
For the five years ended June 30, 1996, the Company's on-balance-sheet portfo-
lio has increased primarily through direct credit card solicitations, partially
offset by securitizations. During this time, the Company has continued to refine
and improve its underwriting standards and account management techniques. During
fiscal 1993, the Company increased the allowance for possible credit losses to
$55.5 million from the previous level of $48.0 million due to the increase in
the amount of credit card loans on the balance sheet. During fiscal 1994, the
Company increased the allowance for possible credit losses to $66.0 million due
to the increase in the amount of credit card loans on the balance sheet offset
by the increase in securitized credit card loans. During fiscal 1995, the
Company maintained the allowance for possible credit losses at $66.0 million
based on projected net credit losses and the comparability of on-balance-sheet
loans between fiscal 1995 and 1994. During fiscal 1996, the Company increased
the allowance for possible credit losses to $74.2 million due to the maturation
of the loan portfolio as well as an increase in the amount of credit card loans
on the balance sheet. The increase in the delinquency rate for on-balance-sheet
loans from 2.59% to 3.06% at June 30, 1995 and 1996, respectively, reflects
existing loans approaching their steady state and new loan growth becoming a
smaller percentage of the portfolio. The Company will continue to monitor the
allowance for possible credit losses and make additional provisions to the
allowance as management deems appropriate.
The following table sets forth the provisions and allowance for possible credit
losses for the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
PROVISION AND ALLOWANCE FOR POSSIBLE
CREDIT LOSSES
<S> <C> <C> <C> <C> <C>
Beginning allowance for possible credit losses $66,000 $66,000 $55,500 $48,000 $48,000
Provision for possible credit losses 90,153 54,659 53,469 64,007 61,037
Recoveries 9,889 4,900 13,889 9,507 8,113
Loans charged off (91,879) (59,559) (56,858) (66,014) (69,150)
------ ------ ------ ------ ------
Net credit losses (81,990) (54,659) (42,969) (56,507) (61,037)
------ ------ ------ ------ ------
Ending allowance for possible credit losses $74,163 $66,000 $66,000 $55,500 $48,000
====== ====== ====== ====== ======
Ending allowance as a % of credit card loans 2.1% 2.1% 1.8% 2.7% 2.8%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
FIRST USA PAYMENTECH, INC. On March 27, 1996, Paymentech completed an initial
public underwritten offering of 5.9 million shares of its common stock at $21.00
per share. In addition, Paymentech sold 635,000 shares in a direct placement and
790,000 shares pursuant to a stock loan program funded by the Company. At June
30, 1996, Paymentech had 31.7 million shares outstanding of which the Company
owned 24.4 million shares, or approximately 77%. Net proceeds from the offerings
were $141.4 million. As a result of the offerings, the Company's additional
paid-in capital increased approximately $78 million, which represented an
increase in the Company's proportionate share in the stockholders' equity of
Paymentech. The offerings established a market valuation of Paymentech in excess
of $1.2 billion as of June 30, 1996, and the Company's unrealized gain in
Paymentech's common stock at June 30, 1996, was approximately $520 million, net
of taxes.
Paymentech's net income increased 79.9% to $14.3 million, or $0.54 per share,
for the fiscal year ended June 30, 1996, compared with net income of $7.9
million, or $0.32 per share, for the fiscal year ended June 30, 1995. Net
revenue increased 39.9% to $121.2 million, compared with $86.6 million for the
prior year period. During fiscal 1996, Paymentech processed approximately $30.9
billion in sales volume and approximately 574.2 million transactions, increases
of 53.9% and 60.1%, respectively, compared with the prior year. As a result of
Paymentech's offering, beginning March 27, 1996, the Company's net income has
been reduced by the minority interest in Paymentech's net income.
In February 1996, Paymentech entered into a $100 million revolving credit
facility payable to a bank syndicate. The Paymentech credit facility bears
interest based on the London Interbank Offering Rate ("LIBOR") plus 0.35% to
0.90% and commitment fees ranging from 0.15% to 0.30% on the unused portion
based on Paymentech's debt to capitalization ratio, payable quarterly. The
Paymentech credit facility expires in February 1999, with the option of two one-
year extensions. First USA Financial, Inc. ("Financial"), a wholly owned
subsidiary, is a guarantor to the Paymentech credit facility. The Paymentech
credit facility will provide Paymentech and the Company a source of additional
liquidity to manage cash flow, provide capital to subsidiaries for expansion and
for other corporate uses. Under the Paymentech credit facility, Paymentech loans
to the Company cannot exceed $25 million. At June 30, 1996, there were no
borrowings under the Paymentech credit facility, and none of the covenants would
have had the effect of restricting Paymentech's ability to pay dividends.
Prior to the first quarter of fiscal 1996, Paymentech's policy was to dividend a
portion of its net income to the Company. Subsequent to such quarter, Paymentech
has not paid dividends to the Company and Paymentech has no plans to pay
dividends on its outstanding common stock. The dividends declared prior to
fiscal 1996 were not material to the Company's cash flows.
The Company acquired Litle & Company, Inc. ("Litle") on September 12, 1995, and
subsequently merged Litle's operations with Paymentech. The Litle transaction
has been accounted for as a pooling of interests, and accordingly, the Company's
consolidated financial statements have been restated to include Litle's
operations for all prior periods. In addition, Paymentech acquired merchant
contracts and cer-
33
<PAGE>
tain other assets of DMGT Corporation ("DMGT") on August 31, 1995. The
acquisition of DMGT was accounted for as a purchase, and accordingly, DMGT's
operations have been included in the Company's results of operations from August
31, 1995. The Litle, DMGT and other acquisitions occurring in fiscal 1996 were
not material to the Company's consolidated financial statements.
On August 19, 1996, Paymentech purchased for approximately $170 million all of
the outstanding stock of GENSAR Holdings Inc. ("GENSAR"). GENSAR is one of the
nation's largest providers of electronic draft capture and authorization
services, processing approximately 300 million transactions and servicing
120,000 merchant locations annually. The acquisition also included a merchant
processing portfolio which has approximately $1 billion in annual sales volume.
The acquisition will be accounted for as a purchase, and accordingly, its
results will be included in Paymentech's results of operations from the
effective date of the acquisition.
Paymentech funded the GENSAR purchase and subsequent payoff of GENSAR's debt
with proceeds from its common stock offerings ($75 million), a loan from the
Company ($25 million) and a non-interest-bearing note payable to the previous
shareholders of GENSAR ($100 million) due October 18, 1996. Paymentech plans to
refinance the note payable to the previous shareholders of GENSAR through the
Paymentech credit facility.
FIRST USA FEDERAL SAVINGS BANK During April 1996, upon approval of the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation ("FDIC"),
the Company formed First USA Federal Savings Bank ("FSB"), to offer other
financial products. FSB will be used as a vehicle to create and own some
products and to partner with leading companies that market other financial
products. New products include mortgages, insurance and installment loans.
FSB received an initial capital contribution of $24.3 million from the Company,
of which $13.5 million was invested in U.S. government agency mortgage-backed
securities at June 30, 1996. FSB's primary methods of funding will include
securitizations, certificates of deposit, individual retirement accounts and
short-term borrowings.
FSB is subject to the capital adequacy guidelines adopted by the FDIC. In
addition, as a savings association, FSB is required to meet a qualified thrift
lender test whereby FSB must have invested at least 65% of its tangible assets
in qualifying thrift investments. At June 30, 1996, FSB met these requirements.
FUNDING AND LIQUIDITY Traditional asset liquidity is provided by cash, cash
equivalents and investments. These items represented 42.8%, 38.3% and 26.0% of
the Company's assets as of June 30, 1996, 1995 and 1994, respectively.
In December 1995, Financial entered into a $300 million, five-year, unsecured
revolving credit facility with a bank syndicate. The credit facility bears
interest based on LIBOR plus 0.25% to 0.65% and commitment fees ranging from
0.125% to 0.25% on the unused portion based on Financial's debt to
capitalization ratio. The revolving credit facility provides a source of
additional liquidity to manage cash flow, provide capital to subsidiaries for
expansion and for other corporate uses. At June 30, 1996, borrowings under
34
<PAGE>
the credit facility were $18.0 million and the applicable rates and commitment
fees were 5.74% and 0.125%, respectively. The credit facility replaced an
existing $150 million unsecured credit facility of Financial and Merchant
Services, which was terminated in December 1995.
In December 1995, the Company implemented the Dividend Reinvestment and Stock
Purchase Plan in which participants may purchase shares of the Company's common
stock.
During fiscal 1994, the Company issued 5.75 million shares of 6 1/4% mandatory
convertible preferred stock. Beginning May 20, 1997, the Company may redeem each
share of the preferred stock with the number of shares of common stock equal to
the sum of (i) $32.373, declining to $31.875 until May 19, 1998, and (ii) all
accrued and unpaid dividends divided by the current market price, but in no
event less than 1.67 of a share of common stock. The Company has reserved 11.5
million shares of common stock for conversion of the preferred stock.
On October 16, 1996, the Company's Board of Directors approved a two-for-
one common stock split and increased the quarterly cash dividend to $0.06 per
share on a post-split basis. The two-for-one common stock split was effected in
the form of a 100% stock dividend payable November 12, 1996, to stockholders of
record on October 28, 1996.
During July 1996, the Company increased the quarterly dividend on its common
stock from $0.03 per share to $0.045 per share. The Company will continue to be
dependent on the cash flow from First USA Bank, received through dividends or
other intercompany transfers of funds, for its dividend obligations. First USA
Bank's ability to pay dividends is affected by its profitability which is a
function of loan growth, interest rate spread, Cardmember usage, credit quality
and marketing expenses. In addition, the ability of First USA Bank to pay
dividends and make certain other intercompany transfers of funds is limited by
banking regulations.
First USA Bank's primary methods of funding include credit card securitizations,
bank and deposit notes and other borrowings, certificates of deposit in amounts
of $100,000 or greater and federal funds purchased from customer banks. In
addition, First USA Bank maintains facilities which provide for the
securitization of receivables on a revolving basis totaling $2.5 billion through
the issuance of commercial paper ($1.0 billion) and a committed bank facility
for introductory rate cards ($1.5 billion). As of June 30, 1996, the Company had
securitized $193.3 million of credit card loans through these facilities.
The Company had securitized credit card loans of $15.2 billion, $10.1 billion
and $3.8 billion at June 30, 1996, 1995 and 1994, respectively. During the
fiscal year ended June 30, 1996, the Company completed securitizations totaling
$5.3 billion, offset by the scheduled amortization of prior securitizations. In
addition, the Company increased the shelf registration for securitizations from
$13.0 billion to $15.9 billion, of which $5.1 billion was remaining at June 30,
1996. The market for securities backed by credit card receivables is a reliable,
efficient and cost-effective source of funds which the Company plans to continue
to use as a source of funding. In the fourth quarter of fiscal 1996, the Company
completed a $500 million securitization that provides funded credit enhancement
through November 1997 for future securitization issues with average maturities
of five years or less. This unique facility will expedite the completion of
future transactions by assuring availability of credit enhancement and allowing
the Company to complete more frequent securitizations in response to market
conditions.
35
<PAGE>
At June 30, 1996, securitized credit card loans of $15.2 billion had a weighted
average remaining life of 3.4 years and a weighted average cost of funds of
approximately 5.77%. The following table depicts the amounts of investor
principal of securitized credit card loans during fiscal 1996, the scheduled
amortization of all securitizations and the average annualized portfolio yield.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(Dollars in millions)
CREDIT CARD SECURITIZATIONS
<S> <C>
Beginning balance $ 10,100
Securitizations completed 5,268
Amortization (205)
--------
Ending balance $ 15,163
========
- -------------------------------------------------------------------------------
AMORTIZATION OF SECURITIZATIONS
1997 $ 1,132
1998 3,018
1999 3,215
2000 904
2001 3,824
Thereafter 3,070
--------
$ 15,163
========
- -------------------------------------------------------------------------------
ANNUALIZED PORTFOLIO YIELD
Three month average for the three months
ended June 30, 1996
Annualized portfolio yield 11.63%
Base rate 7.80
------
Variance 3.83%
======
</TABLE>
36
<PAGE>
Early amortization begins if the annualized portfolio yield (the sum of
interest, interchange and other credit card fees less net credit losses) for a
certain period drops below a base rate (generally equal to the sum of the
weighted average certificate and credit enhancement rates and loan servicing
fees) or certain other events occur. The Company does not presently anticipate
the occurrence of any such early amortization events. The annualized portfolio
yield minus the base rate has declined from 4.77% for the three month average
ended June 30, 1995, to 3.83% for the three month average ended June 30, 1996.
This decrease was primarily due to higher credit losses offset by increases in
portfolio yield and a lower cost of funds. During the amortization period,
principal payments on the credit card loans are paid to the investors, and the
Company's funding requirements increase accordingly. The Company plans to fund
the amortization of future securitizations through additional securitizations of
credit card loans, issuance of bank and deposit notes, acceptance of additional
deposits and the use of other bank liabilities.
The Company maintains short- and medium-term bank note programs. Bank notes
represent unsecured obligations of First USA Bank and are not insured by the
FDIC. Bank notes may be issued in maturities ranging from seven days to 15 years
in minimum denominations of $250,000 and integral multiples of $1,000 in excess
thereof. The Company had approximately $1.9 billion and $1.5 billion of bank
notes outstanding at June 30, 1996 and 1995, respectively. At June 30, 1996, the
average remaining maturity of the outstanding bank notes was 1.5 years and the
average cost was 5.89%. In addition, the Company had approximately $952.0
million and $487.0 million of term federal funds purchased at June 30, 1996 and
1995, respectively. The average maturities of the term federal funds purchased
were five months with an average cost of 5.59% at June 30, 1996.
Interest-bearing deposits, which include deposit notes of $269.3 million at June
30, 1996, primarily represent directly placed and brokered deposits and totaled
$1.5 billion and $2.1 billion at June 30, 1996 and 1995, respectively. During
fiscal 1996, all interest-bearing deposits in denominations of less than
$100,000 were issued by Financial Services. The
37
<PAGE>
Company's interest-bearing deposits had an average cost of 5.62% at June 30,
1996. The decrease in interest-bearing deposits is a result of the increase in
securitization and bank note funding for loan growth and liquidity.
The maturity distribution for interest-bearing deposits on the dates shown is
set forth in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
At June 30, 1996 At June 30, 1995 At June 30, 1994
----------------------------------------------------------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
MATURITY DISTRIBUTION OF INTEREST-BEARING
DEPOSITS
Equal to or more than $100,000
<S> <C> <C> <C> <C> <C> <C>
Less than three months $ 373,045 25.6% $ 460,051 21.7% $ 270,507 9.1%
Three to six months 166,046 11.4 557,082 26.3 419,476 14.2
Six to twelve months 441,725 30.3 706,854 33.3 675,023 22.8
More than twelve months 475,364 32.7 396,661 18.7 1,593,302 53.9
---------- ----- ---------- ----- ---------- -----
1,456,180 100.0 2,120,648 100.0 2,958,308 100.0
Less than $100,000
Less than three months 190 4.6 -- -- 101,499 84.0
Three to six months 189 4.6 -- -- 19,273 16.0
Six to twelve months 3,072 74.2 -- -- -- --
More than twelve months 690 16.6 -- -- -- --
---------- ----- ---------- ----- ---------- -----
4,141 100.0 -- -- 120,772 100.0
Total
Less than three months 373,235 25.6 460,051 21.7 372,006 12.1
Three to six months 166,235 11.4 557,082 26.3 438,749 14.2
Six to twelve months 444,797 30.5 706,854 33.3 675,023 21.9
More than twelve months 476,054 32.5 396,661 18.7 1,593,302 51.8
---------- ----- --------- ----- ---------- -----
$1,460,321 100.0% $2,120,648 100.0% $3,079,080 100.0%
========== ===== ========== ===== ========== =====
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, only
"well capitalized" and "adequately capitalized" banks may accept brokered
deposits and "adequately capitalized" banks must first obtain a waiver from the
FDIC before accepting brokered deposits. First USA Bank, Financial Services and
FSB each met the requirements of a "well capitalized" institution as of June 30,
1996.
At June 30, 1996, the Company had interest rate swap agreements with commercial
banks having a total notional principal amount of $2.1 billion. The Company
enters into interest rate swap agreements to hedge interest rate risk by
converting fixed rate liabilities to floating rate liabilities. This strategy is
an efficient alternative to floating rate funding sources. The Company is
exposed to potential credit risk with interest rate swap agreements if the
counterparty fails to perform. The Company has reduced credit risk in these
instruments by entering into agreements with highly rated counterparties and by
diversifying the exposure with any one counterparty. At June 30, 1996, there
were no defaults under the counterparty agreements. The following table depicts
the estimated fair values of the Company's financial liabilities:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
At June 30, 1996 At June 30, 1995
---------------------------------------------------------------------
Carrying Fair Unrealized Carrying Fair Unrealized
(In thousands) Value Value Gain (Loss) Value Value Gain
FINANCIAL LIABILITIES
<S> <C> <C> <C> <C> <C> <C>
Swapped fixed rate liabilities $2,100,500 $2,077,852 $22,648 $1,978,500 $1,973,351 $ 5,149
Interest rate swaps, net (a) -- 8,372 (8,372) -- (4,511) 4,511
---------- ---------- ------- ---------- ---------- --------
Net 2,100,500 2,086,224 14,276 1,978,500 1,968,840 9,660
Unswapped liabilities 4,024,787 4,023,605 1,182 3,196,837 3,193,725 3,112
---------- ---------- ------- ---------- ---------- --------
Total $6,125,287 $6,109,829 $15,458 $5,175,337 $5,162,565 $ 12,772
========== ========== ======= ========== ========== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Notional amounts of $2.1 billion and $2.0 billion at June 30, 1996 and 1995,
respectively.
39
<PAGE>
The following table presents period-end and average short-term borrowings for
the periods indicated and the weighted average interest rates thereon at the end
of the periods shown.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
-------------------------------------------
(Dollars in thousands) 1996 1995 1994
FEDERAL FUNDS PURCHASED
<S> <C> <C> <C>
Balance at period end $1,308,460 $ 871,390 $384,380
Weighted average interest rate at period end 5.21% 6.23% 6.08%
Average amount outstanding during the period $1,345,008 $ 544,735 $485,417
Maximum amount outstanding at any month end $1,558,675 $ 871,390 $661,831
Weighted average interest rate during the period 5.69% 5.51% 3.47%
- ---------------------------------------------------------------------------------------------------
OTHER SHORT-TERM BORROWINGS
Balance at period end $1,529,469 $ 921,000 $338,000
Weighted average interest rate at period end 5.56% 6.28% 4.94%
Average amount outstanding during the period $1,718,925 $ 848,751 $130,535
Maximum amount outstanding at any month end $2,696,997 $1,830,902 $338,000
Weighted average interest rate during the period 5.84% 6.20% 2.93%
- ---------------------------------------------------------------------------------------------------
</TABLE>
INTEREST RATE SENSITIVITY Interest rate sensitivity refers to the change in
interest spread resulting from changes in interest rates. To the extent that
interest income and interest expense do not respond equally to changes in
interest rates, or that all rates do not change uniformly, earnings will be
affected.
In determining interest rate sensitivity, the Company uses simulation models to
identify changes in net interest income based on different interest rate
scenarios. The Company manages its interest rate sensitivity through several
techniques which include changing the maturity and distribution of assets and
liabilities, interest rate swaps, repricing of credit card loans, subject to
certain legal constraints, and other methods.
Interest rate sensitivity at a point in time can be analyzed using a static gap
analysis which measures the match in balances subject to repricing between
earning assets and interest-bearing liabilities. The table on page 41 is an
interest rate sensitivity schedule at June 30, 1996, based on a static gap
analysis.
40
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
At June 30, 1996
Subject to Repricing
-----------------------------------------
Under 1 Year
(Dollars in thousands) 1 Year and over Total
INTEREST RATE SENSITIVITY
Earning assets
<S> <C> <C> <C>
Cash equivalents $ 40,701 $ -- $ 40,701
Federal funds sold 97,450 -- 97,450
Investments 2,656,707 246,384 2,903,091
Credit card loans (a) 2,475,152 1,089,282 3,564,434
---------- ---------- ----------
Total earning assets $5,270,010 $1,335,666 $6,605,676
========== ========== ==========
Interest-bearing liabilities
Bank notes and other borrowings (b) $3,356,506 $ -- $3,356,506
Interest-bearing deposits (b) 1,460,321 -- 1,460,321
Federal funds purchased 1,308,460 -- 1,308,460
---------- ---------- ----------
Total interest-bearing liabilities $6,125,287 $ -- $6,125,287
========== ========== ==========
Earning assets less interest-bearing liabilities ("gap") $ (855,277) $1,335,666 $ 480,389
Gap as a percentage of total assets (11.10)% 17.33% 6.23%
========== ========== ==========
Total assets $7,708,501
==========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a)The majority of the Company's credit card loans are either variable rate
or at fixed rates that are repriceable with 30 days notice to Cardmembers.
Additionally, the Company had securitized 81% of its managed credit card
portfolio at June 30, 1996. The Company uses this information to estimate
the remaining maturity of its credit card loan portfolio.
(b)The Company has entered into interest rate swap agreements with total
notional principal amounts of $2.1 billion ($1.4 billion of which have
terms of greater than one year). The interest rate swap agreements are
matched by maturity and dollar amount to fixed rate liabilities and convert
such fixed rate liabilities to floating rates.
INVESTMENTS The Company primarily invests in variable rate U.S. government
agency mortgage-backed securities which enhance yield and provide a source of
secondary liquidity through repurchase agreements and are primarily classified
as held-to-maturity. Investments totaled $2.9 billion, $2.2 billion and $1.2
billion at June 30, 1996, 1995 and 1994, respectively. The average maturity
based on historical payment rates of the investment portfolio at June 30, 1996,
was approximately 6.4 years.
The table on page 42 presents maturities of the investment portfolio at June 30,
1996, and reflects scheduled payments and expected prepayments based on
historical payment rates.
41
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996
-----------------------------------
(Dollars in thousands) Amount Percentage Yield
INVESTMENT MATURITY
<S> <C> <C> <C>
Within 1 year $ 385,177 13.3% 6.64%
1-5 years 1,162,528 40.0 6.67
5-10 years 694,459 23.9 6.71
After 10 years 660,927 22.8 6.66
---------- ----- ----
Total carrying value $2,903,091 100.0% 6.67%
========== ===== ====
</TABLE>
CAPITAL ADEQUACY The Company's stockholders' equity increased from $764.8
million at June 30, 1995, to $1.1 billion at June 30, 1996, primarily due to
retained earnings and approximately $78 million as a result of the Paymentech
offerings. Furthermore, tangible equity increased to $955.0 million at June 30,
1996, from $601.5 million at June 30, 1995.
First USA Bank's stockholder's equity increased from $636.6 million at June 30,
1995, to $908.0 million at June 30, 1996, as a result of retained earnings and
capital contributions of $65.0 million from Financial. First USA Bank is subject
to the capital adequacy guidelines adopted by the FDIC. At June 30, 1996, First
USA Bank's risk-based total capital ratio was 25.42%, its tier 1 capital ratio
was 20.63% and its leverage ratio was 11.43%. As of June 30, 1996, First USA
Bank met the requirements of a "well capitalized" institution.
Paymentech's stockholders' equity increased from $47.2 million at June 30, 1995,
to $231.1 million at June 30, 1996, due to the results of its common stock
offering of $141.4 million, capital contributions from the Company of $28.1
million and retained earnings.
INCOME TAXES The Company's consolidated provision for income taxes includes
state income and federal income tax components. The Company's effective federal
tax rate was 35.1%, 34.9% and 35.1% for fiscal 1996, 1995, and 1994,
respectively.
CAPITAL EXPENDITURES The Company spent $77.1 million for capital expenditures in
fiscal 1996, compared with $40.4 million in fiscal 1995. Capital expenditures
are made generally to accommodate growth in credit
42
<PAGE>
card loans and payment processing volume and provide for operating efficiencies.
During fiscal 1996, the Company incurred increased capital expenditures related
to facility expansions and additions.
SELECTED RATIOS The following table presents certain financial ratios, as
restated, for the Company and First USA Bank for the periods indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
------------------------------
1996 1995 1994
FIRST USA, INC.
<S> <C> <C> <C>
Return on assets* 3.18 2.93 3.13
Return on stockholders' equity* 27.26 25.85 42.08
Average stockholders' equity to average total assets 11.66 11.35 7.43
Common dividend payout ratio* 6.52 4.41 3.51
Net interest margin (managed) 5.99 5.31 6.28
Net interest margin 1.83 2.28 4.29
- ---------------------------------------------------------------------------------------
FIRST USA BANK
Return on assets 3.56 3.46 3.84
Return on stockholder's equity 35.32 35.82 51.11
Average stockholder's equity to average assets 10.09 9.65 7.51
Net interest margin (managed) 5.98 5.31 6.38
Net interest margin 1.79 2.27 4.45
- ---------------------------------------------------------------------------------------
</TABLE>
* Before extraordinary item, net of tax benefit, for fiscal 1994.
43
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
<TABLE>
<CAPTION>
First USA, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
June 30,
---------------------------
(Dollars in thousands, except per share data) 1996 1995
ASSETS
<S> <C> <C>
Cash and due from banks $ 254,553 $ 69,594
Short-term investments 40,701 8,009
Federal funds sold 97,450 159,175
---------- ----------
Cash and cash equivalents 392,704 236,778
Investments 2,903,091 2,205,523
Credit card loans 3,564,434 3,187,568
Allowance for possible credit losses (74,163) (66,000)
---------- ----------
Net loans 3,490,271 3,121,568
Premises and equipment 116,666 60,050
Accrued interest receivable 51,558 42,719
Due from securitizations 182,462 287,671
Customer base intangible, net 70,008 123,289
Purchased merchant portfolios and goodwill, net 88,894 40,024
Other assets 412,847 261,494
---------- ----------
$7,708,501 $6,379,116
========== ==========
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank notes and other borrowings $3,356,506 $2,183,299
Interest-bearing deposits 1,460,321 2,120,648
Federal funds purchased 1,308,460 871,390
Accrued interest payable 60,246 54,550
Accrued expenses and other liabilities 355,943 384,414
Minority interest 53,145 --
---------- ----------
6,594,621 5,614,301
Stockholders' Equity
6 1/4% mandatory convertible preferred stock,
$.01 par value, 5,750,000 shares authorized,
issued and outstanding at June 30, 1996
and 1995 58 58
Common stock, $.01 par value, 200,000,000
shares authorized, 120,959,334 and 117,431,756
issued and outstanding at June 30, 1996 and
1995, respectively 1,210 1,174
Additional paid-in capital 568,840 440,929
Retained earnings 543,772 322,654
---------- ----------
1,113,880 764,815
---------- ----------
$7,708,501 $6,379,116
========== ==========
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
First USA, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
----------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994
As Restated
INTEREST INCOME
<S> <C> <C> <C>
Credit card loans $ 326,928 $312,843 $323,544
Investments 181,466 106,396 57,698
Federal funds sold 6,699 8,486 7,649
---------- ---------- ----------
Total Interest Income 515,093 427,725 388,891
INTEREST EXPENSE
Bank notes and other borrowings 201,986 125,651 30,349
Deposits 113,435 149,869 145,555
Federal funds purchased 76,518 30,028 16,850
Senior and Acquisition debt -- -- 8,517
---------- ---------- ----------
Total Interest Expense 391,939 305,548 201,271
---------- ---------- ----------
NET INTEREST INCOME 123,154 122,177 187,620
PROVISION FOR POSSIBLE CREDIT LOSSES 90,153 54,659 53,469
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 33,001 67,518 134,151
- ----------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Securitization income 950,008 640,607 310,260
Interchange income 29,066 31,988 47,455
Credit card fee income 27,586 18,286 22,143
Other 111,989 73,453 47,011
---------- ---------- ----------
Total Other Operating Income 1,118,649 764,334 426,869
- ----------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE
Postage, shipping, stationery and supplies 193,863 153,297 58,382
Salaries and employee benefits 149,196 98,642 64,695
Data processing and communications 110,030 85,596 54,821
Occupancy and equipment 48,056 28,244 18,068
Amortization of intangibles 55,906 54,748 54,958
Other 204,315 129,726 71,946
---------- ---------- ----------
Total Other Operating Expense 761,366 550,253 322,870
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 390,284 281,599 238,150
PROVISION FOR INCOME TAXES 143,548 103,177 87,216
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 246,736 178,422 150,934
EXTRAORDINARY ITEM, NET OF INCOME TAX BENEFIT -- -- (10,637)
---------- ---------- ----------
NET INCOME $ 246,736 $178,422 $140,297
========== ========== ==========
- -----------------------------------------------------------------------------------------------------
Income before extraordinary item per share $ 1.84 $ 1.36 $ 1.23
Extraordinary item per share -- -- (0.09)
---------- ---------- ----------
Net income per share $ 1.84 $ 1.36 $ 1.14
========== ========== ===========
Weighted average common and common equivalent shares
outstanding 133,840,204 131,597,760 119,764,444
========== ========== ===========
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
First USA, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
For the Three Fiscal Years Ended June 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Mandatory
Convertible
Preferred Common Stock
Stock Common Nonvoting Additional
(Dollars in thousands, ------------------------------------------------------- Paid-In Deferred Retained
except per share data) Shares Amount Shares Amount Shares Amount Capital Compensation Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 108,699,944 $1,088 2,105,264 $22 $183,276 $ 28,512 $ 212,898
Net income 140,297 140,297
Issuance of common stock, net 4,059,350 40 47,287 47,327
Issuance of 6 1/4% mandatory
convertible preferred
stock, net 5,750,000 $58 177,344 177,402
Exercise of stock options 376,944 2 931 933
Tax benefit from exercise of
stock options 2,026 2,026
Conversion of nonvoting stock
to common stock 2,105,264 22 (2,105,264) (22) --
Common cash dividends --
$0.04 per share (4,204) (4,204)
Preferred cash dividends --
$0.37 per share (2,132) (2,132)
--------- ---- ----------- ------ --------- ---- -------- -------- -------- --------
Balance at June 30, 1994 5,750,000 58 115,241,502 1,152 -- -- 410,864 162,473 574,547
Net income 178,422 178,422
Issuance of common stock, net 1,548,246 16 28,215 $(3,990) 24,241
Exercise of stock options 642,008 6 1,927 1,933
Tax benefit from exercise of
stock options 3,913 3,913
Common cash dividends --
$0.06 per share (6,787) (6,787)
Preferred cash dividends --
$1.99 per share (11,454) (11,454)
--------- ---- ----------- ------ ---------- ---- -------- -------- -------- ----------
Balance at June 30, 1995 5,750,000 58 117,431,756 1,174 -- -- 444,919 (3,990) 322,654 764,815
Net income 246,736 246,736
Issuance of common stock, net 1,880,322 20 39,163 (7,822) 31,361
Issuance of subsidiary common stock 77,344 77,344
Exercise of stock options 1,647,256 16 6,986 7,002
Tax benefit from exercise of
stock options 12,240 12,240
Common cash dividends --
$0.12 per share (14,164) (14,164)
Preferred cash dividends --
$1.99 per share (11,454) (11,454)
--------- ---- ----------- ------ --------- ---- -------- -------- -------- ---------
Balance at June 30, 1996 5,750,000 $58 120,959,334 $1,210 -- $ -- $580,652 $(11,812) $543,772 $1,113,880
========= ==== =========== ====== ========= ==== ======== ======== ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
First USA, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
------------------------------------------
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 246,736 $ 178,422 $ 140,297
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses 90,153 54,659 53,469
Provision for depreciation and amortization 110,991 85,362 73,674
Gains on securitization transactions, net of amortization (71,825) (77,672) (73,000)
Extraordinary item related to prepayment of
Acquisition debt -- -- 16,365
Changes in operating assets and liabilities:
Accrued interest receivable (8,839) (8,546) (7,833)
Accrued interest payable 5,696 9,484 22,874
Accrued expenses and other liabilities (28,471) 205,205 96,706
Other operating activities 30,241 (56,785) 14,036
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 374,682 390,129 336,588
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of investments 680,215 270,219 229,821
Purchases of investments (1,386,059) (1,234,669) (990,636)
Net increase in credit card loans, excluding
acquisitions and sales (5,714,706) (6,040,908) (4,380,097)
Proceeds from sale of credit card loans 5,257,484 6,478,092 2,741,905
Purchases of premises and equipment (77,076) (40,372) (21,159)
Purchases of merchant portfolios, processing
services and other acquisitions (41,401) (14,665) (1,750)
Other investing activities (28,840) (11,617) (2,453)
----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (1,310,383) (593,920) (2,424,369)
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to common stockholders (14,164) (6,787) (4,204)
Dividends paid to preferred stockholders (11,454) (11,454) (2,132)
Issuance of subsidiary common stock, net 141,432 -- --
Issuance of common stock, net 29,543 2,450 48,400
Issuance of 6 1/4% mandatory convertible preferred stock, net -- -- 177,402
Net payments to trustees relating to securitizations (3,680) (147,443) (42,421)
Net increase in bank notes and other borrowings 1,173,207 871,773 1,142,214
Net (decrease) increase in interest-bearing deposits (660,327) (958,432) 877,910
Net increase (decrease) in federal funds purchased 437,070 487,010 (4,115)
Repayment of credit card backed notes -- -- (104,167)
Repayment of senior debt -- -- (227,000)
Proceeds from senior debt -- -- 227,000
Net repayment of Acquisition debt and prepayment premium -- -- (217,200)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,091,627 237,117 1,871,687
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 155,926 33,326 (216,094)
Cash and cash equivalents at beginning of year 236,778 203,452 419,546
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 392,704 $ 236,778 $ 203,452
=========== =========== =========
- -------------------------------------------------------------------------------------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITY
Common stock issued for acquisitions $ 12,002 $ 22,571 $ --
=========== =========== ===========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE>
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS The consolidated financial statements include the
accounts of First USA, Inc. and its majority-owned subsidiaries (the "Company").
All significant intercompany balances and transactions have been eliminated. The
Company is one of the nation's largest providers of Visa and MasterCard services
through its principal operating subsidiaries, First USA Bank and First USA
Paymentech, Inc. ("Paymentech"). First USA Bank is an issuer of Visa and
MasterCard credit cards with 14.3 million credit cards issued and $18.7 billion
in managed credit card loans outstanding at June 30, 1996. First USA Bank's
profitability is affected by loan growth, interest rate spread, Cardmember
usage, credit quality and marketing expenses. Paymentech conducts its business
through its wholly owned subsidiaries, First USA Merchant Services, Inc.
("Merchant Services") and First USA Financial Services, Inc. ("Financial
Services"). Merchant Services, a processor of merchant bankcard transactions,
processed approximately $30.9 billion in sales volume and approximately 574.2
million transactions for the fiscal year ended June 30, 1996. Financial Services
during the past fiscal year has begun to market and issue to businesses and
other entities commercial cards that facilitate business-to-business payment
solutions.
On January 19, 1997, the Company and Banc One Corporation ("Banc One")
entered into an agreement and plan of merger pursuant to which the Company would
merge with and into Banc One and Banc One would be the surviving corporation.
The merger is subject to approvals by the shareholders of the Company and Banc
One, the receipt of all required regulatory approvals and the making of all
necessary filings. The Merger is expected to close in the second quarter of
calendar 1997.
The Company has restated its financial statements to properly reflect the
two items described below. The changes did not affect the Company's net cash
flows, liquidity or regulatory capital compliance, nor did the restatement have
an effect on the Company's fiscal year 1996 and 1995 net income. The restatement
did however have an effect on previously reported quarterly results of the 1996
and 1995 fiscal years (see Unaudited quarterly information, as restated) and
increased 1994 earnings.
The Company had previously not recorded gains on securitization
transactions consistent with the Company's belief and common industry assumption
that such gains would not be significant due to the relatively short life of the
outstanding balances and the narrow spread between the account yield and the sum
of the cost of servicing these accounts and investor yield on the
securitizations. As a result of a more detailed analysis of gains on all
securitizations of credit card receivable balances in connection with the
preparation for the adoption of Statement of Financial Accounting Standards No.
125, which is effective January 1, 1997, the Company has restated its financial
statements to recognize gains in those periods where the gains were significant.
In addition, the Company has been deferring the costs to solicit new
accounts. These costs were deferred and matched with the future revenues from
these new accounts over a twelve-month period. The average life of these new
accounts, including all annual renewals, is expected to be seven years. During
the course of a review of the Company's accounting policies in connection with
its pending merger with Banc One, the Company learned that, while its deferred
costs were paid to independent third parties, these costs were not eligible for
deferral and that its accounting policy regarding such solicitations did not
conform with the accounting policy of Banc One. As a result, the Company has
restated its financial statements to expense these costs in the period such
costs were incurred.
As previously noted, the changes had no effect on fiscal 1996 or 1995 net
income. The Company has restated its fiscal year 1994 consolidated statement of
income resulting in an increase in net income and retained earnings of $47.4
million and an increase in net income per share of $0.40.
On October 16, 1996, the Company's Board of Directors approved a two-for-
one common stock split and increased the quarterly cash dividend to $0.06 per
share on a post-split basis. The two-for-one common stock split was effected in
the form of a 100% stock dividend paid on November 12, 1996, to stockholders of
record on October 28, 1996. The consolidated financial statements and notes to
consolidated financial statements presented herein reflect the retroactive
treatment of this stock split.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments,
with maturities of three months or less when purchased, to be cash equivalents.
Federal funds sold are considered to be cash equivalents and are invested with
banks which are considered to be in compliance with their regulatory capital
requirements.
INVESTMENTS Investments are carried at cost, adjusted for amortization of
premiums and accretion of discounts. The Company has both the ability and intent
to hold these investments to maturity.
CREDIT CARD LOANS Credit card loans represent primarily revolving Visa and
MasterCard credit card loans. Interest on credit card loans is recognized based
on the balances outstanding according to the terms of the related Cardmember
agreements.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES The provision for possible
credit losses includes current period credit losses and an amount which, in the
judgment of management, is necessary to maintain the allowance for possible
credit losses at a level that reflects known and inherent risks in the credit
card loan portfolio.
48
<PAGE>
PREMISES AND EQUIPMENT Premises and equipment are carried at cost, net of
accumulated depreciation and amortization of $49.9 million and $32.2 million at
June 30, 1996 and 1995, respectively. Depreciation of furniture and equipment is
provided on a straight-line basis over periods ranging from two to 10 years.
Leasehold improvements are amortized over the lesser of the economic useful life
of the improvement or the term of the lease.
CUSTOMER BASE INTANGIBLE The customer base intangible represents the excess of
amounts paid over the stated amount of the credit card loans acquired, net of
accumulated amortization of $376.3 million and $322.8 million at June 30, 1996
and 1995, respectively. The intangible assets are amortized over the estimated
periods to be benefited, generally seven to 11 years, on a straight-line basis.
As of June 30, 1996, the customer base intangible consisted of $54.1 million of
customer base intangible resulting from the management-led leveraged acquisition
of certain of the Company's operating subsidiaries in 1989 (the "Acquisition")
and $15.9 million of customer base intangible resulting from credit card
portfolio purchases subsequent to the date of the Acquisition.
PURCHASED MERCHANT PORTFOLIOS AND GOODWILL
Purchased merchant portfolios are amortized over the estimated period to be
benefited, primarily 25 years, on a straight-line basis. Purchased merchant
portfolios are evaluated by management for impairment at each balance sheet date
through review of actual cash flows generated by each merchant portfolio in
relation to the expected cash flows and the recorded amortization expense. If,
upon review, actual cash flows indicate an impairment of the value of the
purchased merchant portfolio, amortization will be accelerated.
Goodwill represents the excess of purchase price over the fair value of
identifiable assets acquired less liabilities assumed from business combinations
and is amortized over 40 years, on a straight-line basis. Goodwill is reviewed
for impairment whenever events indicate that the carrying amount may not be
recoverable. If estimates of future operating results would be insufficient to
recover future charges to goodwill amortization, then the recorded value of
goodwill balances would be reduced by the estimated deficiencies in operating
results.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
in the first quarter of fiscal 1997 and, based on current circumstances, does
not believe the effect of adoption will be material. Accumulated amortization
for purchased merchant portfolios and goodwill was $3.9 million and $1.5 million
at June 30, 1996 and 1995, respectively.
49
<PAGE>
SECURITIZATION INCOME
Securitization income reflects gains on the securitization of credit card loans
based upon the present value of net interest income and credit card fees less
estimated credit losses and servicing fees over the lives of the securitized
loans.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," ("SFAS No.
125") which provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on an
approach that focuses on control of the assets and extinguishment of the
liabilities. In addition, the statement provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings and provides implementation guidance for securitization transactions
and repurchase agreements. The statement is effective for transactions occurring
subsequent to December 31, 1996. The Company is currently evaluating the impact
of this statement and expects no material effect on its consolidated financial
statements as a result of adopting SFAS No. 125.
INTEREST RATE SWAPS The Company enters into interest rate swap transactions
for managing its interest rate risk by converting fixed rate liabilities to
floating rate liabilities. The Company does not hold or issue interest rate swap
agreements for trading purposes. Net receipts or payments under these agreements
are recognized as an adjustment to interest expense. The Company classifies cash
flows from interest rate swaps in the same category in the consolidated
statements of cash flows as the cash flows from the items being hedged.
STOCK-BASED COMPENSATION The Company accounts for stock option and stock
purchase plans in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB
25, no compensation expense is recognized for stock options issued to employees
since the options have an exercise price equal to the market value of the common
stock on the day of the grant. In addition, the Company does not recognize
compensation expense for its employee stock purchase plan since it qualifies as
a non-compensatory plan under APB 25. In October 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for fiscal
years beginning after December 15, 1995. Under SFAS No. 123, the Company may
elect to recognize stock-based compensation expense based on the fair value of
the awards or continue to account for stock-based compensation under APB 25 and
disclose in the financial statements the effects of SFAS No. 123 as if the
recognition provisions were adopted. The Company has evaluated its alternatives
available under the provisions of SFAS No. 123 and has determined it will not
adopt the recognition provisions of the statement. Therefore, the adoption of
SFAS No. 123 will have no impact on the Company's consolidated financial
statements.
FEDERAL INCOME TAXES Federal income taxes are accounted for utilizing the
liability method. Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
50
<PAGE>
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS Certain amounts for fiscal 1995 and fiscal 1994 have been
reclassified to conform to the fiscal 1996 presentation.
NOTE B - INITIAL PUBLIC OFFERING OF FIRST USA PAYMENTECH, INC. COMMON STOCK
On March 27, 1996, Paymentech completed an initial public underwritten offering
of 5.9 million shares of its common stock at $21.00 per share. In addition,
Paymentech sold 635,000 shares in a direct placement and 790,000 shares pur-
suant to a stock loan program funded by the Company primarily at $19.53 per
share. At June 30, 1996, Paymentech had 31.7 million shares outstanding of which
the Company owned 24.4 million shares, or approximately 77%.
As a result of the offerings, the Company's additional paid-in capital increased
approximately $78 million which represents an increase in the Company's
proportionate share in the stockholders' equity of Paymentech. In addition, as
of June 30, 1996, the Company had recorded minority interest of $53.1 million.
Beginning on March 27, 1996, the Company's net income has been reduced by the
minority interest in Paymentech's net income.
NOTE C - INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is calculated as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
- --------------------------------------------------------------------------------
-------------------------------------------------
(Dollars in thousands,
except per share data) 1996 1995 1994
(As Restated)
<S> <C> <C> <C>
Income before extraordinary
item $ 246,736 $ 178,422 $ 150,934
Less accrual of preferred
stock dividends -- -- (3,436)
----------- ----------- -----------
Income before extraordinary
item applicable to
common stock 246,736 178,422 147,498
Extraordinary item, net of
tax benefit -- -- (10,637)
----------- ----------- -----------
Net income applicable to
common stock for primary
net income per share $ 246,736 $ 178,422 $ 136,861
=========== =========== ===========
Average common shares
outstanding 119,088,870 116,819,438 114,520,384
Common stock equivalents:
Stock options 5,168,384 5,195,372 5,244,060
Mandatory convertible
preferred stock 9,582,950 9,582,950 --
----------- ----------- -----------
Weighted average common
and common equivalent
shares outstanding 133,840,204 131,597,760 119,764,444
=========== =========== ===========
Income before extraordinary
item $ 1.84 $ 1.36 $ 1.23
Extraordinary item, net of
tax benefit -- -- (0.09)
----------- ----------- -----------
Net income per share $ 1.84 $ 1.36 $ 1.14
=========== =========== ===========
</TABLE>
51
<PAGE>
NOTE D - BUSINESS COMBINATIONS AND MERCHANT PORTFOLIO PURCHASES
The Company issued 1.9 million shares of its common stock for all of the
outstanding common stock of Litle & Company, Inc. ("Litle") on September 12,
1995, and subsequently merged Litle's operations with Paymentech. The Litle
transaction has been accounted for as a pooling of interests, and accordingly,
the Company's consolidated financial statements have been restated to include
Litle's operations for all prior periods. In addition, Paymentech acquired
merchant contracts and certain other assets of DMGT Corporation ("DMGT") on
August 31, 1995, for $34.0 million. The acquisition of DMGT was accounted for as
a purchase, and accordingly, DMGT's operations have been included in the
Company's results of operations from August 31, 1995. The Litle, DMGT and other
acquisitions occurring in fiscal 1996 were not material to the Company's
consolidated financial statements.
On August 19, 1996, Paymentech purchased for approximately $170 million all of
the outstanding stock of GENSAR Holdings Inc. ("GENSAR"). GENSAR is one of the
nation's largest providers of electronic draft capture and authorization
services, processing approximately 300 million transactions and servicing
120,000 merchant locations annually. The acquisition also includes a merchant
processing portfolio which has approximately $1 billion in annual sales volume.
The acquisition will be accounted for as a purchase, and accordingly, its
results will be included in Paymentech's results of operations from the
effective date of the acquisition.
NOTE E - INVESTMENTS
The Company's investments, which totaled $2.9 billion and $2.2 billion at
June 30, 1996 and 1995, respectively, consist primarily of variable U.S.
government agency mortgage-backed securities which enhance yield and provide a
source of secondary liquidity through repurchase agreements. The Company's
policy is primarily to hold securities until maturity. The average maturity
based on historical payment rates of the investment portfolio at June 30, 1996,
is approximately 6.4 years.
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
At June 30,
------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Amortized cost $2,903,091 $2,205,523 $1,245,993
Gross unrealized gains 4,865 10,059 3,721
Gross unrealized losses (32,647) (7,083) (24,054)
---------- ---------- ----------
Market value $2,875,309 $2,208,499 $1,225,660
========== ========== ==========
- -------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value at June 30, 1996, by estimated maturity are
as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Amortized Market
Cost Value
<S> <C> <C>
Due within one year $ 385,177 $ 381,491
Due after one but within five years 1,162,528 1,151,403
Due after five but within ten years 694,459 687,813
Due after ten years 660,927 654,602
---------- ----------
$2,903,091 $2,875,309
========== ==========
- -------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
NOTE F - ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The activity in the allowance for possible credit losses is as follows (in
thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Fiscal Year Ended June 30,
----------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Balance at July 1 $66,000 $66,000 $55,500
Provision for possible credit losses 90,153 54,659 53,469
Recoveries of loans previously
charged off 9,889 4,900 13,889
Loans charged off (91,879) (59,559) (56,858)
------- ------- -------
Balance at June 30 $74,163 $66,000 $66,000
======= ======= =======
- -------------------------------------------------------------------------------
</TABLE>
NOTE G - DEBT
Bank notes and other borrowings at June 30, 1996, included bank notes of $1.9
billion which had average maturities of 1.5 years with an average cost of
approximately 5.89%, term federal funds purchased of $952.0 million which had
average maturities of five months with an average cost of approximately 5.59%
and securities sold under agreements to repurchase which were recorded at cost
of $349.5 million and matured in July 1996. Bank notes and other borrowings at
June 30, 1995, included bank notes of $1.5 billion which had average maturities
of 1.6 years with an average cost of approximately 6.42% and term federal
funds purchased of $487.0 million which had average maturities of three months
with an average cost of approximately 6.26%. At June 30, 1996 and 1995, bank
notes and other borrowings also included subordinated notes issued by First USA
Bank of $150.0 million which had a cost of approximately 7.08% and 7.68%,
respectively. The notes are due August 1, 2003, with interest paid semiannually
on February 1 and August 1.
Interest-bearing deposits of $1.5 billion and $2.1 billion at June
30, 1996 and 1995, respectively, represent certificates of deposit and deposit
notes with an average cost of approximately 5.62% and 6.23%, respectively.
At June 30, 1996, federal funds purchased of $1.3 billion had overnight
maturities and an interest rate of approximately 0.125% over the effective
federal funds rate. At June 30, 1995, federal funds purchased of $871.4 million
had overnight maturities and an interest rate of approximately 0.15% over the
effective federal funds rate.
In December 1995, First USA Financial, Inc. ("Financial") entered into a $300
million, five-year, unsecured revolving credit facility with a bank syndicate.
The credit facility bears interest based on LIBOR plus 0.25% to 0.65% and
commitment fees ranging from 0.125% to 0.25% on the unused portion based on
Financial's debt to capitalization ratio. The revolving credit facility provides
a source of additional liquidity to manage cash flow, provide capital to
subsidiaries for expansion and for other corporate uses. At June 30, 1996,
borrowings under the credit facility, included in bank notes and other
borrowings, were $18.0 million and the applicable rates and commitment fees were
5.74% and 0.125%, respectively. The credit facility replaced the $150 million
unsecured credit facility of Financial and Merchant Services, which was
terminated in December 1995. The ability to pay dividends is conditioned upon
the observance of certain financial covenants in the credit facility. At June
30, 1996, none of the covenants had the effect of restricting the ability to pay
dividends.
53
<PAGE>
In February 1996, Paymentech entered into a $100 million revolving credit
facility payable to a bank syndicate. The Paymentech credit facility bears
interest based on LIBOR plus 0.35% to 0.90% and commitment fees ranging from
0.15% to 0.30% on the unused portion based on Paymentech's debt to
capitalization ratio, payable quarterly. The Paymentech credit facility expires
in February 1999, with the option of two one-year extensions. Financial is a
guarantor to the Paymentech credit facility. The Paymentech credit facility
provides Paymentech and the Company a source of additional liquidity to manage
cash flow, provide capital to subsidiaries for expansion and for other corporate
uses. Paymentech loans to the Company cannot exceed $25 million. The ability of
Paymentech to pay dividends is conditioned upon the observance of certain
financial covenants in the agreement. At June 30, 1996, there were no borrowings
under the Paymentech credit facility, and none of the covenants would have had
the effect of restricting Paymentech's ability to pay dividends. The Company
paid $386.2 million, $296.1 million and $178.4 million during fiscal 1996, 1995
and 1994, respectively, in interest on interest-bearing liabilities.
Annual fiscal year maturities are as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Bank Notes Interest-
and Other Bearing
Borrowings Deposits Total
<S> <C> <C> <C>
1997 $2,107,869 $ 984,267 $3,092,136
1998 571,777 144,181 715,958
1999 359,169 167,878 527,047
2000 -- 800 800
2001 167,691 155,035 322,726
Thereafter 150,000 8,160 158,160
---------- ---------- ----------
$3,356,506 $1,460,321 $4,816,827
========== ========== ==========
- --------------------------------------------------------------------------------
</TABLE>
The Company incurred an extraordinary item in the first quarter of fiscal 1994
which reduced net income by $10.6 million and $0.09 per share after taxes for
the premium associated with the prepayment of the debt incurred in connection
with the Acquisition.
NOTE H - PREFERRED STOCK
The Company has issued 5.75 million shares of 6 1/4% mandatory convertible
preferred stock, $.01 par value. Dividends at an annual rate of $1.99 per share
on the preferred stock are cumulative and payable quarterly in arrears. The
liquidation value is $31.875 per share plus accrued and unpaid dividends. The
preferred stock is convertible at any time at the option of the holder into 1.67
shares of common stock, subject to adjustment in certain events. Shares are not
redeemable by the Company prior to May 20, 1997. Beginning May 20, 1997, the
Company may redeem each share of the preferred stock with the number of shares
of common stock equal to the sum of (i) $32.373, declining to $31.875 until May
19, 1998, and (ii) all accrued and unpaid dividends divided by the current
market price, but in no event less than 1.67 of a share of common stock. The
Company has reserved 11.5 million shares of common stock for conversion of the
preferred stock. Each share of preferred stock is entitled to 1.67 votes.
The Board of Directors of the Company has the authority to determine the
principal rights, preferences and privileges of the remaining 1.65 million
shares of authorized preferred stock, which will increase to 7.4 million shares
after redemption of the preferred stock into common stock. Provisions could be
included in the shares of preferred stock, such as extraordinary voting,
dividend,
54
<PAGE>
redemption or conversion rights, which could discourage an unsolicited tender
offer or takeover proposal. However, the Company has no plans to include such
provisions.
NOTE I - INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Federal income taxes - current $110,831 $ 69,038 $61,375
Federal income taxes - deferred 22,652 26,691 20,563
State income taxes - current 10,065 7,448 5,278
-------- -------- -------
$143,548 $103,177 $87,216
======== ======== =======
</TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes and
extraordinary item due to the following (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fiscal Year Ended June 30,
-----------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Statutory rate applied to
income before income taxes
and extraordinary item $136,599 $ 98,560 $83,353
State income taxes, net of federal
tax benefit 6,542 4,841 3,431
Amortization of intangibles and
other 407 (224) 432
-------- -------- -------
$143,548 $103,177 $87,216
======== ======== =======
- -----------------------------------------------------------------------------
</TABLE>
The tax rate for the 1996, 1995 and 1994 fiscal years reflect Litle as a
Subchapter S corporation, which included no federal income taxes in its
financial statements since its income was taxed at the shareholder level.
Temporary differences, which result in deferred income taxes, relate primarily
to the differences which arise from recording certain transactions in different
years for financial statement and federal income tax purposes. These
transactions primarily include provision for possible credit losses, gains on
securitization transactions, origination costs and incentive payments from data
processors.
The Company made federal income tax payments of $91.5 million, $70.1 million and
$53.1 million during fiscal 1996, 1995 and 1994, respectively. Subsequent to the
initial public offering of its common stock, Paymentech will file a separate
consolidated federal income tax return.
NOTE J - RETIREMENT BENEFITS
The Company has a noncontributory defined benefit retirement plan that provides
retirement benefits for substantially all employees who meet certain service
requirements. The Company's funding policy is to annually contribute the minimum
amount required under the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits attributed to
compensation to date, but also for compensation increases to be earned in the
future. Each participant's cash balance account is credited with an amount equal
to 4% of the participant's compensation plus interest. Each participant becomes
fully vested in benefits under the plan after five years of employment. Prior to
that time, no portion of a participant's benefits is vested. The plan's assets
consist mainly of investments in mutual funds.
55
<PAGE>
A summary of the components of the periodic pension expense follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Service cost - benefits earned
during the period $1,060 $674 $479
Interest cost on projected
benefit obligation 322 239 200
Actual return on plan assets (551) (414) 27
Net amortization 369 282 (159)
------ ---- ----
Net periodic pension expense $1,200 $781 $547
====== ==== ====
</TABLE>
Assumptions used in the accounting for the plan were:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Discount rate 8.0% 7.5% 8.5%
Expected rate of increase in
compensation levels 5.0 5.0 6.0
Expected long-term rate of
return on assets 8.5 8.5 8.5
</TABLE>
The Company increased the discount rate assumption at June 30, 1996. This change
in assumption will not have a material effect on the Company's consolidated
financial statements for fiscal 1997.
The following sets forth the funded status and the amount recognized in the
consolidated balance sheets for the Company's defined benefit retirement plan
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------
1996 1995
<S> <C> <C>
Accumulated Benefits
Actuarial present value of accumulated
plan benefits:
Vested $ 2,987 $ 2,454
Nonvested 775 750
------- -------
Total $ 3,762 $ 3,204
======= =======
Pension Liability
Projected benefit obligation for service
rendered to date $(4,907) $(4,185)
Fair value of net assets available for benefits 4,158 2,768
------- -------
Projected benefit obligation in excess
of plan assets (749) (1,417)
Unrecognized prior service cost (249) (249)
Unrecognized net loss 774 1,230
------- -------
Total $(224) $ (436)
======= =======
</TABLE>
The Company's First USA Retirement Savings Plan (the "Savings Plan") provides
savings and investment opportunities. The Savings Plan stipulates that eligible
employees with at least one year and 1,000 hours of service may elect to
contribute to the Savings Plan. Pre-tax contributions up to 3% of an eligible
employee's defined compensation are matched 50% by the Company. The consolidated
statements of income include $576,000, $377,000 and $273,000 for contributions
to the Savings Plan for fiscal 1996, 1995 and 1994, respectively.
56
<PAGE>
NOTE K - STOCK OPTION, STOCK PURCHASE AND RESTRICTED STOCK PLANS At June 30,
1996, the Company had four stock option plans that provide for grants of
nonqualified stock options to officers and key employees. All stock options have
an exercise price equal to the market value of the Company's common stock on the
date the option was granted and may not be exercised more than 10 years from the
date of grant. In November 1991, the Company accelerated the vesting of the
options granted pursuant to three of the plans to make each such option
immediately exercisable and to grant no further options under the plans. As of
June 30, 1996, 1995 and 1994, the amount of common shares available for future
grants under the remaining plan is 9,216,760, 2,742,200 and 3,925,400 shares,
respectively. The common shares available for future grant at June 30, 1996,
reflect an increase of 9 million shares reserved for future issuance approved
by the Company's stockholders in November 1995. In addition, the Company has an
outside directors option plan (the "Director Plan"). Under the Director Plan,
members of the Board of Directors of the Company who are not employees of the
Company or its subsidiaries or affiliates, receive an option to purchase 20,000
shares of common stock at an option price equal to the fair market value of the
common stock on the date of grant. The option is granted on the date the
Director joins the Board. In November 1994, the Director Plan was amended to
also provide for an annual grant of 5,000 shares after each annual stockholders'
meeting. The options terminate 10 years from the date of grant. In addition,
options terminate if not exercised within 90 days after the Director ceases to
be a member of the Board. As of June 30, 1996 and 1995, 200,000 and 230,000
shares of common stock were available for future grant under the Director Plan,
respectively.
Activity under the Company's stock option plans was as follows:
<TABLE>
<CAPTION>
Number
Number of Option Price of Shares
Shares Per Share Exercisable
<S> <C> <C> <C>
Outstanding
June 30, 1994 7,114,024 $ 1.25 - 21.125
Granted 1,382,000 15.75 - 20.00
Exercised (642,008) 1.25 - 17.69
Forfeitures (128,800) 2.375- 17.69
--------- ----------------
Outstanding
June 30, 1995 7,725,216 1.25 - 21.125
Granted 2,736,000 21.125- 27.875
Exercised (1,647,256) 1.25 - 21.125
Forfeitures (180,560) 2.375- 21.125
--------- ----------------
Outstanding
June 30, 1996 8,633,400 $ 1.25 - 27.875 5,073,400
========= ================ =========
</TABLE>
The Company has also adopted the First USA, Inc. Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan provides a means for employees to purchase
shares of the Company's common stock at 85% of the fair market value thereof. An
aggregate of 400,000 shares of common stock have been authorized for issuance
under the Purchase Plan. In June 30, 1996, 388,354 shares had been purchased
under the Purchase Plan. The Company's Board of Directors intends to recommend
to the Company's stockholders an increase in the number of shares authorized for
issuance under the Purchase Plan to meet future demand.
57
<PAGE>
In addition, the Company has adopted the First USA, Inc. 1994 Restricted Stock
Plan (the "Restricted Stock Plan"). The Restricted Stock Plan authorizes the
granting of awards in the form of restricted shares of the Company's common
stock to key officers and employees subject to risks of forfeiture which may be
eliminated over time based on performance criteria. A maximum of 2,000,000
shares of common stock has been reserved for issuance under the Restricted Stock
Plan, subject to adjustment. At June 30, 1996, 695,000 shares had been awarded
under the Restricted Stock Plan. The market value of restricted shares at the
time of grant of approximately $15.5 million was recorded as deferred
compensation and was netted against additional paid-in capital. Deferred
compensation is being amortized over the five-year vesting period resulting in
amortization expense of approximately $2.8 million and $1.0 million during
fiscal 1996 and 1995, respectively.
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company has an agreement with a third party to receive data processing and
credit card transaction services. The agreement requires annual base charges and
also provides for additional payments in future years based upon volume levels
and cost savings realized by the Company.
The Company leases its office space and certain equipment under leases with
remaining terms ranging up to 10 years. The office space leases contain renewal
options and generally require the Company to pay certain operating expenses.
Future minimum lease commitments under noncancelable operating leases as of
June 30, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 16,373
1998 16,430
1999 15,119
2000 14,056
2001 13,892
Thereafter 84,480
--------
$160,350
========
</TABLE>
The consolidated statements of income include rental expense for operating
leases of $12.9 million, $8.0 million and $6.4 million for fiscal 1996, 1995 and
1994, respectively.
In the course of business, the Company is a defendant in various lawsuits.
Management believes that the resolution of these lawsuits will not have a
material adverse effect on the Company's financial condition.
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
At June 30, 1996 and 1995, the Company had interest rate swap agreements with
notional amounts totaling $2.1 billion and $2.0 billion, respectively. The
Company enters into interest rate swap agreements to convert fixed rate
liabilities to floating rate liabilities as an efficient alternative to issuing
floating rate funding sources. The Company does not hold or issue interest rate
swap agreements for
58
<PAGE>
trading purposes. The Company is exposed to potential credit risk with interest
rate swap agreements if the counterparty fails to perform. Credit risk is
reduced in these instruments by entering into agreements with highly rated
counterparties and by diversifying the exposure with any one counterparty. At
June 30, 1996, there were no defaults under the counterparty agreements.
Under the terms of a certain interest rate swap agreement, each party may be
required to pledge certain assets if the market value of the interest rate swap
agreement exceeds an amount set forth in the agreement or in the event of a
change in credit rating.
Under these agreements, the Company pays or receives the difference between the
floating rate, generally three-month LIBOR, and the fixed rates as stated in the
agreements. At June 30, 1996, the variable rate to be paid by the Company was
5.52% and the fixed rate to be received by the Company was 6.12%. Amounts due to
the Company under these swap agreements were $12.5 million and $10.5 million at
June 30, 1996 and 1995, respectively. As a result of the swap agreements,
interest expense was reduced by $5.9 million, $4.7 million and $38.7 million for
fiscal 1996, 1995 and 1994, respectively.
The following summarizes activity of interest rate swap agreements (in
thousands):
<TABLE>
<CAPTION>
Receive Pay Estimated
Fixed Rate Fixed Rate Total Fair Value
<S> <C> <C> <C> <C>
Balance at
June 30, 1993 $1,361,000 $100,000 $1,461,000
Additions 625,000 -- 625,000
Maturities (290,000) (100,000) (390,000)
---------- -------- ----------
Balance at
June 30, 1994 1,696,000 -- 1,696,000
Additions 535,500 -- 535,500
Maturities (253,000) -- (253,000)
---------- -------- ----------
Balance at
June 30, 1995 1,978,500 -- 1,978,500
Additions 720,000 -- 720,000
Maturities (598,000) -- (598,000)
---------- -------- ----------
Balance at
June 30, 1996 $2,100,500 $ -- $2,100,500 $(8,372)
========== ======== ========== =======
</TABLE>
The notional amounts at June 30, 1996, by estimated maturity are as
follows (in thousands):
<TABLE>
<S> <C>
1997 $665,500
1998 535,000
1999 450,000
2000 --
2001 300,000
Thereafter 150,000
----------
$2,100,500
==========
</TABLE>
NOTE N - ASSET SECURITIZATION
The Company had outstanding securitizations of credit card loans of $15.2
billion and $10.1 billion at June 30, 1996 and 1995, respectively. During fiscal
1996, 1995 and 1994, the Company securitized credit card loans of $5.3 billion,
$6.5 billion and $2.8 billion, respectively, which were offset
59
<PAGE>
by the scheduled amortization of previous credit card securitizations. Fiscal
1996 includes a $500 million securitization that represents funded credit
enhancement for future securitization issues. These transactions have been
recorded as sales and the Company recognized gains based upon the present value
of the net interest income and credit card fees less estimated credit losses and
servicing fees over the lives of the securitized loans.
Certain pools of credit card loans have been sold to a master trust, of which
the master trust has sold participation interests in public and private
offerings. The participations have remaining maturities averaging approximately
3.4 years, with respective fixed or floating coupon rates and ratings as a
result of specific credit enhancement features. The providers of the credit
enhancements have no recourse to the Company. The Company does not receive
collateral from any party to the securitizations, nor does the Company have any
risk of counterparty nonperformance.
In addition, First USA Bank maintains facilities which provide for the
securitization of receivables on a revolving basis totaling $2.5 billion through
the issuance of commercial paper ($1.0 billion) and a committed bank facility
for introductory rate cards ($1.5 billion). The Company had securitized $193.3
million and $493.2 million of credit card loans through these facilities at June
30, 1996 and 1995, respectively.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------
At June 30, 1996 At June 30, 1995
--------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 392,704 $ 392,704 $ 236,778 $ 236,778
Investments 2,903,091 2,875,309 2,205,523 2,208,499
Credit card loans, net of allowance for possible credit losses 3,490,271 3,490,271 3,121,568 3,121,568
---------- ---------- ---------- ----------
Total $6,786,066 $6,758,284 $5,563,869 $5,566,845
========== ========== ========== ==========
Financial liabilities:
Bank notes and other borrowings $3,356,506 $3,339,167 $2,183,299 $2,174,975
Interest-bearing deposits 1,460,321 1,453,830 2,120,648 2,120,711
Federal funds purchased 1,308,460 1,308,460 871,390 871,390
---------- ---------- ---------- ----------
Total 6,125,287 6,101,457 5,175,337 5,167,076
Off-balance-sheet financial instruments:
Interest rate swaps, net (a) -- 8,372 -- (4,511)
---------- ---------- ---------- ----------
Total including off-balance-sheet financial instruments $6,125,287 $6,109,829 $5,175,337 $5,162,565
========== ========== ========== ==========
</TABLE>
(a) Notional amounts of $2.1 billion and $2.0 billion at June 30, 1996 and
1995, respectively.
60
<PAGE>
The above values, in many cases, could not be realized in an immediate
settlement of the financial instrument. In addition, certain financial
instruments and all non-financial instruments are excluded. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and cash equivalents
- -------------------------
Cash and cash equivalents are carried at an amount that approximates fair value.
Investments
- -----------
Fair value is based on quoted market prices, dealer quotes or estimates using
quoted market prices for similar securities.
Credit card loans
- -----------------
Credit card loans are carried at an amount that approximates fair value since
the Company's credit card loans are either variable rate or at fixed rates that
are repriceable within 30 days notice to Cardmembers.
Bank notes and other borrowings
- -------------------------------
The fair value of fixed-rate bank notes and subordinated debt is estimated using
the rates currently offered for instruments of similar remaining maturities. The
carrying amount for variable-rate instruments approximates their fair value. The
carrying amount of other borrowings approximates fair value.
Interest-bearing deposits
- -------------------------
The fair value of fixed-rate deposits is estimated using the rates currently
offered for deposits of similar remaining maturities. The carrying amount for
variable-rate deposits approximates their fair value.
Federal funds purchased
- -----------------------
The carrying amount approximates fair value.
Interest rate swaps
- -------------------
The fair value of interest rate swaps is the estimated amount that the Company
would receive or pay to terminate the agreement at the reporting date, taking
into account current interest rates and the current creditworthiness of the
counterparty.
NOTE P - CONCENTRATION OF CREDIT RISK
The Company is active in originating credit card loans to customers throughout
the United States. All loans are primarily made on an unsecured basis after
reviewing each potential Cardmember's credit application and evaluating their
financial history and ability to repay.
The geographic concentration of owned and serviced credit card loans was as
follows (dollars in thousands):
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------
Credit Card
State Loans Percent
<S> <C> <C>
California $ 2,698,497 14.4%
Texas 1,992,631 10.6
New York 1,506,811 8.0
Florida 1,296,225 6.9
Illinois 806,092 4.3
New Jersey 743,756 4.0
All Others 9,683,813 51.8
----------- -----
$18,727,825 100.0%
=========== =====
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1995
---------------------------
Credit Card
State Loans Percent
<S> <C> <C>
California $ 1,687,065 12.7%
Texas 1,640,196 12.3
New York 1,101,119 8.3
Florida 867,633 6.5
Illinois 630,012 4.7
New Jersey 602,493 4.5
All Others 6,758,934 51.0
----------- -----
$13,287,452 100.0%
=========== =====
</TABLE>
61
<PAGE>
NOTE Q - OTHER OPERATING EXPENSE
The other expense component of other operating expense consists of the following
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Professional services and other $140,998 $ 75,131 $22,854
Credit card fraud losses 33,565 24,070 13,409
Other 29,752 30,525 35,683
-------- -------- --------
$204,315 $129,726 $ 71,946
======== ======== ========
</TABLE>
NOTE R - PARENT COMPANY ONLY INFORMATION
The condensed financial statements of First USA, Inc., prepared on a parent
company unconsolidated basis, are as follows (in thousands):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
- -------------------------------------------------------------------------------
June 30,
----------------------------------
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,664 $ 7,746
Investment in subsidiary 1,069,765 749,120
Receivable from subsidiary 18,999 482
Other assets 23,536 7,625
---------- --------
$1,113,964 $764,973
========== ========
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 84 $ 158
Stockholder's Equity
6 1/4% mandatory convertible
preferred stock 58 58
Common stock 1,210 1,174
Additional paid-in capital 568,840 440,929
Retained earnings 543,772 322,654
---------- --------
1,113,880 764,815
---------- --------
$1,113,964 $764,973
========== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Fiscal Year Ended June 30,
---------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Equity in earnings of subsidiary $250,514 $180,317 $140,549
Interest income 114 221 462
Other expense 3,742 1,966 564
-------- -------- --------
Income before Income Taxes 246,886 178,572 140,447
Provision for income taxes 150 150 150
-------- -------- --------
Net Income $246,736 $178,422 $140,297
======== ======== ========
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Fiscal Year Ended June 30,
-----------------------------------
1996 1995 1994
<S> <C> <C> <C>
Operating Activities
Net income $246,736 $178,422 $140,297
Adjustments to reconcile net
income to net cash used
for operating activities:
Equity in earnings of
subsidiary (250,514) (180,317) (140,549)
Other operating activities (19,588) 718 88
-------- -------- -------
Net Cash Used for
Operating Activities (23,366) (1,177) (164)
Investing Activities
Capital contributions to
First USA Financial, Inc. -- -- (219,000)
Dividends received from
subsidiary 25,618 18,241 6,142
Other investing activities (12,259) -- --
-------- -------- -------
Net Cash Provided by
(Used for) Investing Activities 13,359 18,241 (212,858)
Financing Activities
Issuance of common stock, net 29,543 2,450 48,400
Dividends paid to common
stockholders (14,164) (6,787) (4,204)
Dividends paid to preferred
stockholders (11,454) (11,454) (2,132)
Issuance of 6 1/4% mandatory
convertible preferred stock -- -- 177,402
-------- -------- -------
Net Cash Provided by
(Used for) Financing Activities 3,925 (15,791) 219,466
-------- -------- -------
(Decrease) Increase in Cash and
Cash Equivalents (6,082) 1,273 6,444
Cash and cash equivalents at
beginning of year 7,746 6,473 29
-------- -------- -------
Cash and Cash Equivalents
at End of Year $ 1,664 $ 7,746 $ 6,473
======== ======== =======
</TABLE>
63
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
First USA, Inc.
We have audited the accompanying consolidated balance sheets of First USA, Inc.
and subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the two years in the period ended June 30, 1996 and the year ended June 30,
1994, as restated. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First USA, Inc.
and subsidiaries at June 30, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended June 30, 1996, and the year ended June 30, 1994, as restated, in
conformity with generally accepted accounting principles.
As discussed in Note A, the Company has restated its financial statements to
recognize gains on securitization transactions and expense certain costs to
solicit new accounts.
/s/ Ernst & Young LLP
Dallas, Texas
July 17, 1996, except for Notes D and A
as to which the dates are August 19, 1996 and April 22, 1997, respectively.
64
<PAGE>
Quarterly Financial Information - Unaudited
<TABLE>
<CAPTION>
First USA, Inc. and Subsidiaries
----------------------------------------------------
Fiscal 1996
(As Restated)
----------------------------------------------------
(In thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Interest income $122,823 $145,002 $132,561 $114,707
Interest expense 93,284 103,647 103,967 91,041
Net interest income 29,539 41,355 28,594 23,666
Provision for possible credit losses 23,546 25,704 19,672 21,231
Other operating income 276,847 292,518 287,138 262,146
Amortization of intangibles 14,128 14,080 13,925 13,773
Operating expenses 192,471 160,630 177,559 174,800
Income before income taxes 76,241 133,459 104,576 76,008
Net income $ 47,775 $ 84,999 $ 66,158 $ 47,804
Net income per share $ 0.35 $ 0.63 $ 0.50 $ 0.36
Weighted average common and common equivalent shares outstanding 135,185 134,130 133,295 132,749
----------------------------------------------------
Fiscal 1995
(As Restated)
----------------------------------------------------
(In thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Interest income $106,104 $111,036 $101,708 $108,877
Interest expense 84,948 85,330 71,463 63,807
Net interest income 21,156 25,706 30,245 45,070
Provision for possible credit losses 14,938 12,798 13,881 13,042
Other operating income 202,342 212,261 194,446 155,285
Amortization of intangibles 13,685 13,667 13,694 13,702
Operating expenses 162,655 130,475 110,463 91,912
Income before income taxes 32,220 81,027 86,653 81,699
Net income $ 19,631 $ 51,618 $ 55,031 $ 52,142
Net income per share $ 0.15 $ 0.39 $ 0.43 $ 0.41
Weighted average common and common equivalent shares outstanding 132,249 131,627 121,756 121,593
</TABLE>
Quarterly income per share amounts are computed on the basis of the weighted
average number of shares outstanding for each quarter. Changes between quarters
in the number of shares outstanding result in the annual computation differing
from the aggregate of the quarterly amounts.
Beginning with the third quarter of fiscal 1995, weighted average common and
common equivalent shares outstanding assume conversion of the Company's 5.75
million shares of mandatory convertible preferred stock that are currently
convertible into 9.58 million shares of common stock.
As described in Note A to the Company's consolidated financial statements, the
above unaudited quarterly financial information has been restated to reflect the
recognition of gains on the securitization of credit card loans and to expense
certain costs to solicit new accounts in the period they were incurred. The
effects of such restatements on the Company's quarterly financial information
are included in the following table. The "as previously reported" information
includes certain reclassifications to conform to the Company's current style of
presentation.
<TABLE>
<CAPTION>
-----------------------------------------------------------
Fiscal 1996
-----------------------------------------------------------
(In thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Other operating income as previously
reported $297,929 $270,774 $252,381 $225,740
Adjustment (21,082) 21,744 34,757 36,406
--------- --------- --------- ---------
Other operating income as restated $276,847 $292,518 $287,138 $262,146
========= ========= ========= =========
Other operating expenses as previously
reported $181,201 $171,024 $153,943 $127,467
Adjustment 11,270 (10,394) 23,616 47,333
--------- --------- --------- ---------
Other operating expenses as restated $192,471 $160,630 $177,559 $174,800
========= ========= ========= =========
Net income as previously reported $ 68,767 $ 64,145 $ 58,929 $ 54,895
Adjustment (20,992) 20,854 7,229 (7,091)
--------- --------- --------- ---------
Net income as restated $ 47,775 $ 84,999 $ 66,158 $ 47,804
========= ========= ========= =========
Net income per share as previously
reported $ 0.51 $ 0.48 $ 0.44 $ 0.41
Adjustment (0.16) 0.15 0.06 (0.05)
--------- --------- --------- ---------
Net income per share as restated $ 0.35 $ 0.63 $ 0.50 $ 0.36
========= ========= ========= =========
<CAPTION>
-----------------------------------------------------------
Fiscal 1995
-----------------------------------------------------------
(In thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Other operating income as previously
reported $201,561 $182,135 $170,544 $132,422
Adjustment 781 30,126 23,902 22,863
--------- --------- --------- ---------
Other operating income as restated $202,342 $212,261 $194,446 $155,285
========= ========= ========= =========
Other operating expenses as previously
reported $114,118 $105,889 $105,914 $ 91,912
Adjustment 48,537 24,586 4,549 --
--------- --------- --------- ---------
Other operating expenses as restated $162,655 $130,475 $110,463 $ 91,912
========= ========= ========= =========
Net income as previously reported $ 50,710 $ 48,013 $ 42,436 $ 37,263
Adjustment (31,079) 3,605 12,595 14,879
--------- --------- --------- ---------
Net income as restated $ 19,631 $ 51,618 $ 55,031 $ 52,142
========= ========= ========= =========
Net income per share as previously
reported $ 0.38 $ 0.36 $ 0.33 $ 0.28
Adjustment (0.23) 0.03 0.10 0.13
--------- --------- --------- ---------
Net income per share as restated $ 0.15 $ 0.39 $ 0.43 $ 0.41
========= ========= ========= =========
</TABLE>
65
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
a. (1) The following consolidated financial statement schedule of First
USA, Inc. and its subsidiaries is included in Item 14(d):
No financial statement schedules are required to be filed.
(2) Listing of Exhibits
The following exhibits are incorporated by reference or filed herewith:
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.1.1 to the Company's Annual Report
on Form 10-K for the Company's Fiscal Year Ended June 30,
1992 and incorporated by reference herein.
3.1.1 Certificate of Correction of the Restated Certificate of
Incorporation of the Company, filed as Exhibit 3.1.1 to
the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended September 30, 1993 and incorporated by
reference herein.
3.1.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed as Exhibit 3.1.2 to
the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended September 30, 1993 and incorporated by
reference herein.
3.2 By-Laws of the Company, filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (No.
33-45110) and incorporated by reference herein.
4.1 Certificate of the Powers, Designations, Preferences
and Rights of the Mandatory Convertible Preferred Stock,
filed as Exhibit 4.1 to the Company's Annual Report on
Form 10-K for the Fiscal Year ended June 30, 1995 and
incorporated by reference herein.
4.2 Revolving Credit Agreement dated December 27, 1995
among First USA Financial, Inc., the lenders listed
therein and NationsBank of Texas, N.A., as Agent,
including the form of Promissory Note thereto, filed as
Exhibit 4.2 to the Company's
Quarterly
66
<PAGE>
Report on Form 10-Q for the Fiscal Quarter ended December 31,
1995 and incorporated by reference herein.
4.3 Form of Global Bank Note, Floating Rate, filed as Exhibit 4.3
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.4 Form of Global Bank Note, Fixed Rate, filed as Exhibit 4.4 to
the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.5 Form of Global Deposit Note, Floating Rate, filed as Exhibit
4.5 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended December 31, 1995 and incorporated by
reference herein.
4.6 Form of Global Deposit Note, Fixed Rate, filed as Exhibit 4.6
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.7 Guaranty Agreement, dated February 21, 1996, by First USA
Financial, Inc., and Revolving Credit Agreement dated February
21, 1996 among First USA Paymentech, Inc., the lenders listed
therein and NationsBank of Texas, N.A., as Agent, including
the notes related thereto, filed as Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended March 31, 1996 and incorporated by reference herein.
10.1 Service Agreement, dated as of March 9, 1990, among First USA
Bank, First USA Financial and First Data Resources, Inc.,
filed as Exhibit 10.2 to the Company's Registration Statement
on Form S-1 (No. 33-45110) and incorporated by reference
herein.
10.1.1 First Amendment to Service Agreement, dated as of June 19,
1991, filed as Exhibit 10.2.1 to the Company's Registration
Statement on Form S-1 (No. 33-45110) and incorporated by
reference herein.
10.2 Employment Agreement, dated as of August 7, 1989, between the
Company and John C. Tolleson, filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.2.1 First Amendment to Employment Agreement between the Company
and John C. Tolleson, filed as Exhibit 10.4.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994 and incorporated by reference herein.
10.2.2 Second Amendment to Employment Agreement between the Company
and John C. Tolleson, dated January 19, 1994, filed as Exhibit
10.8.2 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended March 31, 1994 and incorporated by
reference herein.
10.2.3 Third Amendment to Employment Agreement between the Company
and John C. Tolleson, dated as of October 18, 1995, filed as
Exhibit 10.3.3 to the Company's Quarterly Report on Form 10-Q
for the Fiscal Quarter ended September 30, 1995, and
incorporated by reference herein.
10.3 Employment Agreement, dated as of August 7, 1989, between the
Company and Richard W. Vague, filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
67
<PAGE>
10.3.1 First Amendment to Employment Agreement between the Company
and Richard W. Vague, filed as Exhibit 10.5.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994 and incorporated by reference herein.
10.3.2 Second Amendment to Employment Agreement between the Company
and Richard W. Vague, dated January 19, 1994, filed as Exhibit
10.9.2 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended March 31, 1994 and incorporated by
reference herein.
10.3.3 Third Amendment to Employment Agreement between the Company
and Richard W. Vague, dated as of October 18, 1995, filed as
Exhibit 10.4.3 to the Company's Quarterly Report on Form 10-Q
for the Fiscal Quarter ended September 30, 1995, and
incorporated by reference herein.
10.4 First USA Retirement Savings Plan, filed as Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (No. 333-
11265) and incorporated by reference herein.
10.5 Supplemental Executive Retirement Plan, filed as Exhibit 10.10
to the Company's Registration Statement on Form S-1 (No. 33-
45110) and incorporated by reference herein.
10.6 First USA Savings Restoration Plan, filed as Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the Fiscal Year
ended June 30, 1994 and incorporated by reference herein.
10.6.1 Amendment No. 1 to the First USA Savings Restoration Plan,
filed as Exhibit 10.8.1 to the Company's Annual Report on Form
10-K for the Fiscal Year ended June 30, 1994 and incorporated
by reference herein.
10.7 Management Security Plan, filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.8 Employee Stock Option Plan, filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.9 Management Investors Stock Option Plan, filed as Exhibit 10.13
to the Company's Registration Statement on Form S-1 (No. 33-
45110) and incorporated by reference herein.
10.10 Management Investors Performance Stock Option Plan, filed as
Exhibit 10.14 to the Company's Registration Statement on Form
S-1 (No. 33-45110) and incorporated by reference herein.
10.11 1991 Stock Option Plan, filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.11.1 First Amendment to the 1991 Stock Option Plan, effective
November 4, 1993, filed as Exhibit 10.15.1 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
March 31, 1994 and incorporated by reference herein.
10.11.2 Second Amendment to the 1991 Stock Option Plan, effective
April 20, 1994, filed as Exhibit 10.15.2 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
March 31, 1994 and incorporated by reference herein.
10.11.3 Third Amendment to the 1991 Stock Option Plan, effective
November 1, 1995, filed as Exhibit 10.10.3 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
December 31, 1995 and incorporated by reference herein.
68
<PAGE>
10.12 Employee Stock Purchase Plan, filed as Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.12.1 First Amendment to Employee Stock Purchase Plan, effective
November 2, 1994, filed as Exhibit 10.14.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994 and incorporated by reference herein.
10.12.2 Second Amendment to Employee Stock Purchase Plan, effective
July 17, 1996, filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (No. 333-11245) and
incorporated by reference herein.
10.13 Amended and Restated Outside Directors Option Plan, effective
November 2, 1994, filed as Exhibit 10.17.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994, and incorporated by reference herein.
10.14 1994 Restricted Stock Plan, effective November 2, 1994, filed
as Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1994, and incorporated by
reference herein.
10.14.1 First Amendment to the 1994 Restricted Stock Plan, effective
November 1, 1995, filed as Exhibit 10.13.1 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
December 31, 1995 and incorporated by reference herein.
10.15 First USA Deferred Compensation Plan, filed as Exhibit 4.6 to
the Company's Registration Statement on Form S-8 (No. 333-
07025) and incorporated by reference herein.
10.16 Pooling and Servicing Agreement, dated as of September 1,
1992, between First USA Bank and The Bank of New York
(Delaware) (as successor to NationsBank of Virginia, N.A.), as
trustee, with respect to the First USA Credit Card Master
Trust, Class A Asset Backed Certificates, Series 1992-1 and
Class B Asset Backed Certificates, Series 1992-1, including
the form of Series 1992-1 Supplement and Certificates, filed
as Exhibit 4 to First USA Bank's Registration Statement on
Form S-1 (No. 33-50600) and incorporated by reference herein.
10.16.1 Series 1993-1 Supplement, dated as of May 1, 1993 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1993-1, filed as
Exhibit 4.2 to First USA Bank's Registration Statement on Form
S-1 (No. 33-59672) and incorporated by reference herein.
10.16.2 Series 1993-2 Supplement, dated as of October 1, 1993 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1993-2, filed as
Exhibit 10.19.2 to the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1994 and incorporated by
reference herein.
10.16.3 Series 1993-3 Supplement, dated as of October 1, 1993 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1993-3, filed as
Exhibit 10.19.3 to the Company's
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<PAGE>
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994 and incorporated by reference herein.
10.16.4 Series 1994-1 Supplement, dated as of April 5, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Variable
Funding Certificates, Series 1994-1, filed as Exhibit 10.23.4
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended March 31, 1994 and incorporated by reference
herein.
10.16.5 First Amendment to Series 1994-1 Supplement, dated as of March
23, 1995 between First USA Bank and The Bank of New York
(Delaware) (as successor to NationsBank of Virginia, N.A.), as
trustee, with respect to the First USA Credit Card Master
Trust, Variable Funding Certificates, Series 1994-1, filed as
Exhibit 10.16.5 to the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1995 and incorporated by
reference herein.
10.16.6 Series 1994-2 Supplement, dated as of April 5, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Variable
Funding Certificates, Series 1994-2, filed as Exhibit 10.23.5
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended March 31, 1994 and incorporated by reference
herein.
10.16.7 First Amendment to Series 1994-2 Supplement, dated as of
October 11, 1994 between First USA Bank and The Bank of New
York (Delaware) (as successor to NationsBank of Virginia,
N.A.), as trustee, with respect to the First USA Credit Card
Master Trust, Variable Funding Certificates, Series 1994-2,
filed as Exhibit 10.16.7 to the Company's Annual Report on
Form 10-K for the Fiscal Year ended June 30, 1995 and
incorporated by reference herein.
10.16.8 Second Amendment to Series 1994-2 Supplement, dated as of
November 7, 1994 between First USA Bank and The Bank of New
York (Delaware) (as successor to NationsBank of Virginia,
N.A.), as trustee, with respect to the First USA Credit Card
Master Trust, Variable Funding Certificates, Series 1994-2,
filed as Exhibit 10.16.8 to the Company's Annual Report on
Form 10-K for the Fiscal Year ended June 30, 1995 and
incorporated by reference herein.
10.16.9 Third Amendment to Series 1994-2 Supplement, dated as of June
30, 1995 between First USA Bank and The Bank of New York
(Delaware) (as successor to NationsBank, N.A.), as trustee,
with respect to the First USA Credit Card Master Trust,
Variable Funding Certificates, Series 1994-2, filed as Exhibit
10.16.9 to the Company's Annual Report on Form 10-K for the
Fiscal Year ended June 30, 1995 and incorporated by reference
herein.
10.16.10 Series 1994-3 Supplement, dated as of June 1, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-3, filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K,
dated as of June 9, 1994 and incorporated by reference herein.
10.16.11 Series 1994-4 Supplement, dated as of June 1, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-4, filed as
Exhibit 99.2 to the Company's Current Report on Form 8-K,
dated as of June 9, 1994 and incorporated by reference herein.
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<PAGE>
10.16.12 Series 1994-5 Supplement, dated as of July 30, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-5 filed as Exhibit
99.1 to the Company's Current Report on Form 8-K, dated as of
August 24, 1994 and incorporated by reference herein.
10.16.13 Series 1994-6 Supplement, dated as of July 30, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-6 filed as Exhibit
99.2 to the Company's Current Report on Form 8-K, dated as of
August 24, 1994 and incorporated by reference herein.
10.16.14 Series 1994-7 Supplement, dated as of November 8, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-7 filed as Exhibit
99.1 to the Company's Current Report on Form 8-K, dated as of
November 8, 1994 and incorporated by reference herein.
10.16.15 Series 1994-8 Supplement, dated as of November 8, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-8 filed as Exhibit
99.2 to the Company's Current Report on Form 8-K, dated as of
November 8, 1994 and incorporated by reference herein.
10.16.16 Series 1995-1 Supplement, dated as of March 1, 1995 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1995-1 filed as Exhibit
99.1 to the Company's Current Report on Form 8-K, dated as of
March 1, 1995 and incorporated by reference herein.
10.16.17 Series 1995-2 Supplement, dated as of March 1, 1995 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1995-2 filed as Exhibit
99.2 to the Company's Current Report on Form 8-K, dated as of
March 1, 1995 and incorporated by reference herein.
10.16.18 Series 1995-3 Supplement, dated as of May 16, 1995 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1995-3 filed as Exhibit
99.1 to the Company's Current Report on Form 8-K, dated as of
May 16, 1995 and incorporated by reference herein.
10.16.19 Series 1995-4 Supplement, dated as of September 14, 1995
between First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as trustee, with respect to
the First USA Credit Card Master Trust, Floating Rate Asset
Backed Certificates, Series 1995-4 filed as Exhibit 99.1 to
the Company's Current Report on Form 8-K, dated as of
September 22, 1995 and incorporated by reference herein.
10.16.20 Series 1995-5 Supplement, dated as of September 14, 1995
between First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as
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<PAGE>
trustee, with respect to the First USA Credit Card Master
Trust, Floating Rate Asset Backed Certificates, Series 1995-5
filed as Exhibit 99.2 to the Company's Current Report on Form
8-K, dated as of September 22, 1995 and incorporated by
reference herein.
10.16.21 Series 1995-6 Supplement, dated as of December 7, 1995 between
First USA Bank and The Bank of New York (Delaware), as
trustee, with respect to the First USA Credit Card Master
Trust, Floating Rate Asset Backed Certificates, Series 1995-6
filed as Exhibit 99.2 to the Company's Current Report on Form
8-K, filed on December 21, 1995 and incorporated by reference
herein.
10.16.22 Series 1996-1 Supplement, dated as of February 22, 1996
between First USA and The Bank of New York (Delaware) (as
successor to The Bank of New York as successor to NationsBank,
N.A.), as trustee, with respect to the First USA Credit Card
Master Trust, Floating Rate Asset Backed Certificates, Series
1996-1 filed as Exhibit 99 to the Company's Current Report on
Form 8-K, filed on March 21, 1996 and incorporated by
reference herein.
10.16.23 Series 1996-E1 Supplement, dated of May 2, 1996 between First
USA Bank and The Bank of New York (Delaware), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1996-E1, filed as
Exhibit 99 to the Company's Current Report on Form 8-K, filed
on May 17, 1996 and incorporated herein by reference.
10.16.24 Series 1996-2 Supplement, dated as of June 4, 1996 between
First USA Bank and The Bank of New York (Delaware), as
trustee, with respect to the First USA Credit Card Master
Trust, Floating Rate Asset Backed Certificates, Series 1996-2,
filed as Exhibit 99 to the Company's Current Report on Form 8-
K, filed on June 28, 1996 and incorporated herein by
reference.
10.16.25 Series 1996-3 Supplement, dated as of June 6, 1996 between
First USA Bank and The Bank of New York (Delaware), as
trustee, with respect to the First USA Credit Card Master
Trust, Floating Rate Asset Backed Certificates, Series 1996-3,
filed as Exhibit 99 to the Company's Current Report on Form 8-
K, filed on June 28, 1996 and incorporated herein by
reference.
10.17 Pooling and Servicing Agreement, dated as of May 11, 1995,
between First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as trustee, on behalf of the
Certificateholders of the First USA Credit Card Master Trust
II, filed as Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the Fiscal Year ended June 30, 1995 and
incorporated herein by reference.
10.17.1 Series 1995-A Supplement, dated as of May 11, 1995, between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as trustee, with respect to
the First USA Credit Card Master II, Variable Funding
Certificates, Series 1995-A and Floating Rate Asset Backed
Certificates, Series 1995-A, filed as Exhibit 10.17.1 to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
June 30, 1995 and incorporated herein by reference.
10.18 1995 Incentive Bonus Plan, effective November 1, 1995, filed
as Exhibit 10.16 to the Company's Quarterly Report on Form 10-
Q for the Fiscal Quarter ended December 31, 1995 and
incorporated by reference herein.
10.19 Intercompany Services Agreement, dated as of March 21, 1996,
between First USA Management, Inc. and First USA Paymentech,
Inc., filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the Fiscal Quarter, ended March 31, 1996 and
incorporated by reference herein.
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<PAGE>
10.20 Registration Rights Agreement between the Company and First
USA Paymentech, filed as Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 and incorporated by reference herein.
10.21 Tax Sharing Agreement between the Company and First USA
Paymentech, filed as Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996 and
incorporated by reference herein.
11* Computation of Net Income per Share.
21 Subsidiaries of the Registrant, filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996 and incorporated by reference herein.
23* Consent of Independent Auditors.
27* Financial Data Schedule
____________________
* Filed herewith
b. Reports on Form 8-K filed in the fourth quarter of fiscal year ended June 30,
1996:
Form 8-K filed May 17, 1996
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
Form 8-K filed June 28, 1996
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
Form 8-K filed June 28, 1996
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
Reports on 8-K filed subsequent to June 30, 1996:
Form 8-K filed August 21, 1996
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
c. Exhibits--Such exhibits as are indicated in the Listing of Exhibits as being
filed herewith are filed as exhibits to this report.
d. Financial Statement Schedule--No financial statement schedules are required
or filed herewith.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST USA, INC.
Dated: April 24, 1997 By: /s/ John C. Tolleson
_______________________________________
John C. Tolleson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on April 24, 1997.
SIGNATURE TITLE
--------- -----
/s/ John C. Tolleson Chairman of the Board and Chief Executive Officer
- ----------------------- (Principal Executive Officer)
John C. Tolleson
/s/ Richard W. Vague President and Director
- -----------------------
Richard W. Vague
/s/ Jack M. Antonini Vice Chairman and Chief Financial Officer
- ----------------------- (Principal Financial and Accounting Officer)
Jack M. Antonini
/s/ Gerald S. Armstrong Director
- -----------------------
Gerald S. Armstrong
/s/ Gene H. Bishop Director
- -----------------------
Gene H. Bishop
/s/ Charles T. Russell Director
- -----------------------
Charles T. Russell
/s/ Rupinder S. Sidhu Director
- -----------------------
Rupinder S. Sidhu
/s/ Roger T. Staubach Director
- -----------------------
Roger T. Staubach
/s/ Carl H. Westcott Director
- -----------------------
Carl H. Westcott
74
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Description Page No.
- -------------- ----------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1.1 to the Company's Annual Report on Form 10-K for
the Company's Fiscal Year Ended June 30, 1992 and incorporated
by reference herein.
3.1.1 Certificate of Correction of the Restated Certificate of
Incorporation of the Company, filed as Exhibit 3.1.1 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended September 30, 1993 and incorporated by reference herein.
3.1.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed as Exhibit 3.1.2 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended September 30, 1993 and incorporated by reference herein.
3.2 By-Laws of the Company, filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (No. 33-45110) and
incorporated by reference herein.
4.1 Certificate of the Powers, Designations, Preferences and
Rights of the Mandatory Convertible Preferred Stock, filed as
Exhibit 4.1 to the Company's Annual Report on Form 10-K for
the Fiscal Year ended June 30, 1995 and incorporated by
reference herein.
4.2 Revolving Credit Agreement dated December 27, 1995 among First
USA Financial, Inc., the lenders listed therein and
NationsBank of Texas, N.A., as Agent, including the form of
Promissory Note thereto, filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
December 31, 1995 and incorporated by reference herein.
4.3 Form of Global Bank Note, Floating Rate, filed as Exhibit 4.3
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.4 Form of Global Bank Note, Fixed Rate, filed as Exhibit 4.4 to
the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.5 Form of Global Deposit Note, Floating Rate, filed as Exhibit
4.5 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended December 31, 1995 and incorporated by
reference herein.
4.6 Form of Global Deposit Note, Fixed Rate, filed as Exhibit 4.6
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1995 and incorporated by reference
herein.
4.7 Guaranty Agreement, dated February 21, 1996, by First USA
Financial, Inc., and Revolving Credit Agreement dated February
21, 1996 among First USA Paymentech, Inc., the lenders listed
therein and NationsBank of Texas, N.A., as Agent, including
the notes related thereto, filed as Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended March 31, 1996 and incorporated by reference herein.
</TABLE>
75
<PAGE>
<TABLE>
<S> <C>
10.1 Service Agreement, dated as of March 9, 1990, among First USA
Bank, First USA Financial and First Data Resources, Inc.,
filed as Exhibit 10.2 to the Company's Registration Statement
on Form S-1 (No. 33-45110) and incorporated by reference
herein.
10.1.1 First Amendment to Service Agreement, dated as of June 19,
1991, filed as Exhibit 10.2.1 to the Company's Registration
Statement on Form S-1 (No. 33-45110) and incorporated by
reference herein.
10.2 Employment Agreement, dated as of August 7, 1989, between the
Company and John C. Tolleson, filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.2.1 First Amendment to Employment Agreement between the Company
and John C. Tolleson, filed as Exhibit 10.4.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994 and incorporated by reference herein.
10.2.2 Second Amendment to Employment Agreement between the Company
and John C. Tolleson, dated January 19, 1994, filed as Exhibit
10.8.2 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended March 31, 1994 and incorporated by
reference herein.
10.2.3 Third Amendment to Employment Agreement between the Company
and John C. Tolleson, dated as of October 18, 1995, filed as
Exhibit 10.3.3 to the Company's Quarterly Report on Form 10-Q
for the Fiscal Quarter ended September 30, 1995, and
incorporated by reference herein.
10.3 Employment Agreement, dated as of August 7, 1989, between the
Company and Richard W. Vague, filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.3.1 First Amendment to Employment Agreement between the Company
and Richard W. Vague, filed as Exhibit 10.5.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994 and incorporated by reference herein.
10.3.2 Second Amendment to Employment Agreement between the Company
and Richard W. Vague, dated January 19, 1994, filed as Exhibit
10.9.2 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended March 31, 1994 and incorporated by
reference herein.
10.3.3 Third Amendment to Employment Agreement between the Company
and Richard W. Vague, dated as of October 18, 1995, filed as
Exhibit 10.4.3 to the Company's Quarterly Report on Form 10-Q
for the Fiscal Quarter ended September 30, 1995, and
incorporated by reference herein.
10.4 First USA Retirement Savings Plan, filed as Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (No. 333-
11265) and incorporated by reference herein.
10.5 Supplemental Executive Retirement Plan, filed as Exhibit 10.10
to the Company's Registration Statement on Form S-1 (No. 33-
45110) and incorporated by reference herein.
</TABLE>
76
<PAGE>
<TABLE>
<S> <C>
10.6 First USA Savings Restoration Plan, filed as Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the Fiscal Year
ended June 30, 1994 and incorporated by reference herein.
10.6.1 Amendment No. 1 to the First USA Savings Restoration Plan,
filed as Exhibit 10.8.1 to the Company's Annual Report on Form
10-K for the Fiscal Year ended June 30, 1994 and incorporated
by reference herein.
10.7 Management Security Plan, filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.8 Employee Stock Option Plan, filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.9 Management Investors Stock Option Plan, filed as Exhibit 10.13
to the Company's Registration Statement on Form S-1 (No. 33-
45110) and incorporated by reference herein.
10.10 Management Investors Performance Stock Option Plan, filed as
Exhibit 10.14 to the Company's Registration Statement on Form
S-1 (No. 33-45110) and incorporated by reference herein.
10.11 1991 Stock Option Plan, filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.11.1 First Amendment to the 1991 Stock Option Plan, effective
November 4, 1993, filed as Exhibit 10.15.1 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
March 31, 1994 and incorporated by reference herein.
10.11.2 Second Amendment to the 1991 Stock Option Plan, effective
April 20, 1994, filed as Exhibit 10.15.2 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
March 31, 1994 and incorporated by reference herein.
10.11.3 Third Amendment to the 1991 Stock Option Plan, effective
November 1, 1995, filed as Exhibit 10.10.3 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
December 31, 1995 and incorporated by reference herein.
10.12 Employee Stock Purchase Plan, filed as Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (No. 33-45110)
and incorporated by reference herein.
10.12.1 First Amendment to Employee Stock Purchase Plan, effective
November 2, 1994, filed as Exhibit 10.14.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994 and incorporated by reference herein.
10.12.2 Second Amendment to Employee Stock Purchase Plan, effective
July 17, 1996, filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (No. 333-11245) and
incorporated by reference herein.
</TABLE>
77
<PAGE>
<TABLE>
<S> <C>
10.13 Amended and Restated Outside Directors Option Plan, effective
November 2, 1994, filed as Exhibit 10.17.1 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended June 30,
1994, and incorporated by reference herein.
10.14 1994 Restricted Stock Plan, effective November 2, 1994, filed
as Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1994, and incorporated by
reference herein.
10.14.1 First Amendment to the 1994 Restricted Stock Plan, effective
November 1, 1995, filed as Exhibit 10.13.1 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
December 31, 1995 and incorporated by reference herein.
10.15 First USA Deferred Compensation Plan, filed as Exhibit 4.6 to
the Company's Registration Statement on Form S-8 (No. 333-
07025) and incorporated by reference herein.
10.16 Pooling and Servicing Agreement, dated as of September 1,
1992, between First USA Bank and The Bank of New York
(Delaware) (as successor to NationsBank of Virginia, N.A.), as
trustee, with respect to the First USA Credit Card Master
Trust, Class A Asset Backed Certificates, Series 1992-1 and
Class B Asset Backed Certificates, Series 1992-1, including
the form of Series 1992-1 Supplement and Certificates, filed
as Exhibit 4 to First USA Bank's Registration Statement on
Form S-1 (No. 33-50600) and incorporated by reference herein.
10.16.1 Series 1993-1 Supplement, dated as of May 1, 1993 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1993-1, filed as
Exhibit 4.2 to First USA Bank's Registration Statement on Form
S-1 (No. 33-59672) and incorporated by reference herein.
10.16.2 Series 1993-2 Supplement, dated as of October 1, 1993 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1993-2, filed as
Exhibit 10.19.2 to the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1994 and incorporated by
reference herein.
10.16.3 Series 1993-3 Supplement, dated as of October 1, 1993 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1993-3, filed as
Exhibit 10.19.3 to the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1994 and incorporated by
reference herein.
10.16.4 Series 1994-1 Supplement, dated as of April 5, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to
</TABLE>
78
<PAGE>
<TABLE>
<S> <C>
NationsBank of Virginia, N.A.), as trustee, with respect to
the First USA Credit Card Master Trust, Variable Funding
Certificates, Series 1994-1, filed as Exhibit 10.23.4 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended March 31, 1994 and incorporated by reference herein.
10.16.5 First Amendment to Series 1994-1 Supplement, dated as of March
23, 1995 between First USA Bank and The Bank of New York
(Delaware) (as successor to NationsBank of Virginia, N.A.), as
trustee, with respect to the First USA Credit Card Master
Trust, Variable Funding Certificates, Series 1994-1, filed as
Exhibit 10.16.5 to the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1995 and incorporated by
reference herein.
10.16.6 Series 1994-2 Supplement, dated as of April 5, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Variable
Funding Certificates, Series 1994-2, filed as Exhibit 10.23.5
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended March 31, 1994 and incorporated by reference
herein.
10.16.7 First Amendment to Series 1994-2 Supplement, dated as of
October 11, 1994 between First USA Bank and The Bank of New
York (Delaware) (as successor to NationsBank of Virginia,
N.A.), as trustee, with respect to the First USA Credit Card
Master Trust, Variable Funding Certificates, Series 1994-2,
filed as Exhibit 10.16.7 to the Company's Annual Report on
Form 10-K for the Fiscal Year ended June 30, 1995 and
incorporated by reference herein.
10.16.8 Second Amendment to Series 1994-2 Supplement, dated as of
November 7, 1994 between First USA Bank and The Bank of New
York (Delaware) (as successor to NationsBank of Virginia,
N.A.), as trustee, with respect to the First USA Credit Card
Master Trust, Variable Funding Certificates, Series 1994-2,
filed as Exhibit 10.16.8 to the Company's Annual Report on
Form 10-K for the Fiscal Year ended June 30, 1995 and
incorporated by reference herein.
10.16.9 Third Amendment to Series 1994-2 Supplement, dated as of June
30, 1995 between First USA Bank and The Bank of New York
(Delaware) (as successor to NationsBank, N.A.), as trustee,
with respect to the First USA Credit Card Master Trust,
Variable Funding Certificates, Series 1994-2, filed as Exhibit
10.16.9 to the Company's Annual Report on Form 10-K for the
Fiscal Year ended June 30, 1995 and incorporated by reference
herein.
10.16.10 Series 1994-3 Supplement, dated as of June 1, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-3, filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K,
dated as of June 9, 1994 and incorporated by reference herein.
10.16.11 Series 1994-4 Supplement, dated as of June 1, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed
</TABLE>
79
<PAGE>
<TABLE>
<S> <C>
Certificates, Series 1994-4, filed as Exhibit 99.2 to the
Company's Current Report on Form 8-K, dated as of June 9, 1994
and incorporated by reference herein.
10.16.12 Series 1994-5 Supplement, dated as of July 30, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-5 filed as Exhibit
99.1 to the Company's Current Report on Form 8-K, dated as of
August 24, 1994 and incorporated by reference herein.
10.16.13 Series 1994-6 Supplement, dated as of July 30, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-6 filed as Exhibit
99.2 to the Company's Current Report on Form 8-K, dated as of
August 24, 1994 and incorporated by reference herein.
10.16.14 Series 1994-7 Supplement, dated as of November 8, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-7 filed as Exhibit
99.1 to the Company's Current Report on Form 8-K, dated as of
November 8, 1994 and incorporated by reference herein.
10.16.15 Series 1994-8 Supplement, dated as of November 8, 1994 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1994-8 filed as Exhibit
99.2 to the Company's Current Report on Form 8-K, dated as of
November 8, 1994 and incorporated by reference herein.
10.16.16 Series 1995-1 Supplement, dated as of March 1, 1995 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1995-1 filed as Exhibit
99.1 to the Company's Current Report on Form 8-K, dated as of
March 1, 1995 and incorporated by reference herein.
10.16.17 Series 1995-2 Supplement, dated as of March 1, 1995 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1995-2 filed as Exhibit
99.2 to the Company's Current Report on Form 8-K, dated as of
March 1, 1995 and incorporated by reference herein.
10.16.18 Series 1995-3 Supplement, dated as of May 16, 1995 between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank of Virginia, N.A.), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1995-3 filed as Exhibit
99.1 to the Company's
</TABLE>
80
<PAGE>
<TABLE>
<S> <C>
Current Report on Form 8-K, dated as of May 16, 1995 and
incorporated by reference herein.
10.16.19 Series 1995-4 Supplement, dated as of September 14, 1995
between First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as trustee, with respect to
the First USA Credit Card Master Trust, Floating Rate Asset
Backed Certificates, Series 1995-4 filed as Exhibit 99.1 to
the Company's Current Report on Form 8-K, dated as of
September 22, 1995 and incorporated by reference herein.
10.16.20 Series 1995-5 Supplement, dated as of September 14, 1995
between First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as trustee, with respect to
the First USA Credit Card Master Trust, Floating Rate Asset
Backed Certificates, Series 1995-5 filed as Exhibit 99.2 to
the Company's Current Report on Form 8-K, dated as of
September 22, 1995 and incorporated by reference herein.
10.16.21 Series 1995-6 Supplement, dated as of December 7, 1995 between
First USA Bank and The Bank of New York (Delaware), as
trustee, with respect to the First USA Credit Card Master
Trust, Floating Rate Asset Backed Certificates, Series 1995-6
filed as Exhibit 99.2 to the Company's Current Report on Form
8-K, filed on December 21, 1995 and incorporated by reference
herein.
10.16.22 Series 1996-1 Supplement, dated as of February 22, 1996
between First USA and The Bank of New York (Delaware) (as
successor to The Bank of New York as successor to NationsBank,
N.A.), as trustee, with respect to the First USA Credit Card
Master Trust, Floating Rate Asset Backed Certificates, Series
1996-1 filed as Exhibit 99 to the Company's Current Report on
Form 8-K, filed on March 21, 1996 and incorporated by
reference herein.
10.16.23 Series 1996-E1 Supplement, dated of May 2, 1996 between First
USA Bank and The Bank of New York (Delaware), as trustee, with
respect to the First USA Credit Card Master Trust, Floating
Rate Asset Backed Certificates, Series 1996-E1, filed as
Exhibit 99 to the Company's Current Report on Form 8-K, filed
on May 17, 1996 and incorporated herein by reference.
10.16.24 Series 1996-2 Supplement, dated as of June 4, 1996 between
First USA Bank and The Bank of New York (Delaware), as
trustee, with respect to the First USA Credit Card Master
Trust, Floating Rate Asset Backed Certificates, Series 1996-2,
filed as Exhibit 99 to the Company's Current Report on Form 8-
K, filed on June 28, 1996 and incorporated herein by
reference.
10.16.25 Series 1996-3 Supplement, dated as of June 6, 1996 between
First USA Bank and The Bank of New York (Delaware), as
trustee, with respect to the First USA Credit Card Master
Trust, Floating Rate Asset Backed Certificates, Series 1996-3,
filed as Exhibit 99 to the Company's Current Report on Form 8-
K, filed on June 28, 1996 and incorporated herein by
reference.
10.17 Pooling and Servicing Agreement, dated as of May 11, 1995,
between First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as trustee, on behalf of the
Certificateholders
</TABLE>
81
<PAGE>
<TABLE>
<S> <C>
of the First USA Credit Card Master Trust II, filed as Exhibit
10.17 to the Company's Annual Report on Form 10-K for the
Fiscal Year ended June 30, 1995 and incorporated herein by
reference.
10.17.1 Series 1995-A Supplement, dated as of May 11, 1995, between
First USA Bank and The Bank of New York (Delaware) (as
successor to NationsBank, N.A.), as trustee, with respect to
the First USA Credit Card Master II, Variable Funding
Certificates, Series 1995-A and Floating Rate Asset Backed
Certificates, Series 1995-A, filed as Exhibit 10.17.1 to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
June 30, 1995 and incorporated herein by reference.
10.18 1995 Incentive Bonus Plan, effective November 1, 1995, filed
as Exhibit 10.16 to the Company's Quarterly Report on Form 10-
Q for the Fiscal Quarter ended December 31, 1995 and
incorporated by reference herein.
10.19 Intercompany Services Agreement, dated as of March 21, 1996,
between First USA Management, Inc. and First USA Paymentech,
Inc., filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the Fiscal Quarter, ended March 31, 1996 and
incorporated by reference herein.
10.20 Registration Rights Agreement between the Company and First
USA Paymentech, filed as Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 and incorporated by reference herein.
10.21 Tax Sharing Agreement between the Company and First USA
Paymentech, filed as Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996 and
incorporated by reference herein.
11* Computation of Net Income per Share.
21 Subsidiaries of the Registrant, filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 and incorporated by reference herein.
23* Consent of Independent Auditors.
27* Financial Data Schedule
</TABLE>
____________________
* Filed herewith
82
<PAGE>
EXHIBIT 11
FIRST USA, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Primary (As Restated)
-------
Income before extraordinary item $ 246,736 $ 178,422 $ 150,934
Less accrual of preferred stock dividends -- -- (3,436)
----------- ----------- -----------
Income before extraordinary item applicable
to common stock 246,736 178,422 147,498
Extraordinary item, net of tax benefit -- -- (10,637)
----------- ------------ ------------
Net income applicable to common stock for
primary net income per share $ 246,736 $ 178,422 $ 136,861
=========== ============ ============
Weighted average common and common
equivalent shares outstanding
Average common shares outstanding 119,088,870 116,819,438 114,520,384
Common stock equivalents:
Stock options 5,168,384 5,195,372 5,244,060
Mandatory convertible preferred stock 9,582,950 9,582,950 --
----------- ----------- -----------
Weighted average common and common
equivalent shares 133,840,204 131,597,760 119,764,444
=========== =========== ===========
Income before extraordinary item $ 1.84 $ 1.36 $ 1.23
Extraordinary item, net of tax benefit -- -- (0.09)
----------- ----------- -----------
Net income per share $ 1.84 $ 1.36 $ 1.14
=========== =========== ===========
Fully diluted
-------------
Income before extraordinary item applicable
to common stock $ 246,736 $ 178,422 $ 150,934
Extraordinary item, net of tax benefit -- -- (10,637)
----------- ----------- -----------
Net income applicable to common stock $ 246,736 $ 178,422 $ 140,297
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding
Average common shares outstanding 119,088,870 116,819,438 114,520,384
Common stock equivalents:
Stock options 5,486,390 5,631,536 5,520,310
Mandatory convertible preferred stock 9,582,950 9,582,950 3,434,246
----------- ----------- -----------
Weighted average common and common
equivalent shares 134,158,210 132,033,924 123,474,940
=========== =========== ===========
Income before extraordinary item $ 1.84 $ 1.35 $ 1.23
Extraordinary item, net of tax benefit -- -- (0.09)
----------- ----------- -----------
Net income per share $ 1.84 $ 1.35 $ 1.14
=========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-11245) pertaining to the First USA, Inc. Employee Stock Purchase
Plan, the Registration Statements (Form S-8 No. 33-71190 and Form S-8 No. 333-
03469) pertaining to the First USA, Inc. 1991 Stock Option Plan, the
Registration Statement (Form S-8 No. 33-71188) pertaining to the First USA
Employee Stock Option Plan, the Registration Statement (Form S-8 No. 33-71192)
pertaining to the First USA, Inc. Management Investors Performance Stock Option
Plan, the Registration Statement (Form S-8 No. 33-71186) pertaining to the First
USA, Inc. Management Investors Stock Option Plan, the Registration Statement
(Form S-8 No. 33-88676) pertaining to the First USA, Inc. Amended and Restated
Outside Directors Option Plan, the Registration Statements (Form S-8 No 33-88678
and Form S-8 No. 333-03469) pertaining to the First USA, Inc. 1994 Restricted
Stock Plan, the Registration Statement (Form S-8 No. 333-11265) pertaining to
the First USA Retirement Savings Plan, the Registration Statement (Form S-8 No.
333-07025) pertaining to the First USA Deferred Compensation Plan, the
Registration Statements (Form S-4 33-79026 and Form S-4 No. 33-95478) pertaining
to the offering of common stock for acquisitions by First USA, Inc., and the
Registration Statement (Form S-3 No. 33-98552) pertaining to the Dividend
Reinvestment and Stock Purchase Plan and in the related prospectuses of our
report dated July 17, 1996, except for Note D and Note A as to which the dates
are August 19, 1996, and April 22, 1997, respectively, with respect to the
consolidated financial statements of First USA, Inc. included in the Annual
Report (Form 10-K/A) for the year ended June 30, 1996.
/s/ ERNST & YOUNG LLP
Dallas, Texas
April 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S ANNUAL REPORT (FORM 10-K/A
AMENDMENT NO. 1) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 392,704
<SECURITIES> 2,903,091
<RECEIVABLES> 3,564,434
<ALLOWANCES> 74,163
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 166,567
<DEPRECIATION> 49,901
<TOTAL-ASSETS> 7,708,501
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 4,816,827
0
58
<COMMON> 1,210
<OTHER-SE> 1,112,612
<TOTAL-LIABILITY-AND-EQUITY> 7,708,501
<SALES> 0
<TOTAL-REVENUES> 1,633,742
<CGS> 0
<TOTAL-COSTS> 1,153,305
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 90,153
<INTEREST-EXPENSE> 0<F2>
<INCOME-PRETAX> 390,284
<INCOME-TAX> 143,548
<INCOME-CONTINUING> 246,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 246,736
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 0<F3>
<FN>
<F1>The consolidated balance sheet included in the Company's annual report is
unclassified.
<F2>Interest expense is considered an operating expense for the Registrant as the
Registrant's primary source of income is interest earned on credit card loans.
<F3>EPS on a fully diluted basis is not presented.
</FN>
</TABLE>
